General

The following is a discussion and analysis of our results of operations for the three-month periods ended March 31, 2009 and 2008, and our financial condition as of March 31, 2009 and December 31, 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, 2008, as filed with the Securities and Exchange Commission.

This discussion contains forward-looking statements within the meaning of 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, 2008, 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"), the ratio of acquisition costs to earned premiums (known as the "acquisition cost ratio") and the ratio of general and administrative expenses to earned premiums (known as the "general and administrative 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

Outlook and Trends

Pricing in most insurance and reinsurance markets is generally cyclical in nature. During 2008, pricing throughout the insurance and reinsurance markets declined, with direct and facultative property business showing the largest price reductions. This market softening was a continuation of a trend that largely began in 2007, during which pricing in virtually all insurance and reinsurance markets declined significantly.

During 2009 to date, we have observed positive pricing trends in the majority of our business lines, ending twenty-two consecutive months of price reductions. These price increases also affected the cost of our ceded reinsurance protection, with the overall impact being a reduction in both our gross exposure and our reinsurance purchases. Gross premiums written during the three months ended March 31, 2009 were down 2% as compared to the same period in 2008. This reduction relates primarily to our property catastrophe treaty business, in which we decided to reduce gross exposures at January 1st in anticipation of the lapsing of certain reinsurance covers. This negative impact on gross premium volume was partially offset by: (i) increases in property and other specialty treaty premium written outside of Bermuda; and (ii) price increases on renewal business in most of the classes we write.

Despite a 2% reduction in our gross premiums written, our net premiums written increased by 7% from the 2008 first quarter to that of 2009 as a result of a significant reduction in our reinsurance premiums ceded.

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. The index does not reflect deteriorating pricing or terms of business on risks we decline to renew. The cumulative premium-weighted renewal price index year-to-date, including the April 1st renewals, was 105, with U.S. catastrophe-exposed business showing the most marked improvements from the prior year. This positive price movement is also affecting direct and facultative risks that are not catastrophe-exposed, but to a lesser extent. Our specialty treaty book of business is also showing positive price movement, although the casualty sector remains relatively weak.

We are not immune to the current economic downturn. Our investment returns have been adversely impacted and many of our customers are facing a limited ability to pass higher insurance and reinsurance costs to their customers, and this challenge is in turn reflected in our negotiations. However, we believe that today's pricing environment is favorable to us and expect the improved market conditions we have experienced thus far in 2009 to continue into the year.

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, 2008, as filed with the Securities and Exchange Commission, in particular the specific risk factor appearing on page 27 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 that 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 March 31, 2009, 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                         0.8 %

Europe Windstorm / $20 billion                        1.2 %

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.

Summary Financial Results

We ended the first quarter of 2009 with a fully converted tangible book value per share of $16.31, an increase of 3.2% for the past three months and a decrease of 6.3% for the past twelve months, inclusive of dividends. The increase in fully converted tangible book value per share experienced during the first quarter of 2009 resulted primarily from favorable underwriting results.

Our comprehensive income for the first quarter of 2009 was $51.1 million and our GAAP combined ratio was 74.1%, compared to a comprehensive loss of $1.8 million and a GAAP combined ratio of 89.7% for the comparable 2008 period.

Our underwriting results for the first quarter of 2009 included a $9.9 million net loss from European windstorm Klaus and a $7.5 million net loss from an individual risk. These current year losses were partially offset by net favorable loss reserve development of $14.7 million. Our underwriting results for the first quarter of 2008 included a net loss of $14.4 million relating to European windstorm Emma and $42.8 million of net loss from four significant individual risks, partially offset by $21.0 million of prior year favorable loss development.

Our investment results for the first quarter of 2009 included $2.9 million of net realized and unrealized investment losses, compared to $39.7 million of net realized and unrealized investment losses for the comparable 2008 period. The net investment losses recorded in the first quarter of 2009 were comprised of $9.6 million in net gains from fixed maturities, $9.3 million in net losses from equity securities and $3.2 million in net losses from other investments. The net investment losses recorded in the first quarter of 2008 were comprised of $14.1 million in net losses from fixed maturities, $14.9 million in net losses from equity securities and $10.7 million in net losses from other investments.

During the first quarter of 2009, we recognized a $5.9 million gain on early extinguishment of debt in connection with the repurchase and retirement of $21.0 million in face value of our Senior Notes.

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
as of the dates presented:



                                                  March 31,     Dec. 31,     March 31,
                                                     2009         2008          2008
Book value per share numerators (millions of
dollars):

[A] Book value per share numerator (common
shareholders' equity)                             $  1,437.3    $ 1,357.6    $  1,660.1
Noncontrolling interest in Blue Ocean                      -            -         (90.6 )
Intangible asset (1)                                    (4.8 )       (4.8 )        (4.8 )
[B] Fully converted tangible book value per
share numerator                                   $  1,432.5    $ 1,352.9    $  1,564.7

Book value per share denominators (thousands
of shares):

Common shares outstanding                             86,329       91,827        94,505
Common shares subject to the share issuance
agreement (2)                                              -       (7,920 )      (7,920 )
[C] Book value per share denominator                  86,329       83,907        86,585

Common share obligations under benefit plans           1,487        1,281         1,789
[D] Fully converted book value per share
denominator                                           87,816       85,188        88,374

Book value per share [A] / [C]                    $    16.65    $   16.18    $    18.13
Fully converted book value per share [A] / [D]         16.37        15.94         17.76
Fully converted tangible book value per share
[B] / [D]                                              16.31        15.88         17.71

Change in fully converted tangible book value
per share: (3)
From December 31, 2008                                   3.2 %
From March 31, 2008                                     -6.3 %

(2) The Share Issuance Agreement was terminated on February 27, 2009. Prior to its termination, the Share Issuance Agreement had the effect of substantially eliminating the economic dilution that would otherwise have resulted from the issuance of such Common Shares. Therefore, we did not consider these Common Shares outstanding for the purposes of this computation.

(3) Computed as the change in fully converted tangible book value per share for the period, as adjusted for dividends declared.

We believe that our computations of fully converted tangible book value per share and the 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.