Executive Overview

The Company is a leading global reinsurer, with a broadly diversified and balanced portfolio of traditional reinsurance risks and capital markets risks. Successful risk management is the foundation of the Company's value proposition, with diversification of risks at the core of its risk management strategy.

The Company's ability to succeed in the risk assumption and management business is dependent on its ability to accurately analyze and quantify risk, to understand volatility and how risks aggregate or correlate, and to establish the appropriate capital requirements and absolute limits for the risks assumed. All risks are managed by the Company within an integrated framework of policies and processes that seek to ensure the intelligent and consistent evaluation and valuation of risk, and ultimately to provide an appropriate return to shareholders.

The Company's economic objective is to manage a portfolio of risks that will generate compound annual diluted book value per share growth of 10 percent and an average operating return on beginning shareholders' equity of 13 percent over a reinsurance cycle.

See Executive Overview, Key Financial Measures and Other Key Issues of Management in Item 7 of Part II of the Company's 2008 Annual Report on Form 10-K.

Acquisition of Paris Re

On July 4, 2009, the Company entered into agreements to effect a multi-step acquisition of all of the outstanding common shares and warrants of PARIS RE Holdings Limited (Paris Re), a French-listed, Swiss-domiciled diversified reinsurer.

As a first step in the acquisition, the Company will cause a wholly-owned subsidiary (the Acquisition Subsidiary) to purchase (the Block Purchase) all of the Paris Re common shares and Paris Re warrants held by six private equity firms and their related investment vehicles pursuant to the terms of a purchase agreement (the Block Purchase Agreement). Under the Block Purchase Agreement, the Company will acquire approximately 57.5% of the outstanding Paris Re common shares. These shares, when added together with the approximately 6.1% of the outstanding Paris Re common shares that the Company purchased from certain other Paris Re shareholders prior to the announcement of the Paris Re acquisition and the additional approximately 19.5% of the outstanding Paris Re common shares that the Company has subsequently committed to acquire simultaneously with the closing of the Block Purchase from certain other Paris Re shareholders, will give the Company an aggregate ownership of approximately 83.1% of the outstanding Paris Re common shares following the closing of the Block Purchase.

Following the closing of the Block Purchase and subject to certain conditions, the Company will cause the Acquisition Subsidiary to commence a voluntary public exchange offer (the Exchange Offer) for all remaining outstanding Paris Re common shares and Paris Re warrants. The Exchange Offer will be commenced pursuant to the terms of a transaction agreement dated July 4, 2009 between the Company and Paris Re (the Transaction Agreement). If, after completion of the Exchange Offer, the Company and its affiliates own at least 90% of the outstanding Paris Re common shares, the Company will effect a compulsory merger (the Merger), in accordance with Swiss law to acquire all remaining outstanding Paris Re common shares. In the Merger, Paris Re will be merged into the Acquisition Subsidiary with the Acquisition Subsidiary surviving the Merger.

In each step of the acquisition, the Company has exchanged or will exchange
0.300 Company common shares for each Paris Re common share and 0.167 Company common shares for each Paris Re warrant. The per share consideration and per warrant consideration are each subject to adjustment if the parties' tangible book values per share diverge significantly relative to each other prior to the closing of the Block Purchase. In addition, if the Company declares a cash dividend or other cash distribution on the Company's common shares with a record date on or after the closing of the Block Purchase and prior to the earliest date on which Paris Re shareholders have the right to receive payment for the Paris Re common shares tendered in the Exchange Offer, then the per share consideration will be appropriately adjusted upwards.

