Industry Conditions.

The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As a result, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability. Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best Company and/or Standard & Poor's Rating Services, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

We compete in the U.S., Bermuda and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd's. Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

During the latter part of 2007 and into 2008, there has been a slowdown in the global economy precipitated primarily by increased defaults on sub-prime mortgages in the U.S. and elsewhere, falling house prices and contracting consumer spending. The significant increase in default rates negatively impacted the value of mortgage backed securities held by both foreign and domestic institutions. The defaults have lead to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on the asset-backed securities. During the third quarter and into the fourth quarter of 2008, the credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit. Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands. As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. government to continue operations. The liquidity crisis significantly increased the spreads on fixed maturities and, at the same time, had a dramatic negative impact on the stock markets around the world. The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturities and equity securities has resulted in a significant decline in the capital of most insurance and reinsurance companies. It is too early to predict what impact the capital deterioration from declines in portfolio investment values, underwriting losses and company work-outs will have on market conditions. There is an expectation that these events will result in increased rates for insurance and reinsurance in certain segments of the market, although there is limited evidence of increases at this point.

Worldwide insurance and reinsurance market conditions continued to be very competitive in the quarter. Generally, there was ample insurance and reinsurance capacity relative to demand. We noted, however, that in many markets and lines, the rates of decline have slowed, pricing in some segments was relatively flat and there was upward movement in some others. The extent of competition and its effect on rates, terms and conditions varies widely by market and coverage and continues to be most prevalent in the U.S. casualty insurance and reinsurance markets. In addition to demanding lower rates and improved terms, ceding companies have retained more of their business by reducing quota share percentages, purchasing excess of loss covers in lieu of quota shares, and increasing retentions on excess of loss business. Our quota share premiums have declined, particularly on catastrophe exposed property business, due to slower growth and

increased purchases of common account covers by ceding companies, which reduces the premiums subject to the quota share contract. The U.S. insurance markets in which we participate remain extremely competitive as well, particularly in the workers' compensation, public entity and contractor sectors. While our growth has slowed, given the specialty nature of our business and our underwriting discipline, we believe the impact on the profitability of our business to be less pronounced than on the market generally.

Rate decreases in the international markets have generally been less pronounced than in the U.S., and we have seen some increases, particularly for catastrophe exposed business. We have grown our business in the Middle East, Latin America and Asia. We are expanding our international reach by opening a new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future. The international markets have also benefited somewhat from the weaker U.S. dollar compared to a year ago since the foreign currencies convert to higher dollar amounts resulting in favorable year over year premium comparisons.

The reinsurance industry has experienced a period of falling rates and volume. Profit opportunities have become generally less available over time; however the unfavorable trends appear to have abated somewhat. We are now seeing smaller rate declines, pockets of stability and some increases in some markets and for some coverages. As a result of very significant investment and catastrophe losses incurred by both primary insurers and reinsurers over the past nine months, but principally in the most recent quarter, industry-wide capital has declined and rating agency scrutiny has increased. There is an expectation that given the rate softening that has occurred over the past several quarters, the industry-wide decline in capital combined with volatile and inaccessible capital markets and a looming recession, will lead to a hardening of insurance and reinsurance marketplace rates, terms and conditions. It is too early to gauge the extent of hardening, if any, that will occur; however, it appears that much of the redundant capital has been wrung out of the industry, and the stage is set for firmer markets.

Overall, we believe that current marketplace conditions offer profit opportunities for us given our strong ratings, distribution system, reputation and expertise. We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.

Financial Summary.

We monitor and evaluate our overall performance based upon financial results.
The following table displays a summary of the consolidated net (loss) income,
ratios and shareholders' equity for the periods indicated.



                                                                Three Months Ended         Percentage          Nine Months Ended          Percentage
                                                                  September 30,            Increase/             September 30,            Increase/
(Dollars in millions)                                          2008            2007        (Decrease)        2008             2007        (Decrease)
Gross written premiums                                    $        999.2   $     1,074.7        -7.0%   $      2,782.0   $      3,026.9        -8.1%
Net written premiums                                               960.6         1,055.5        -9.0%          2,664.0          2,963.9       -10.1%

