This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements which 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 expectations. Actual results may differ materially from those projected in such forward-looking statements, and therefore undue reliance should not be placed on them. See "Cautionary Note Regarding Forward-Looking Statements," for a list of additional 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 audited Consolidated Financial Statements and Notes thereto presented under Item 8.

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 results of operations and financial condition.

Index


  Executive Overview                                                              59
  Financial Measures                                                              63
  Results of Operations                                                           65
  Other Key Focuses of Management                                                 73
  Critical Accounting Policies and Estimates                                      76
  Segments                                                                        93
  Income Statement Analysis                                                       93
  Insurance                                                                       93
  Reinsurance                                                                     96
  Life Operations                                                                 99
  Other Financial Lines                                                          101
  Syncora                                                                        101
  Investment Activities                                                          102
  Investment Performance                                                         102
  Net realized gains and losses on investments and other than temporary
declines in the value of investments                                             103
  Net realized and unrealized gains and losses on derivative
instruments                                                                      104
  Other Revenues and Expenses                                                    105
  Balances Sheet Analysis                                                        107
  Investments                                                                    107
  Net unrealized gains and losses on investments                                 108
  Unpaid Losses and Loss Expenses                                                112
  Unpaid Losses and Loss Expenses Recoverable and Reinsurance Balances
Receivable                                                                       113
  Liquidity and Capital Resources                                                117
  Cross-Default and Other Provisions in Debt Instruments                         126
  Long-Term Contractual Obligations                                              127
  Variable Interest Entities and Other Off-Balance Sheet Arrangements            128
  Recent Accounting Pronouncements                                               128
  Cautionary Note Regarding Forward-Looking Statements                           128

Background

The Company operates on a global basis and is a leading provider of insurance and reinsurance coverages to industrial, commercial and professional service firms, insurance companies and other enterprises, typically the global equivalent of the Fortune 2000. The Company operates in markets where it believes its underwriting expertise and financial strength represent a relative advantage.

The Company has grown through acquisitions and development of new business opportunities. Acquisitions included Global Capital Re in 1997, Mid Ocean Limited in 1998, ECS, Inc. and NAC Re Corp. in 1999, Winterthur International in 2001 and Le Mans Re in 2002. All acquisitions were entered into in order to further support the Company's strategic plan to develop a global platform in insurance and reinsurance. The Company competes as an integrated global business and at December 31, 2008 employed approximately 4,000 employees in 28 countries. Subsequent to December 31, 2008, the Company announced a restructuring initiative which will result in the Company's workforce decreasing by approximately 10% during 2009.

Underwriting Environment

The Company earns its revenue primarily from net premiums written and earned. The property and casualty insurance as reinsurance markets have historically been cyclical, meaning that based on market conditions, there have been periods where premium rates are high and policy terms and conditions are more favorable to the Company (a "hard market") and there have been periods where premium rates decline and policy terms and conditions are less favorable to the Company (a "soft market"). Market conditions are driven primarily by competition in the marketplace, the supply of capital in the industry, investment yields and the frequency and severity of loss events. Management's goal is to build long-term shareholder value by capitalizing on current opportunities and managing through any cyclical downturns by reducing its property and casualty book of business and exposures if and when rates deteriorate to unprofitable levels.

Insurance

Throughout 2008, the Company's Insurance segment continued to experience soft property and casualty market conditions as premium rates across most lines of business as compared to the prior year, decreased by approximately 6% in the aggregate and competitive pressures continued. Throughout 2008, property renewals reflected decreases in premium rates of approximately 12% on average, while certain casualty lines experienced premium rate reductions averaging approximately 9%. In addition, premium rates within certain specialty lines of business decreased by up to 5%. Offsetting these premium rate decreases was strong pricing in the U.S. professional Directors and Officers ("Directors and Officers") book of business, specifically with regards to financial institutions, and more recently on the offshore energy book as a result of market losses from Hurricanes Gustav and Ike.

In addition, during 2008, new business writings were impacted by market conditions as competitors continued to focus on retaining business in all lines and markets. However, during this period, the Company wrote approximately $900 million in new business (excluding program business and long-term agreements). This was largely a result of successes in the Company's organic growth strategies which include E&S, private D&O as well as construction and upper middle market. Renewal ratios for core property, casualty and professional lines were approximately 83%. However, following the rating agency actions taken in December 2008 (see "Ratings", above), the Company experienced a slight decline in renewal activity and new business opportunities in certain lines of business. For further information on recent rate and renewal activity, see "2009 Underwriting Outlook" below for further information.