Immediately prior to the closing of the Block Purchase, Paris Re intends, subject to obtaining the requisite regulatory approvals, to effect an extraordinary cash distribution by way of a capital reduction to all Paris Re shareholders in the amount of CHF 4.17 per Paris Re common share (the Swiss franc equivalent of $3.85 as of July 7, 2009, the date on which Paris Re fixed the U.S. dollar/Swiss franc currency exchange rate to be used for the extraordinary cash distribution) (the Share Capital Repayment). To the extent that the Share Capital Repayment is not made in full immediately prior to the closing of the Block Purchase, the remaining portion will be paid (i) to the shareholders selling their Paris Re common shares and Paris Re warrants to the Company at or contemporaneously with the Block Purchase in the form of a promissory note issued by the Company at the closing of the Block Purchase and
(ii) to all other holders of Paris Re common shares in the form of cash by way of a capital distribution from Paris Re immediately prior to the settlement of the Exchange Offer.

The Paris Re shareholders that have previously sold their Paris Re common shares to the Company prior to the announcement of the transactions will receive a payment of $3.85 for each Paris Re common share sold at the earlier of the closing of the Block Purchase and the termination of the Transaction Agreement (net of dividends paid or payable on the Company's common shares with respect to the period after such sale and prior to the closing of the Block Purchase). This payment to these selling shareholders will be made irrespective of whether the Block Purchase closes or the Share Capital Repayment or any portion thereof is paid.

The Transaction Agreement contains certain termination rights for both the Company and Paris Re and further provides that the Company may be required to pay Paris Re a termination fee of $75 million upon termination of such agreement either because (i) the Company's board of directors withdraws, changes or modifies its recommendation with respect to the transactions contemplated by the Block Purchase Agreement and Transaction Agreement in a manner that is adverse to Paris Re or (ii) the Company's shareholders fail to approve such transactions at the Company's shareholders' meeting called for such purpose.

The Block Purchase is expected to close in the fourth quarter of 2009 and the Exchange Offer and the Merger are expected to close in the first quarter of 2010. However, the exact timing of the completion of the transactions cannot be predicted because they are subject to certain shareholder approvals, regulatory approvals and other customary closing conditions.

Risk Management

A key challenge in the reinsurance industry is to create economic value through the intelligent assumption of reinsurance and capital markets and investment risk, but also to limit or mitigate those risks that can destroy tangible as well as intangible value. Management believes that every organization faces numerous risks that could threaten the successful achievement of a company's goals and objectives. These include choice of strategy and markets, economic and business cycles, competition, changes in regulation, data quality and security, fraud, business interruption and management continuity; all factors which can be viewed as either strategic or operational risks that are common to any industry. In addition to these risks, the Company assumes risks and its results are primarily determined by how well the Company understands, prices and manages assumed risk. While many industries and companies start with a return goal and then attempt to shed risks that may derail that goal, the Company starts with a capital-based risk appetite and then looks for risks that meet its return targets within that framework. Management believes that this construct allows the Company to balance the cedants' need for absolute certainty of claims payment with the shareholders' need for an adequate return on their capital. See Executive Overview - Other Key Issues of Management - Risk Management in Item 7 of Part II of the Company's 2008 Annual Report on Form 10-K for a complete description of the Company's risks, risk management framework and the related risk management strategies and controls.

The Company seeks to maintain a risk appetite moderately above the average of the reinsurance market because Management believes that this position offers the best potential for creating shareholder value at an acceptable risk level. The most profitable products generally present the most volatility and potential downside risk. Management believes that the Company's actual risk profile is equal to or less than the average of the reinsurance market because of the level of diversification achieved in the portfolio, the strict adherence to risk appetite and limits, and the risk mitigation strategies employed.

The Company manages assumed risk at a strategic level through diversification, risk appetite, and absolute limits. For each key risk, the Board approves a risk appetite that the Company defines as the percentage of economic capital the Company is willing to expose to economic loss with a modeled probability of occurring once every 15 years and once every 75 years. The Company manages its exposure to key risks such that the modeled economic loss at a 1 in 15 year and a 1 in 75 year return period are less than the economic capital the Company is willing to expose to the key risks at those return periods.

The major risks to the Company's balance sheet are typically due to events that Management refers to as shock losses. The Company defines a shock loss as an event that has the potential to materially damage economic value. The Company defines its economic value as the difference between the net present value of tangible assets and the net present value of liabilities, using appropriate discount rates. For traded assets, the calculated net present values are equivalent to market values.

