General

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

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

This discussion and analysis should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the audited Consolidated Financial Statements and notes thereto, presented under Item 7 and Item 8, respectively, of the Company's Form 10-K for the year ended December 31, 2008.

Executive Overview

See "Executive Overview" in Item 7 of the Company's Form 10-K for the year ended December 31, 2008.

Results of Operations

The following table presents an analysis of the Company's net income available
to ordinary shareholders and other financial measures (described below) for the
three months ended March 31, 2009 and 2008:


                                                                              (Unaudited)
                                                                          Three Months Ended
(U.S. dollars and shares in thousands, except per share                        March 31,
amounts)                                                               2009              2008 (1)
Net income available to ordinary shareholders                      $   178,379         $   211,873
Earnings per ordinary share - basic                                $      0.53         $      1.19
Earnings per ordinary share - diluted                              $      0.53         $      1.19
Weighted average number of ordinary shares and ordinary share
equivalents
- basic                                                                336,217             178,357
Weighted average number of ordinary shares and ordinary share
equivalents
- diluted                                                              336,218             178,357

(1) Basic and diluted earnings per ordinary share was adjsuted for 2008. For further information, see Note 13 to the Consolidated Financial Statements, "Computation of Earnings per Ordinary Share and Ordinary Share Equivalents."

The Company's net income and other financial measures as shown below for the three months ended March 31, 2009 have been affected by, among other things the following significant items:

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

During the quarter ended March 31, 2009, 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 quarter ended March 31, 2009. The credit markets experienced a period of extreme deterioration during 2008, and continuing with certain sectors in early 2009, negatively impacting market liquidity conditions. As a result, the market for fixed-income instruments continued to experience decreased liquidity, increased price volatility, credit downgrade events, and

During the first quarter of 2009, the Company's holdings of Tier One and Upper Tier Two securities (representing committed term debt and hybrid instruments senior to the common and preferred equities of the financial institutions) were particularly impacted by current market conditions, resulting in an increase in net unrealized losses in this portfolio of $195.2 million. In addition, the Company recognized charges for other than temporary impairments of $80.7 million as the Company participated in exchange offers related to Royal Bank of Scotland and Lloyds HBOS. In addition, during the first quarter of 2009, the Company's holdings in non- agency residential mortgage product and Core CDO's deteriorated as a result of escalated loss assumptions in the underlying collateral pool. This resulted in an increase in net unrealized losses of $47.9 million and $125.0 million, and other than temporary impairments of $144.0 and $19.4 million on non-agency residential mortgages and Core CDO's, respectively.

The following table summarizes the impact on the current quarter's mark-to-market of the assets classes mentioned above:

                                                                           Quarter Ended
                                                                           March 31, 2009
                                                                                          Change
                                                                   Realized               in Net
                                                                  (Loss) and            Unrealized
(U.S. dollars in millions)                                      (Impairments)             (Loss)
Tier One and Upper Tier Two Securities                          $      (90.0 )         $     (195.2 )

Non-agency RMBS:
Sub-prime first lien mortgages                                  $      (52.5 )         $        3.0
Alt-A mortgages                                                        (32.2 )                (31.7 )
Second lien mortgages (including sub-prime second lien
mortgages)                                                              (1.9 )                 (8.2 )
ABS CDOs with sub-prime collateral                                      (8.5 )                  5.8
Prime mortgages                                                        (43.7 )                (21.2 )
Jumbo mortgages                                                         (9.9 )                  4.4

                                                                $     (148.7 )         $      (47.9 )

Core CDO's:                                                     $      (22.7 )         $     (125.0 )

The following table provides further detail regarding the extreme volatility in the global credit markets, as well as in government interest rates using some sample market indices:

                   Interest Rate Movement
                    for the quarter ended             Credit Spread Movement
                     March 31, 2009 (1)                for the quarter ended
                   ('+'/'-' represents an               March 31, 2009 (2)
                    increase/decreases in              ('+'/'-' represents a
                       interest rates)         widening/narrowing of credit spreads)
United States    + 11 basis points (5 year     - 25 basis points (US Corporate A
                 Treasury)                     rated)
                                               - 78 basis points (US Agency RMBS,
                                               AAA rated)
                                               + 3 basis points (US CMBS, AAA rated)
United Kingdom   + 15 basis points (10 year    + 45 basis points (UK Corporate, AA
                 Gilt)                         rated)
Euro-zone        - 9 basis points (5 year      + 5 basis points (Europe Corporate, A
                 Bund)                         rated)

(1) Source: Bloomberg Finance L.P.