                                                                             2008                                                                       2007 (3)                                                                    2006 (3)
                                                   Gross                      Net                       Net                     Gross                      Net                      Net                     Gross                     Net                      Net
                                                 Premiums                  Premiums                  Premiums                  Premiums                 Premiums                  Premiums                 Premiums                 Premiums                 Premiums
(U.S. dollars in thousands)                       Written                   Written                   Earned                   Written                   Written                   Earned                  Written                  Written                   Earned
Casualty - professional lines                      1,472,874                 1,351,237                 1,369,668           $     1,516,412          $     1,376,819           $     1,404,567          $     1,558,746          $     1,490,896          $     1,483,518
Casualty - other lines                             1,273,016                   793,512                   822,252                 1,342,817                  848,919                   819,687                1,304,245                  799,957                  847,834
Property catastrophe                                     (65 )                  (2,177 )                     270                    15,312                   (7,460 )                  52,541                  149,436                   68,847                   56,714
Other property                                       886,483                   505,564                   471,013                   871,009                  599,668                   535,322                  830,367                  490,858                  500,956
Marine, energy, aviation, and satellite              747,311                   604,786                   621,774                   809,073                  623,085                   638,162                  942,974                  695,391                  676,009
Other specialty lines (1)                            850,404                   712,307                   660,322                   786,074                  666,208                   582,565                  785,340                  594,247                  500,159
Other (2)                                             22,736                   (22,908 )                 (11,055 )                  36,698                   27,439                    33,416                   10,167                    5,776                   60,784
Structured indemnity                                  56,155                    42,505                    62,801                    56,871                   52,177                    50,328                   46,018                   39,400                   33,349

Total                                              5,308,914                 3,984,826                 3,997,045           $     5,434,266          $     4,186,855           $     4,116,588          $     5,627,293          $     4,185,372          $     4,159,323

(1) Other specialty lines within the Insurance segment includes: environmental, programs, equine, warranty, specie, middle markets and excess and surplus lines.

(2) Other includes credit and surety and other lines.

(3) Certain reclassifications have been made to conform to current year presentation.

Reinsurance

In the Reinsurance segment, the year ended December 31, 2008 reflected a decline in premium rates across most major lines of business, as market conditions continued to soften and the reinsurance industry continued to experience pricing erosion, increased competitive pressures and increased retentions by cedants. Renewals and new business in 2008 continued to be assessed against internal hurdle rates with a continued focus on underwriting discipline. U.S. and non-U.S. catastrophe exposed property lines experienced rate declines of approximately 10% while other property lines of business saw rates decrease by 10% to 15%. Ocean marine pricing rates remained flat to down 5%, while rates within the aviation market decreased by up to 10%. Casualty pricing trends in the reinsurance market experienced deterioration in rates of up to 15%, however, rate changes on business actually bound in this line of business decreased between 10 to 15%. However, with increased hurricane and other loss activity during the latter half of 2008, taken together with the distressed state of the financial markets, rate declines across all lines of business began to slow in the latter half of 2008.

The following table provides an analysis of gross premiums written, net premiums written and net premiums earned for the Reinsurance segment for the last three years ended December 31:

                                                                            2008                                                                       2007                                                                       2006
                                                  Gross                     Net                      Net                     Gross                     Net                      Net                     Gross                     Net                      Net
                                                 Premiums                 Premiums                 Premiums                 Premiums                 Premiums                 Premiums                 Premiums                 Premiums                 Premiums
(U.S. dollars in thousands)                      Written                  Written                   Earned                  Written                  Written                   Earned                  Written                  Written                   Earned
Casualty - professional lines                $       213,519          $       213,498          $       247,979          $       256,280          $       256,327          $       273,494          $       297,962          $       296,221          $       346,870
Casualty - other lines                               356,723                  347,849                  425,541                  543,251                  527,860                  602,452                  660,455                  613,056                  723,854
Property catastrophe.                                401,740                  290,443                  305,690                  475,540                  286,866                  264,666                  449,347                  234,724                  234,965
Other property                                       947,899                  602,423                  678,504                  970,196                  677,764                  753,278                1,044,316                  730,445                  749,714
Marine, energy, aviation, and satellite              119,593                  104,346                  126,761                  150,548                  128,942                  141,619                  176,928                  139,748                  154,313
Other (1)                                            220,332                  194,237                  205,433                  239,418                  204,845                  240,049                  365,844                  298,860                  294,532
Structured indemnity                                     671                      671                    3,298                   28,261                   28,261                   26,481                   71,286                   71,286                   66,711