REVENUES:
Premiums earned                                            $       931.9   $       997.1        -6.5%   $      2,785.9    $     3,001.1        -7.2%
Net investment income                                              164.5           172.8        -4.8%            490.5            508.3        -3.5%
Net realized capital (losses) gains                              (293.4)            18.6           NM          (461.3)            151.2           NM
Net derivative income (expense)                                     14.9           (1.6)           NM             13.2              1.7           NM
Other (expense) income                                             (8.2)            15.1      -152.6%           (23.6)             10.8           NM
Total revenues                                                     809.7         1,202.0       -32.6%          2,804.8          3,673.1       -23.6%

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses                       813.7           583.2        39.5%          1,963.8          1,768.1        11.1%
Commission, brokerage, taxes and fees                              218.0           240.1        -9.2%            689.9            700.2        -1.5%
Other underwriting expenses                                         40.3            40.3         0.0%            120.3            113.9         5.6%
Interest, fees and bond issue cost amortization expense             19.8            26.8       -26.2%             59.4             68.5       -13.4%
Total claims and expenses                                        1,091.8           890.5        22.6%          2,833.3          2,650.8         6.9%

(LOSS) INCOME BEFORE TAXES                                       (282.2)           311.5      -190.6%           (28.6)          1,022.3      -102.8%
Income tax (benefit) expense                                      (49.0)            64.9      -175.6%           (26.4)            195.2      -113.5%
NET (LOSS) INCOME                                          $     (233.1)    $      246.6      -194.5%    $       (2.2)     $      827.0      -100.3%

                                                                                             Point                                          Point
RATIOS:                                                                                      Change                                         Change
Loss ratio                                                         87.3%           58.5%         28.8            70.5%            58.9%         11.6
Commission and brokerage ratio                                     23.4%           24.1%        (0.7)            24.8%            23.3%          1.5
Other underwriting expense ratio                                    4.3%            4.0%          0.3             4.3%             3.8%          0.5
Combined ratio                                                    115.0%           86.6%         28.4            99.6%            86.0%         13.6

                                                                                                              At               At         Percentage
                                                                                                        September 30,     December 31,    Increase/
(Dollars in millions, except per share amounts)                                                              2008             2007        (Decrease)
Balance sheet data:
  Total investments and cash                                                                            $     14,119.6   $     14,936.2        -5.5%
  Total assets                                                                                                17,370.4         17,999.5        -3.5%
  Reserve for losses and loss adjustment expenses                                                              9,247.6          9,040.6         2.3%
  Total debt                                                                                                   1,179.0          1,178.9         0.0%
  Total liabilities                                                                                           12,333.8         12,314.7         0.2%
  Shareholders' equity                                                                                         5,036.6          5,684.8       -11.4%
Book value per share                                                                                             82.02            90.43

(NM, not meaningful)
(Some amounts may not reconcile due to rounding)

Revenues.

Premiums. Gross written premiums decreased by $75.5 million, or 7.0%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, reflecting declines of $41.3 million in our reinsurance business and $34.2 million in our U.S. insurance business. Gross written premiums decreased by $244.9 million, or 8.1%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, reflecting a decline of $233.1 million in our reinsurance business and $11.8 million decrease in our U.S. insurance business. The decline in our reinsurance business was primarily attributable to continued competitive conditions in both the property and casualty sectors of the market, especially in the U.S., partially offset by strong renewals and higher rates in some international markets. Insurance segment premiums were also lower, as conditions for workers' compensation, public equity and contractors business have gotten increasingly competitive, which has reduced the volume of business that meets our underwriting and pricing criteria.

Net written premiums decreased by $94.9 million, or 9.0%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 and by $299.9 million, or 10.1%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to the decrease in gross written premiums and an increase in written premiums ceded. Almost all of the increase in ceded premiums was in the U.S. Insurance segment. Correspondingly, net premiums earned decreased by $65.2 million, or 6.5%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 and by $215.2 million, or 7.2%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.

Net Investment Income. Net investment income decreased by 4.8% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, primarily due to a reduction in our limited partnership income and lower rates on short and long term bonds. The annualized pre-tax investment portfolio yield for the three months ended September 30, 2008 was 4.5% compared to 4.8% for the three months ended September 30, 2007.

Net investment income decreased by 3.5% for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, primarily due to a decrease of income from our limited partnership investments, particularly from those partnerships which invested in public equity securities and lower short-term interest rates. The annualized pre-tax investment portfolio yield for the nine months ended September 30, 2008 was 4.5% compared to 4.8% for the nine months ended September 30, 2007.