There are three areas of risk that the Company has currently identified as having the greatest potential for shock losses: catastrophe, reserving for casualty and other long-tail lines, and equity and equity-like investment risk. The Company manages the risk of shock losses by setting risk appetite and limits as described above for each type of shock loss. The Company establishes limits to manage the absolute maximum foreseeable loss from any one event and considers the possibility that several shock losses could occur at one time, for example a major catastrophe event accompanied by a collapse in the equity markets. Management believes that the limits that it has placed on shock losses will allow the Company to continue writing business should such an event occur.

Other risks such as interest rate risk and credit risk have the ability to impact results substantially and may result in volatility of results from quarter to quarter, but Management believes that by themselves, they are unlikely to represent a material downside threat of destruction of the Company's long-term economic value. See Quantitative and Qualitative Disclosures about Market Risk in Item 3 of Part I of this report for additional disclosure on interest rate risk, credit spread risk, foreign currency risk, counterparty credit risk and equity price risk.

The limits at June 30, 2009 and actual exposures at June 30, 2009 and December 31, 2008 of the Company for its three major risks were as follows:

                                               Limit at        Utilized at          Utilized at
Risk                                        June 30, 2009     June 30, 2009      December 31, 2008
Catastrophe risk - largest zonal limit      $  1.6 billion    $  1.4 billion    $       1.4 billion
Casualty reserving risk - total earned
premiums for casualty and other
long-tail lines for the four most recent
underwriting periods                           3.8 billion       2.6 billion            2.8 billion
Equity investment risk - value of equity
and equity-like securities                     2.4 billion       1.0 billion            920 million

The risk appetite at June 30, 2009 and modeled economic loss at June 30, 2009 and December 31, 2008 for the Company's three major risks were as follows:

                                               Risk          Modeled Economic      Modeled Economic
                                           Appetite at           Loss at                Loss at
Risk                                      June 30, 2009       June 30, 2009        December 31, 2008
Catastrophe risk - 1 in 75 year annual
aggregate loss                            $  960 million    $      870 million    $       810 million
Casualty reserving risk - casualty and
other long-tail lines 1 in 15 year
prior years' reserve development             480 million           330 million            350 million
Equity investment risk - 1 in 75 year
decline in value                             720 million           300 million            280 million

Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates of the Company at June 30, 2009 have not changed materially compared to December 31, 2008. See Critical Accounting Policies and Estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of the Company's 2008 Annual Report on Form 10-K. The following discussion updates specific information related to the Company's estimates for losses and loss expenses and life policy benefits and fair value measurements.

Losses and Loss Expenses and Life Policy Benefits

Losses and Loss Expenses

Because a significant amount of time can elapse between the assumption of risk, occurrence of a loss event, the reporting of the event to an insurance company (the primary company or the cedant), the subsequent reporting to the reinsurance company (the reinsurer) and the ultimate payment of the claim on the loss event by the reinsurer, the Company's liability for unpaid losses and loss expenses (loss reserves) is based largely upon estimates. The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves (case reserves), additional case reserves (ACRs) and incurred but not reported (IBNR) reserves. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. The Company also estimates the future unallocated loss adjustment expenses (ULAE) associated with the loss reserves and these form part of the Company's loss adjustment expense reserves. The Company's Non-life loss reserves for each category and sub-segment are reported in the table included later in this section.

The amount of time that elapses before a claim is reported to the cedant and then subsequently reported to the reinsurer is commonly referred to in the industry as the reporting tail. For all lines, the Company's objective is to estimate ultimate losses and loss expenses. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtraction of case reserves and ACRs from total loss reserves.

The Company analyzes its ultimate losses and loss expenses after consideration of the loss experience of various reserving cells. The Company assigns treaties to reserving cells and allocates losses from the treaty to the reserving cell. The reserving cells are selected in order to ensure that the underlying treaties have homogeneous loss development characteristics (e.g., reporting tail) but are large enough to make estimation of trends credible. The selection of reserving cells is reviewed annually and changes over time as the business of the Company evolves. For each reserving cell, the Company's estimates of loss reserves are reached after a review of the results of several commonly accepted actuarial projection methodologies. In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the reserving cell and underwriting year for which the projection is made.