(2) Source: Merrill Lynch Global Indices (maintained by Barclays)

The net impact of the market conditions on the Company's investment portfolio for the quarter ended March 31, 2009 resulted in net realized losses of $251.9 million and an increase in net unrealized losses on available-for-sale investments of $790.4 million. This represents approximately a 3.9% deterioration on average assets for the quarter ended March 31, 2009. See Item 1A, "Risk Factors," "Deterioration in the public debt and equity markets could lead to additional investment losses" and "We are exposed to significant capital markets risk related to changes in interest rates, credit spreads, equity prices and foreign exchange rates which may adversely affect our results of operations, financial condition or cash flows," in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

As noted above, $244.1 million of impairments related to Tier One and Upper Tier Two securities, Non-Agency RMBS and Core CDOs. $84.7 million related to securities with sub-prime and Alt-A collateral which are included in the table above. The remaining impairment during the first quarter of 2009 was spread across the portfolio including structured credit, equity and other fixed income investments. Consistent with prior quarters, management continues to evaluate the impairment of the portfolio and satisfy itself that the remaining gross unrealized losses are temporary in nature.

All portfolio holdings, including those with sub-prime exposure, are reviewed as part of the ongoing other than temporary impairment monitoring process. The Company continues to actively monitor its exposures, and to the extent market disruptions continue, including but not limited to disruptions in the residential mortgage market and the related impacts on the assumptions embedded in the Company's impairment assessments and estimates of future cash flows, the Company's financial position could be negatively impacted. See Item 1A, "Risk Factors - Deterioration in the public debt and equity markets could lead to additional investment losses," above.

Alternative investment portfolio

Net loss from investment fund affiliates was $26.9 million in the quarter ended March 31, 2009. This was primarily driven by net losses of $42.9 million within the Company's private investments, which is recorded on a quarter lag and reflects deterioration in the fourth quarter of 2008 on the valuation of comparative investments used to determine fair value. These losses were partially offset by income from alternative fund affiliates of $16.0 million reflecting improving market conditions for credit and global focused alternative managers.

2) Factors Impacting the Underwriting Environment

Insurance

With regards to market conditions within the core lines of business of the Insurance segment, first quarter 2009 renewals reflected continued competitive pressures. Renewals reflected an aggregate price decrease of approximately 2.0% for the entire book, largely influenced by single digit rate declines in the Insurance segment's European January renewals. Premium rates increased approximately 1% in core professional lines, with a 12% increase in financial institutions, 6% in marine and offshore energy and 7% in the Company's specie book. Property and casualty rates reflected low single digit decreases of approximately 4%. Data for February and March showed some rate improvement, with moderate increases in property and some specialty lines and a lessoning of casualty rate decreases.

Gross premiums written were impacted by the Company's decision to reduce its writings of long-term agreements, exit some specific sub-lines of business and by unfavorable foreign exchange rate movements following the significant strengthening of the U.S. Dollar over the past six months. In addition, while market conditions impacted rates as noted above, the credit rating downgrade by S&P in December 2008 also negatively impacted some renewals as well as new business opportunities, resulting in a decrease in gross premiums written. As well, weakened economic conditions resulted in declining ratable exposure bases and risk managers capping spending and diversifying their exposures by spreading limits across multiple carriers. These conditions impacted renewals across several lines of business, in particular professional lines and excess casualty lines and new business flow was also negatively impacted across most lines. As the quarter proceeded, the Company did see improving underlying trends in several metrics, including submissions and renewals.

                                                        (Unaudited)                                                               (Unaudited)
                                                     Three Months Ended                                                       Three Months Ended
                                                       March 31, 2009                                                           March 31, 2008
                                     Gross                    Net                   Net                    Gross                      Net                       Net
(U.S. dollars in                    Premiums               Premiums              Premiums                Premiums                  Premiums                  Premiums
thousands)                          Written                 Written               Earned                  Written                   Written                   Earned
Casualty - professional
lines                           $       213,805          $     202,861         $     316,189         $       304,386           $       267,862           $       345,567
Casualty - other lines                  311,748                207,507               154,505                 490,735                   335,571                   219,268
Property catastrophe                          2                      2                     2                     (30 )                  (1,105 )                     766
Other property                          196,442                140,022               110,598                 334,915                   225,682                   131,014
Marine, energy, aviation,
and satellite                           194,402                146,422               147,648                 234,491                   186,732                   171,087
Other specialty lines (1)               171,682                131,751               170,097                 239,146                   188,802                   163,176
Other (2)                                 2,954                  3,393                 6,210                   4,669                   (37,079 )                 (36,374 )
Structured indemnity                        210                    210                 4,862                  20,037                    17,387                    13,898

Total                           $     1,091,245          $     832,168         $     910,111         $     1,628,349           $     1,183,852           $     1,008,402

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

(2) Other includes employers' liability, surety, political risk and other lines.

Reinsurance

Across the Reinsurance segment, January 1, 2009 renewals resulted in a moderate rise in premium rates across most major lines of business. Market conditions continued 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%.

While rate changes have positively impacted gross premiums written, such increases have been more than offset by the Company's focus on short-tail lines, certain lost renewals and reduced shares on certain accounts as a result of the S&P ratings downgrade in December 2008, most notably within the Company's European based reinsurance operations. In addition, unfavorable foreign exchange rate movements negatively impacted gross premiums written as a result of the increase in the value of the U.S. Dollar against most major currencies over the past six months.

