General

The following is a discussion and analysis of our results of operations for the three and nine months ended September 30, 2008 and 2007, and our financial condition as of September 30, 2008. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission.

This discussion contains forward-looking statements within the meaning of the United States (the "U.S.") federal securities laws, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, that are not historical facts, including statements about our beliefs and expectations. These statements are based upon current plans, estimates and projections. Forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and various risk factors, many of which are outside the Company's control, that could cause actual results to differ materially from such statements. See "Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission and as amended herein in Part II, Item 1A. In particular, statements using words such as "may," "should," "estimate," "expect," "anticipate," "intend," "believe," "predict," "potential," or words of similar import generally involve forward-looking statements.

Important events and uncertainties that could cause the actual results, future dividends and distributions or future common share repurchases to differ include, but are not necessarily limited to: market conditions affecting our common share price; the possibility of severe or unanticipated losses from natural or man-made catastrophes, in particular catastrophes that are weather-related; the effectiveness of our loss limitation methods; our dependence on principal employees; our ability to execute the business plan of our new insurance and reinsurance initiatives effectively, including the integration of those operations into our existing operations; increases in our general and administrative expenses due to new business ventures, which expenses may not be recoverable through additional profits; the cyclical nature of the insurance and reinsurance businesses; the levels of new and renewal business achieved; opportunities to increase writings in our core property and specialty reinsurance and insurance lines of business and in specific areas of the casualty reinsurance market and our ability to capitalize on those opportunities; the sensitivity of our business to financial strength ratings established by independent rating agencies; the inherent uncertainty of our risk management process, which is subject to, among other things, industry loss estimates and estimates generated by modeling techniques; the accuracy of estimates reported by cedants and brokers on pro-rata contracts and certain excess of loss contracts where the deposit premium is not specified in the contract; the inherent uncertainties of establishing reserves for loss and LAE, particularly on longer-tail classes of business such as casualty; unanticipated adjustments to premium estimates; changes in the availability, cost or quality of reinsurance or retrocessional coverage; changes in general economic and financial market conditions including, but not limited to, the liquidity of financial markets and the level of volatility of interest rate fluctuations; changes in and the impact of governmental legislation or regulation, including changes in tax laws in the jurisdictions where we conduct business; our ability to assimilate effectively the additional regulatory issues created by our entry into new markets; the amount and timing of reinsurance recoverables and reimbursements we actually receive from our reinsurers; the overall level of competition, and the related demand and supply dynamics in our markets relating to growing capital levels in the reinsurance industry; declining demand due to increased retentions by cedants and other factors; the impact of terrorist activities on the economy; rating agency policies and practices; unexpected developments concerning the small number of insurance and reinsurance brokers upon whom we rely for a large portion of revenues; our dependence as a holding company upon dividends or distributions from our insurance and reinsurance operating subsidiaries; and the impact of foreign currency fluctuations.

We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.

A widely-used measure of relative underwriting performance for an insurance or reinsurance company is the combined ratio. Our combined ratio is calculated by adding the ratio of incurred losses and LAE to earned premiums (known as the "loss ratio") and the ratio of policy acquisition and other underwriting expenses to earned premiums (known as the "expense ratio"), each computed based on our losses and LAE, underwriting expenses and earned premiums, determined in accordance with generally accepted accounting principles in the U.S. ("GAAP combined ratio"). A GAAP combined ratio under 100% indicates that an insurance or reinsurance company is generating an underwriting profit. A GAAP combined ratio over 100% indicates that an insurance or reinsurance company is generating an underwriting loss.

Overview

Summary Financial Results

We ended the third quarter of 2008 with a fully converted tangible book value per share of $16.56, a decrease of 8.5% for the past three months, 5.8% for the past nine months and 1.0% for the past twelve months, inclusive of dividends. The decrease in fully converted tangible book value per share experienced during the 2008 periods resulted from catastrophic storms in addition to net realized and unrealized investment losses.

Our comprehensive loss for the third quarter of 2008 was $142.0 million and our GAAP combined ratio was 149.6%, compared to comprehensive income of $102.0 million and a GAAP combined ratio of 57.9% for the comparable 2007 period.