Net Realized Capital (Losses) Gains. Net realized capital losses were $293.4 million and $461.3 million for the three and nine months ended September 30, 2008, respectively. Net realized capital gains were $18.6 million and $151.2 million for the three and nine months ended September 30, 2007, respectively. The capital losses for the three and nine months were primarily the result of the credit crisis impacting the global financial markets, which drove down the values of equity and fixed income securities. Our equity security portfolio declined $115.6 million and $265.6 million for the three and nine months ended September 30, 2008, respectively. We report changes in the fair values of our public equity securities as realized capital gains or losses in accordance with Financial Accounting Standards ("FAS") No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115" ("FAS 159"), irrespective of whether or not the securities have been sold. We reported realized losses on our fixed income portfolio of $153.4 million and $159.9 million for the three and nine months ended September 30, 2008, respectively. All of these losses resulted from other-than-temporary impairments to the values of specific fixed income securities. We report other-than-temporary impairments as realized capital losses in accordance with FAS No. 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FAS 115-1").

Net Derivative Income (Expense). In prior years, we sold seven equity index put options, which are outstanding. These contracts meet the definition of a derivative under FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). We recognized net derivative income of $14.9 million and a net derivative expense of $1.6 million for the three months ended September 30, 2008 and 2007, respectively, and net derivative income of $13.2 million and $1.7 million for the nine months ended

September 30, 2008 and 2007, respectively. The net derivative income or expense represents changes in the fair value of these contracts.

Other (Expense) Income. We recorded $8.2 million and $23.6 million of other expenses for the three and nine months ended September 30, 2008, and $15.1 million and $10.8 million of other income for the three and nine months ended September 30, 2007. These amounts were primarily due to the fluctuations in foreign currency exchange rates.

Claims and Expenses.

Incurred Losses and Loss Adjustment Expenses. The following tables present our
incurred losses and loss adjustment expenses ("LAE") for all segments combined
for the periods indicated.



                                            Three Months Ended September 30,
                                        2008                                      2007                               Variance
                        Current          Prior         Total         Current      Prior      Total        Current     Prior       Total
(Dollars in
millions)                 Year           Years        Incurred        Year        Years     Incurred       Year       Years     Incurred
Attritional (a)         $      516.8    $     (9.1) $      507.8   $     554.4 $    (39.4) $    515.0   $    (37.6)  $    30.4 $     (7.2)
Catastrophes                   302.5            3.4        305.9          28.4         1.5       30.0         274.1        1.9       275.9
A&E                                -              -            -             -        38.3       38.3             -     (38.3)      (38.3)
Total all
segments                 $     819.3     $    (5.7) $      813.7   $     582.8  $      0.4 $    583.2    $    236.5 $    (6.1)  $    230.4
Loss ratio                     87.9%          -0.6%        87.3%         58.5%        0.0%      58.5%          29.4      (0.6)        28.8

                                             Nine Months Ended September 30,
                                        2008                                      2007                               Variance
                        Current          Prior         Total         Current      Prior      Total        Current     Prior       Total
(Dollars in
millions)                 Year           Years        Incurred        Year        Years     Incurred       Year       Years     Incurred
Attritional (a)         $    1,553.0     $     65.9 $    1,619.0   $   1,632.3 $    (84.8) $  1,547.5   $    (79.3) $    150.7   $    71.4
Catastrophes                   336.2            8.6        344.8         140.9         3.4      144.3         195.3        5.2       200.5
A&E                                -              -            -             -        76.3       76.3             -     (76.3)      (76.3)
Total all segments       $   1,889.2     $     74.6  $   1,963.8   $   1,773.2  $    (5.1) $  1,768.1   $     116.0  $    79.6  $    195.6
Loss ratio                     67.8%           2.7%        70.5%         59.1%       -0.2%      58.9%           8.7        2.9        11.6

(a) Attritional losses exclude catastrophe and A&E losses.
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE were higher by $230.4 million, or 39.5%, for the three months ended September 30, 2008 compared to the same period in 2007. The increase was primarily due to $275.9 million greater catastrophe losses, principally from Hurricanes Gustav and Ike, partially offset by the absence in 2008 of any asbestos and environmental ("A&E") prior years' reserve strengthening.

Incurred losses and LAE were higher by $195.6 million, or 11.1%, for the nine months ended September 30, 2008 compared to the same period in 2007. The increase was primarily due to $200.5 million greater catastrophe losses, principally from Hurricanes Gustav and Ike and the China snowstorm. We experienced $150.7 million of unfavorable reserve development in prior years' attritional reserves. An unfavorable arbitration decision relating to a 2001 retrocessional cover resulted in a charge of $32.6 million and prior years' reserve strengthening for an auto loan credit program in run-off of $85.3 million, more than offset the generally favorable development experienced on the run-off of our other reserves. Partially offsetting these increases was the absence in 2008 of any A&E loss development.

Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees decreased by $22.1 million, or 9.2%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 and by $10.3 million, or 1.5%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. This directly variable expense was influenced by the decline in net earned premiums combined with higher commissions due to new insurance programs and market conditions along with the business mix.

Our commission and brokerage ratio was impacted by reinsurance premiums. Catastrophe reinsurance provides coverage for one event; however, when limits are exhausted, some contractual arrangements provide for the availability of additional coverage upon the payment of additional premium, referred to as reinstatement premium. In general, there are no commissions on reinstatement premiums. Our commission and brokerage ratio includes a 1.0 point decrease due to reinstatement premiums for the quarter ended September 30, 2008. All other periods were minimally impacted.

Other Underwriting Expenses. Other underwriting expenses were $40.3 million for the three months ended September 30, 2008 and 2007, and $120.3 million and $113.9 million for the nine months ended September 30, 2008 and 2007, respectively. The increase for the nine months, period over period, of 5.6% was principally due to higher compensation and benefits expense and increased staff count, primarily in the U.S. Insurance segment. Included in other underwriting expenses were corporate expenses, which are expenses that are not allocated to segments, of $3.3 million and $6.8 million for the three months ended September 30, 2008 and 2007, respectively, and $10.7 million and $21.7 million for the nine months ended September 30, 2008 and 2007, respectively. These decreases were primarily due to the allocation, starting in the fourth quarter of 2007 to segments, of share-based compensation expense which had been previously retained in corporate expenses.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest and other expense was $19.8 million and $26.8 million for the three months ended September 30, 2008 and 2007, respectively, and $59.4 million and $68.5 million for the nine months ended September 30, 2008 and 2007, respectively. These decreases were primarily due to the acceleration of issue cost amortization for the retired junior subordinated debt securities in 2007, with no such expense in 2008.

Income Tax (Benefit) Expense. Our income tax benefit was $49.0 million and $26.4 million for the three and nine months ended September 30, 2008, respectively. Our income tax expense was $64.9 million and $195.2 million for the three and nine months ended September 30, 2007, respectively. We received an income tax benefit in the 2008 periods because we had taxable losses as a result of catastrophe losses and net realized capital losses. In contrast, we had taxable income in the 2007 periods. Our income tax expense is primarily a function of the statutory tax rates and corresponding pre-tax income in the jurisdictions where we operate, coupled with the impact from tax-preferenced investment income. Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income among jurisdictions with different tax rates.

Net (Loss) Income.

Our loss was $233.1 million and $2.2 million for the three and nine months ended September 30, 2008, compared to net income of $246.6 million and $827.0 million for the three and nine months ended September 30, 2007. These results were primarily driven by after-tax net realized capital losses and increased catastrophe losses in the 2008 periods compared to after-tax net realized capital gains and fewer catastrophe losses in 2007.

Ratios.

Our combined ratio increased by 28.4 points to 115.0% for the three months ended September 30, 2008 compared to 86.6% for the three months ended September 30, 2007 and by 13.6 points to 99.6% for the nine months ended September 30, 2008 compared to 86.0% for the nine months ended September 30, 2007. The loss ratio component increased 28.8 points for the three month comparison and 11.6 points for the nine month comparison, principally due to the increase in current year catastrophe losses and attritional prior years' reserve development. The commission and brokerage ratio component decreased by 0.7 points for the three month comparison and increased by 1.5 points for the nine month comparison. The other

underwriting expense ratio component increased minimally by 0.3 points for the three month comparison and 0.5 points for the nine month comparison.

Shareholders' Equity.

Shareholders' equity declined by $648.2 million to $5,036.6 million at September 30, 2008 from $5,684.8 million as of December 31, 2007 due to $355.4 million of unrealized depreciation, net of tax, on investments, the repurchase of 1.6 million common shares for $150.7 million, $89.1 million of shareholder dividends, $67.1 million of translation adjustments and a net loss of $2.2 million. The increase in unrealized depreciation is due to the current financial market liquidity crisis that has resulted in significantly increased credit spreads and concomitantly lower corporate and municipal security values. The market values for our fixed maturities are received from third party vendors and no mitigating adjustments have been made to the values for the illiquid market conditions.

. . .