See Critical Accounting Policies and Estimates-Losses and Loss Expenses and Life Policy Benefits in Item 7 of Part II of the Company's 2008 Annual Report on Form 10-K for additional information on the reserving methodologies employed by the Company, the principal reserving methods used for the reserving lines, the principal parameter assumptions underlying the methods and the main underlying factors upon which the estimates of reserving parameters are predicated.

The Company's best estimate of total loss reserves is typically in excess of the midpoint of the actuarial reserve estimates. The Company believes that there is potentially significant risk in estimating loss reserves for long-tail lines of business and for immature underwriting years that may not be adequately captured through traditional actuarial projection methodologies. In selecting its best estimate of future liabilities, the Company considers both the results of actuarial point estimates of loss reserves as well as the potential variability of these estimates as captured by a reasonable range of actuarial reserve estimates. Selected reserves are always within the indicated reasonable range of estimates indicated by the Company's actuaries.

During the three months and six months ended June 30, 2009 and 2008, the Company reviewed its estimate for prior year losses for each sub-segment of the Non-life segment and, in light of developing data, determined to adjust its ultimate loss ratios for prior accident years. The following table summarizes the prior year net favorable reserve development for the Company's Non-life segment for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars):

                                      For the three        For the three        For the six        For the six
                                      months ended         months ended        months ended       months ended
                                        June 30,             June 30,            June 30,           June 30,
                                          2009                 2008                2009               2008
Prior year favorable loss
development:
Non-life segment
U.S.                                 $            56      $            22      $          77      $          38
Global (Non-U.S.) P&C                             35                   52                 87                110
Global (Non-U.S.) Specialty                       31                   32                 56                 65
Catastrophe                                       21                   24                 23                 34

Total Non-life prior year net
favorable reserve development        $           143      $           130      $         243      $         247

The net favorable reserve development on prior accident years of $143 million and $243 million recorded in the three months and six months ended June 30, 2009, respectively, resulted from a reassessment of the Company's total Non-life reserves of approximately $126 million and $216 million, respectively, of loss development assumptions used by the Company to estimate future liabilities predominantly due to favorable loss emergence, as losses reported by cedants, including treaties where the risk period expired, were lower than expected. This impact was supplemented by approximately $17 million and $27 million related to change in exposure due to downward premium adjustments in the three months and six months ended June 30, 2009, respectively.

The net favorable reserve development on prior accident years of $130 million and $247 million recorded in the three months and six months ended June 30, 2008, respectively, resulted from a reassessment of approximately $137 million and $223 million, respectively, predominantly due to favorable loss emergence and was partially offset by approximately $7 million related to change in exposure due to upward premium adjustments in the three months ended June 30, 2008 and was supplemented by approximately $24 million related to change in exposure due to downward premium adjustments in the six months ended June 30, 2008.

For a discussion of prior year net favorable reserve development by Non-life sub-segment, see Results by Segment below. See Critical Accounting Policies and Estimates-Losses and Loss Expenses and Life Policy Benefits in Item 7 of Part II of the Company's 2008 Annual Report on Form 10-K for additional information by reserving lines.

Case reserves are reported to the Company by its cedants, while ACRs and IBNR reserves are estimated by the Company. The following table shows the gross reserves reported by cedants (case reserves), those estimated by the Company (ACRs and IBNR reserves) and the total net loss reserves recorded as of June 30, 2009 for each Non-life sub-segment (in millions of U.S. dollars):

                                                                           Total gross                         Total net
                                                               IBNR       loss reserves    Ceded loss        loss reserves
                                   Case reserves    ACRs     reserves       recorded        reserves           recorded
U.S.                              $           730   $ 143   $    1,873   $         2,746   $       (29 )    $         2,717
Global (Non-U.S.) P&C                       1,232       9          992             2,233           (36 )              2,197
Global (Non-U.S.) Specialty                 1,120      15        1,016             2,151           (61 )              2,090
Catastrophe                                   160     107           -                267            -                   267