Our underwriting results for the third quarter of 2008 included $151.9 million of net losses from hurricanes Gustav and Ike, partially offset by $23.1 million of prior year favorable loss development. Our underwriting results for the third quarter of 2007 included a net loss of $11.4 million relating to July U.K. floods, partially offset by $4.6 million of prior year favorable loss development.

Our investment results for the third quarter of 2008 included $80.1 million of net realized and unrealized investment losses, compared to $14.0 million of net realized and unrealized investment gains for the comparable 2007 period. The net investment losses recorded in the third quarter of 2008 were comprised of $38.0 million in net losses from fixed maturities, $30.7 million in net losses from equity securities and $11.4 million in net losses from other investments. The net investment gains recorded in the third quarter of 2007 were comprised of $19.0 million in net gains from fixed maturities, $4.9 million in net losses from equity securities and $0.1 million in net losses from other investments.

Our comprehensive loss for the first nine months of 2008 was $99.6 million and our GAAP combined ratio was 100.5%, compared to comprehensive net income of $226.1 million and a GAAP combined ratio of 64.3% for the first nine months of 2007.

Our underwriting results for the first nine months of 2008 included the significant net losses incurred during the 2008 third quarter, as described above, in addition to net losses of $14.4 million from European windstorm Emma and $48.8 million from several significant individual risk losses. The 2008 net losses were offset by $71.9 million in year-to-date prior year favorable loss development. Our underwriting results for the first nine months of 2007 included the net losses incurred during the 2007 third quarter, as described above, in addition to net losses of $35.0 million from European windstorm Kyrill and $30.5 million relating to June U.K. and Australian floods. The 2007 net losses were offset by $32.3 million in year-to-date prior year favorable loss development.

Our investment results for the first nine months of 2008 included $136.3 million of net realized and unrealized investment losses, compared to $24.1 million of net realized and unrealized investment gains during the comparable 2007 period. The net investment losses recorded in the first nine months of 2008 were comprised of $69.3 million in net losses from fixed maturities, $47.2 million in net losses from equity securities and $19.8 million in net losses from other investments. The net investment gains recorded in the first nine months of 2007 were comprised of $10.5 million in net gains from fixed maturities, $13.7 million in net gains from equity securities and $0.1 in net losses from other investments.

Book Value Per Share



The following table presents our computation of book value per share, fully
converted book value per share and fully converted tangible book value per
share:



                                           Sept. 30,     June 30,    Dec. 31,    Sept. 30,
                                              2008         2008        2007         2007
Book value per share numerators
(millions of dollars):

[A] Common Shareholders' Equity            $  1,413.5    $ 1,571.7   $ 1,653.1   $  1,630.0
Intangible asset (1)                             (4.8 )       (4.8 )      (4.8 )          -
[B] Common Shareholders' Equity, as
adjusted                                   $  1,408.7    $ 1,566.9   $ 1,648.3   $  1,630.0

Book value per share denominators
(thousands of shares):

Common shares outstanding                      91,491       92,164      99,290      102,618
Common shares subject to the Share
Issuance Agreement (2)                         (7,920 )     (7,920 )    (7,920 )     (7,920 )
[C] Book value per share denominator           83,571       84,244      91,370       94,698

Common share obligations under benefit
plans                                           1,502        1,901       1,109        1,030
[D] Fully converted book value per share
denominator                                    85,073       86,145      92,479       95,728

Book value per share [A] / [C]             $    16.91    $   18.13   $   18.09   $    17.21
Fully converted book value per share [A]
/ [D]                                           16.61        17.76       17.88        17.03
Fully converted tangible book value per
share [B] / [D]                                 16.56        17.71       17.82        17.03

Change in fully converted tangible book
value per share: (3)
From June 30, 2008                               (8.5 )%
From December 31, 2007                           (5.8 )%
From September 30, 2007                          (1.0 )%

(2) Under the terms of the Share Issuance Agreement, 7,920,000 common shares currently remain issued and outstanding. In view of the contractual undertakings of the forward counterparty in the share issuance agreement, which have the effect of substantially eliminating the economic dilution that would otherwise result from the issuance of such shares, we do not consider these shares outstanding for the purposes of this computation.