Total                                        $     2,260,477          $     1,753,467          $     1,993,206          $     2,663,494          $     2,110,865          $     2,302,039          $     3,066,138          $     2,384,340          $     2,570,959

(1) Other includes credit and surety, whole account contracts and other lines.

2009 Underwriting Outlook

Given the changing economic environment that has been experienced throughout 2008 and early 2009 due to the global economic and financial crises and following the significant impacts to the Company during 2008, including the downgrade of the financial strength ratings of the Company's core insurance and reinsurance subsidiaries by leading rating agencies, the Company plans to focus on those lines of business within its insurance and reinsurance operations that provide the best return on capital over the pricing cycle. As such, the Company will be highly selective on new business, emphasize short-tail lines, where applicable, in the Company's reinsurance operations, exit other businesses (e.g., Casualty facultative business), non-renew certain insurance programs, as well as continue to reduce long-term agreements (within the insurance operations) in order to capture the benefit of improving pricing. While certain of these decisions as well as any lost business as a result of rating agency downgrades will result in a reduction to both gross and net premiums written in 2009, the Company expects such negative impacts to be partially offset by the positive impact of hardening rates across most lines of business as described below.

Throughout 2007 and the majority of 2008, the property and casualty insurance and reinsurance markets experienced soft market conditions across most, if not all lines of business, as evidenced by decreases in market pricing and a weakening of policy terms and conditions. However, following catastrophe activity throughout 2008, most notably, losses resulting from Hurricanes Ike and Gustav, and more importantly, following severe economic conditions and the impacts of the financial crisis, which reduced the available capital of many property and casualty (re)insurers, market capacity decreased and in conjunction, market pricing across most insurance and reinsurance lines of business began to improve and is expected to continue improving throughout 2009. The following is a summary of the January 2009 rate indications and recent renewal activity for each of the Insurance and Reinsurance segments of the Company:

Insurance

With regards to market conditions within the core lines of business within the Insurance segment, fourth quarter 2008 renewals reflected modest improvement in market conditions as premium rates improved across all line of business and certain lines experienced rate increases. Overall, December 2008 renewals reflected an aggregate price increase of 1% for the entire book. More specifically, December premium rates increased approximately 5% in professional lines, 10% in offshore energy and well over 10% in the Company's specie book. Rates in both property and casualty were down in the low single digits. Initial indications based on January 2009 renewals reflect continued rate improvement with positive rate movement in property, professional and some specialty lines. Rates within the Company's casualty lines were down slightly by approximately 3%, which represents a significant improvement as compared to rate declines experienced in 2008.

While the Insurance segment's gross and net premiums written will be impacted by its decision to focus on those lines of business that provide the best return on capital as described above, as well as from a certain level of lost renewals or business opportunities as a result of rating agency actions taken throughout 2008, indications from recent underwriting activity highlight that retention rates remain strong and broadly in line with management's expectations.

Reinsurance

Across the Reinsurance segment, initial indications, based on January 1, 2009 renewals, point to a moderate rise in premium rates across most major lines of business. Market conditions continue to harden as a result of the reduction in available reinsurer capital, due in part to the credit and liquidity crisis, causing a firming in market pricing across most lines of business. U.S. and non-U.S. catastrophe exposed property lines experienced rate increases of approximately 15% and 5% respectively, while other property lines in the U.S. were generally flat. While U.S. casualty rates, excluding D&O, were down slightly, casualty motor rates in Europe saw increases of up to 10% with rates in other casualty lines remaining flat. In addition, aviation and marine lines of business experienced rate increases of between 5 to 10%.

Investment Environment

The Company seeks to generate revenue from investment activities through returns on its investment portfolio. The Company's current investment strategy seeks to support the liabilities arising from the operations of the Company, generate investment income and build book value over the longer term.