The following table provides an analysis of gross premiums written, net premiums written and net premiums earned for the Reinsurance segment for the three month periods ended March 31, 2009 and 2008:

                                                        (Unaudited)                                                          (Unaudited)
                                                     Three Months Ended                                                  Three Months Ended
                                                       March 31, 2009                                                      March 31, 2008
                                    Gross                   Net                    Net                    Gross                   Net                   Net
(U.S. dollars in                   Premiums               Premiums               Premiums               Premiums               Premiums              Premiums
thousands)                         Written                Written                 Earned                 Written                Written               Earned
Casualty - professional
lines                           $      60,288                 60,288                 53,122          $        82,910         $      82,908         $      66,621
Casualty - other lines                 88,006                 85,005                 71,655                  176,942               171,459               117,889
Property catastrophe                  203,468                191,868                 70,696                  244,060               216,206                93,149
Other property                        277,868                193,962                142,760                  289,455               226,935               179,601
Marine, energy, aviation,
and satellite                          46,878                 43,895                 21,281                   68,919                66,317                31,550
Other (1)                             111,649                 99,299                 52,093                  206,385               185,002                54,499
Structured indemnity                   (1,174 )               (1,174 )                  (31 )                  3,874                 3,874                 1,069

Total                           $     786,983                673,143                411,576          $     1,072,545         $     952,701         $     544,378

(1) Other includes employers' liability, surety, political risk and other lines.

During the first three months of 2009, the Company incurred net favorable prior year reserve development in property and casualty operations of $90.2 million compared to $67.0 million for the same period in 2008. Reinsurance favorable development accounted for $83.5 million of the favorable development in 2009, with the balance from the Insurance segment. In addition, net losses incurred were lower during the first quarter of 2009 as compared the same period in 2008 as a result of a lower level of catastrophe losses and the lower level of exposures resulting from reduced premium writings over the past year. For further details see the segment results in the Income Statement Analysis below.

4) Redemption of Series C Preference Ordinary Shares

On March 26, 2009, the Company completed a cash tender offer for its outstanding Series C Preference Ordinary Shares that resulted in approximately 12.7 million Series C Preference Ordinary Shares with a liquidation value of $317.3 million being purchased by the Company for approximately $104.7 million plus accrued and unpaid dividends, combined with professional fees totaling $0.8 million. As a result, a book value gain of approximately $211.8 million was recorded in the first quarter of 2009 to common shareholders.

Financial Measures

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


                                                                          (Unaudited)
                                                                      Three Months Ended
(U.S. dollars and shares in thousands, except ratios and                   March 31,
per share amounts)                                                 2009                2008
Underwriting profit - property and casualty operations         $   104,903         $   108,071
Combined ratio - property and casualty operations.                    93.0 %              93.6 %
Net investment income - property and casualty operations
(1)                                                            $   242,166         $   308,041
Annualized return on average shareholders' equity                     13.9 %               9.9 %



                                                     (Unaudited)
                                                      March 31,           December 31,
                                                        2009                  2008
Book value per ordinary share                        $     15.02         $        15.46
Fully diluted book value per ordinary share (2)      $     15.02         $        15.46

(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 is a non-GAAP measure and 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.

Underwriting profit - property and casualty operations

One way that the Company evaluates the performance of its insurance and reinsurance operations is the underwriting profit or loss. The Company does not measure performance based on the amount of gross premiums written. Underwriting profit or loss is calculated from premiums earned and fee income, less net losses incurred and expenses related to underwriting activities, plus unrealized foreign exchange gains and losses on underwriting balances. Underwriting profit in the three month period ended March 31, 2009 is primarily reflective of the combined ratio discussed below.

Combined ratio - property and casualty operations

The combined ratio for property and casualty operations is used by the Company and many other insurance and reinsurance companies as another measure of underwriting profitability. The combined ratio is calculated from the net losses incurred and underwriting expenses as a ratio of the net premiums earned for the Company's insurance and reinsurance operations. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% reflects an underwriting loss. The Company's combined ratio for

Net investment income - property and casualty operations

Net investment income related to property and casualty operations is an important measure that affects the Company's overall profitability. The largest liability of the Company relates to its unpaid loss reserves, and the Company's investment portfolio provides liquidity for claims settlements of these reserves as they become due, and thus a significant part of the portfolio is invested in fixed income securities. Net investment income is influenced by a number of factors, including the amounts and timing of inward and outward cash flows, the level of interest rates and credit spreads and changes in overall asset allocation. Net investment income related to property and casualty operations decreased by $65.9 million during the first quarter of 2009 as compared to same period in the prior year. Overall, portfolio yields have decreased as yields earned on investment of cash flows and reinvestment of maturing or sold securities are generally lower than on securities previously held, as prevailing market interest rates have decreased over the last year. In addition, the portfolio mix has changed as a result of the settlement of the GIC liabilities during 2008, as the property and casualty operations assumed a number of the floating rate securities that previously supported this business. In addition, the Company increased its allocation to lower yielding U.S. Treasuries, cash and . . .