(3) Computed as the internal rate of return derived from the change in fully converted tangible book value per share, as adjusted for dividends declared.

We believe that the computations of our fully converted tangible book value per share and our change in fully converted tangible book value per share, as adjusted for dividends, are measurements which are important to our investors, analysts and other interested parties who benefit from having an objective and consistent basis for comparison with other companies within our industry.

Outlook and Trends

Pricing in most insurance and reinsurance markets is generally cyclical in nature. During 2007, pricing in virtually all insurance and reinsurance markets declined due to increasing competition from the private sector and, for catastrophe prone business, the impact of event-linked securities and certain governmental initiatives that occurred or were anticipated to occur.

The most significant price decline in 2007 was related to writings of collateralized property catastrophe retrocessional business which, from January 1, 2006 to June 30, 2007, was predominantly written by Blue Ocean Re. This was the first segment to show significant rate increases following the 2005 catastrophes and, likewise, its pricing has deteriorated most rapidly. As a result, since the second half of 2007, Blue Ocean Re wrote no new business.

We assign a price index percentage to business which we renew. This index represents an internal subjective measure which takes into account both changes in pricing and terms and conditions which we observe. This index does not reflect deteriorating pricing or terms of business we decline to renew.

During the first quarter of 2008, the period in which we write the majority of our annual premium, we observed an average renewal price index across our portfolio of minus 10%, with the U.S. market being slightly more competitive than other regions at an average of minus 11% versus an average of minus 9% for international accounts. Direct and facultative property business continued to be the single class showing the largest rate decline with an average decrease of minus 18%. We also observed strong incumbent market retention within existing positions on desirable programs, which means that the Montpelier Bermuda segment was able to maintain and/or expand positions with its long-term target client base. We also observed that aggregate demand was either static or decreasing in most catastrophe markets.

During the second quarter of 2008, we observed an average renewal price index of minus 9% in Property Catastrophe lines, minus 11% in Property Specialty lines, and minus 12% in Other Specialty lines.

During the third quarter of 2008, we observed an average renewal price index of minus 9% in Property Catastrophe lines, minus 9% in Property Specialty lines, and minus 11% in Other Specialty lines.

Gross premiums written during the three and nine months ended September 30, 2008 were down 20% and 5%, respectively, as compared to the same periods in 2007, as new writings within our Montpelier Syndicate 5151 and MUSIC segments did not fully offset the impact of the rate reductions previously discussed, and due to non-renewals for pricing reasons, business attrition due to larger ceding company retentions and the run-off of Blue Ocean.

Looking ahead to future periods, it is difficult to predict the amount of annual premiums we will write. However, we believe that the recent widespread investment and catastrophe losses have weakened the balance sheets of many insurance and reinsurance companies and have reduced the reinsurance capacity provided by the capital markets. We see all of these factors as directly reducing the supply of capital which should, in turn, result in higher return hurdles. Based on discussions with a variety of ceding companies, we also expect to see increased demand for reinsurance driven by several sources, including weaker capital adequacy positions and shrinking risk tolerances.

On October 23, 2008, we announced that we had received approval from Lloyd's for the establishment of our own wholly-owned Managing Agent, MUA. MUA will assume the management of Montpelier Syndicate 5151 for the 2009 underwriting year of account, with effect from January 1, 2009.

The formation of MUA represents the latest step in a series of strategic initiatives we began in mid 2006. We now have operations in four countries employing three different insurance licenses. As a result, we have become more optimistic in our outlook for 2009 as we expect to see increased opportunities for all of our underwriting platforms.

Natural Catastrophe Risk Management

As a predominantly short-tail property reinsurer, we have exposure to various natural catastrophes around the world. We manage our exposure to catastrophes using a combination of CATM (our proprietary modeling tool), third-party vendor models, underwriting judgment, and our own reinsurance purchases.