During the year ended December 31, 2008, financial market conditions continued to be extremely challenging as the global credit crisis that began in July 2007, continued to adversely impact global markets. This unprecedented market volatility directly and materially affected the Company's results of operations and investment portfolio during the year ended December 31, 2008, resulting in decreased net investment income and increases in both realized and unrealized losses in the Company's investment portfolio. The fixed income markets experienced a period of extreme volatility during 2008, negatively impacting market liquidity conditions. As a result, the market for fixed-income instruments experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Domestic and international equity markets also experienced heightened volatility and turmoil during this period.

During 2008, the Company reported significant decreases in both its structured credit and corporate portfolios as a result of the negative conditions described above. Within the structured credit portfolio, the market conditions particularly impacted the Company's holdings in sub-prime non-agency securities, second liens, ABS CDOs with sub-prime collateral and Alt-A mortgages ("Topical Assets"), core collateralized debt obligations ("CDOs") and commercial mortgage-backed securities ("CMBS"). Within the corporate portfolio, the Company's financial sector holdings were particularly affected as credit spreads, which widened across the entire rating spectrum impacted all spread assets classes, particularly financials following the bankruptcy of Lehman Brothers Holdings Inc. ("Lehman") in September 2008 and the subsequent failure or near failure of other financial institutions. The impact of the credit spread widening was partially offset by the increase in the fixed income portfolio which resulted from declining government interest rates.

Claims Environment

The Company's profitability in any given period is based upon its premium and investment revenues as noted above, less net losses incurred and expenses. Net losses incurred are based upon claims paid and changes to unpaid loss reserves. Unpaid loss reserves are estimated by the Company and include both reported loss reserves and reserves for losses incurred but not reported, or IBNR. The Company's lower underwriting results for 2008 as compared to 2007 were largely a reflection of the increase in catastrophe and property risk losses experienced in 2008. However, offsetting the current year incurred losses was $610.7 million of net favorable prior year reserve development in various lines of business within the Company's Insurance and Reinsurance segments. In contrast, the Company's positive underwriting results for 2007 and 2006 were partly a result of the lack of significant catastrophe events occurring throughout these years as well as net favorable development of prior year reserves. However, consistent with 2006 and 2007, net favorable development was partially offset in 2008 by the continuing increase in current period loss ratios during this period. The increase in 2008 reflects the impact of the softening rate environment as well as higher levels of catastrophe and attritional losses as noted above. In addition, in 2008, claims activity within the D&O and Errors and Omissions ("E&O") insurance markets overall, rose as a result of an increase in class action lawsuits filed against public companies due to market losses and related stock price depreciation associated with the sub-prime mortgage and credit crisis in the U.S. Management actively monitors its potential exposure to such events and gives due consideration to emerging claim trends in determining its loss reserve requirements at each quarter end. For further analysis of this exposure, see "- Results of Operations" below.

Financial Measures

The following are some of the financial measures management considers important
in evaluating the Company's operating performance in the Company's property and
casualty operations:


(U.S. dollars in thousands, except ratios and
per share amounts)                                          2008                     2007                     2006
Underwriting profit - property and casualty
operations                                            $       307,205          $       737,449          $       733,633
Combined ratio - property and casualty
operations                                                       95.7 %                   88.8 %                   89.5 %
Net investment income - property and casualty
operations (1)                                        $     1,174,856          $     1,289,554          $     1,090,785
Book value per ordinary share                         $         15.46          $         50.30          $         53.12
Fully diluted book value per ordinary share (2)       $         15.46          $         50.29          $         53.01
Return on average ordinary shareholders' equity                    NM *                    2.2 %                   19.6 %

(1) Net investment income relating to property and casualty operations does not include the net investment income related to the net results from structured products.

(2) Fully diluted book value per ordinary share represents book value per ordinary share combined with the impact from dilution of share based compensation including in-the-money stock options at any period end. The Company believes that fully diluted book value per ordinary share is a financial measure important to investors and other interested parties who benefit from having a consistent basis for comparison with other companies within the industry. However, this measure may not be comparable to similarly titled measures used by companies either outside or inside of the insurance industry.

* NM - Not Meaningful

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