Total Non-life                    $         3,242   $ 274   $    3,881   $         7,397   $      (126 )    $         7,271

The net loss reserves represent the Company's best estimate of future losses and loss expense amounts based on information available as of June 30, 2009. Loss reserves are estimates involving actuarial and statistical projections at a given time that reflect the Company's expectations of the costs of the ultimate settlement and administration of claims. The estimates are continually reviewed and the ultimate liability may be in excess of, or less than, the amounts provided, for which any adjustments will be reflected in the period in which the need for an adjustment is determined.

The Company estimates its net loss reserves using single actuarial point estimates. Ranges around these actuarial point estimates are developed using stochastic simulations and techniques and provide an indication as to the degree of variability of the loss reserves. The Company interprets the ranges produced by these techniques as confidence intervals around the Company's best estimates for each Non-life sub-segment. However, due to the inherent volatility in the business written by the Company, there can be no guarantee that the final settlement of the loss reserves will fall within these ranges.

The actuarial point estimates recorded by the Company, and the range of estimates around these point estimates at June 30, 2009, were as follows for each Non-life sub-segment (in millions of U.S. dollars):

                                                Recorded Point
                                                   Estimate        High       Low
     Net Non-life sub-segment loss reserves:
     U.S.                                      $          2,717   $ 2,966   $ 2,114
     Global (Non-U.S.) P&C                                2,197     2,334     1,920
     Global (Non-U.S.) Specialty                          2,090     2,195     1,824
     Catastrophe                                            267       282       238

It is not appropriate to add together the ranges of each sub-segment in an effort to determine a high and low range around the Company's total net Non-life recorded loss reserves.

The deteriorating condition of the financial markets during 2008 continued into the first quarter of 2009. However, during the second quarter of 2009, signs of improvement in the financial markets emerged, primarily with increases in worldwide equity markets. During the second quarter the U.S. dollar reversed its course over the prior nine months and weakened against most currencies compared to March 31, 2009, risk-free rates increased and credit spreads narrowed. The fair value of the Company's investment portfolio benefited from these improved conditions in the financial markets. The Company's financial position and second quarter results of operations include an increase in the fair value of its investment portfolio, and the related increase in the level of unrealized gains on investments, which following the adoption of SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115" (SFAS 159), are recorded in net income.

Based on information currently available and the range of potential estimated ultimate liabilities, the Company believes that the unpaid loss and loss expense reserves for U.S. and Global (Non-U.S.) specialty casualty, Global (Non-U.S.) credit/surety, U.S. surety and other potentially exposed classes of business contemplate a reasonable provision for exposures related to the effect of increased financial stress in the world economies. The Company is unaware of any specific issues that would materially affect its unpaid loss and loss expenses estimates related to this exposure.

Life Policy Benefits

Policy benefits for life and annuity contracts relate to the business in the Company's Life operations, which predominantly includes reinsurance of longevity, subdivided into standard and non-standard annuities, and mortality business, which includes traditional death and disability covers (with various riders), term assurance and critical illness (TCI) written in the UK and Ireland, and guaranteed minimum death benefit (GMDB) written in Continental Europe.

The Company categorizes life reserves into three types: reported outstanding loss reserves (case reserves), incurred but not reported (IBNR) reserves and reserves for future policy benefits. Such liabilities are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards. Principal assumptions used in the establishment of reserves for future policy benefits have been determined based upon information reported by ceding companies, supplemented by the Company's actuarial estimates of mortality, critical illness, persistency and future investment income, with appropriate provision to reflect uncertainty.

For the traditional life portfolio, case reserves, IBNR reserves and reserves for future policy benefits are mainly calculated at the treaty level. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants.

For the products that are covered by the long duration provisions of Financial Accounting Standards Board (FASB) Statement No. 60 "Accounting and Reporting by . . .