Our three-tiered risk management approach focuses on tracking exposed contract limits, estimating the potential impact of a single natural catastrophe event, and simulating our yearly net operating result to reflect certain modellable underwriting and investment risks we face on an aggregate basis. We seek to refine and improve our risk management process over time. The following discussion should be read in conjunction with Item 1A. "Risk Factors"included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission, in particular the specific risk factor appearing on page 28 entitled "Our stated catastrophe and enterprise-wide risk management exposures are based on estimates and judgments which are subject to significant uncertainties."

Exposure Management

We track gross reinsurance treaty contract limits which we deem exposed to a single natural perils occurrence within certain broadly defined major catastrophe zones. The resulting measure represents the sum of all contract limits assumed through property reinsurance treaties, other specialty reinsurance treaties and event-linked insurance derivatives, but excludes limits relating to individual risk insurance business and the benefit of any reinsurance protections we have purchased. As of September 30, 2008, our largest single zonal concentration was Northern European windstorm (the zone consisting of the U.K., Ireland, Germany, France, the Benelux countries, Switzerland, Denmark, Norway and Sweden). For individual risk business, including both direct insurance and facultative reinsurance accounts, we supplement our treaty approach by tracking contract limits to a finer geographic resolution.

Single Event Losses

For certain defined natural catastrophe region and peril combinations, we assess the probability and likely magnitude of losses using a combination of industry third-party vendor models, CATM and underwriting judgment. We attempt to model the projected net impact from a single event, taking into account contributions from our inward portfolio of property, aviation, workers' compensation, casualty, and personal accident insurance policies, reinsurance policies, and event-linked derivative securities offset by the net benefit of any reinsurance or derivative protections we purchase and the net benefit of reinstatement premiums. The table below details our estimated average net impact market share for selected natural catastrophe events of various industry loss magnitudes:

Event / Resulting Market Loss    Our Average Market Share

U.S. Hurricane / $50 billion                          0.7 %

U.S. Earthquake / $50 billion                         0.5 %

Europe Windstorm / $20 billion                        1.4 %

The market share estimates above represent an estimate of our average market share across multiple event scenarios corresponding to industry losses of a given size. However, it is important to note that our average market share may vary considerably within a particular territory depending on the specific characteristics of the event. This is particularly true for the direct insurance and facultative reinsurance portfolio we underwrite. Other factors contributing to such variation may include our decision to be overweight or underweight in certain regions within a territory. For example, our market share for a large European wind event may differ depending on whether the majority of loss comes from the U.K. or from Continental Europe. Additionally, our net market share may be impacted by the number and order of occurrence of catastrophic events during a year which could exhaust individual policy limits or trigger additional losses from certain policies offering second-event or aggregate protection. Further, certain reinsurance we purchase may have geographic restrictions or provide coverage for only a single occurrence within the policy period. Lastly, these estimates represent snapshots at a point in time. The composition of our in-force portfolio will fluctuate due to the acceptance of new policies, the expiration of existing policies, and changes in our reinsurance program.

Each industry-recognized catastrophe model contains its own assumptions as to the frequency and severity of large events, and results may vary significantly from model to model. Given the relatively limited historical record, there is a great deal of uncertainty with regard to the accuracy of any catastrophe model, especially at relatively remote return periods.

There is no single standard methodology or set of assumptions utilized industry-wide in estimating property catastrophe losses. As a consequence, it may be difficult to compare estimates of risk exposure among different insurance and reinsurance companies, due to differences in modeling, portfolio composition and concentrations, modeling assumptions, and selected event scenarios.

Annual Operating Result

In addition to monitoring exposed contract limits and single event accumulation potential, we attempt to measure enterprise-wide risk using a simulated annual aggregate operating result approach. This approach estimates a net operating result over simulated annual return periods, including contributions from certain variables such as aggregate

premiums, losses, expenses, and investment results. We view this approach as a supplement to our single event stress test as it allows for multiple losses from natural catastrophe and other sources and attempts to take into account certain risks from non-underwriting sources. Through our modeling we endeavor to take into account many risks that we face as an enterprise. By the very nature of the insurance and reinsurance business, and the limitations of models generally, our modeling does not cover every potential risk. Examples include emerging risks, changes in liability awards, pandemic illnesses, asteroid strikes, climate change, bioterrorism, scientific accidents, and various imaginable and unimaginable political and financial market catastrophes.