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, all of which involve risk and uncertainty. 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 non-exclusive 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 September 30, 2009 and 2008:



                                                                    (Unaudited)
                                                                Three Months Ended
                                                                   September 30,
(U.S. dollars and shares in thousands, except per
share amounts)                                               2009             2008 (1)
Net income (loss) available to ordinary shareholders       $ (11,402 )      $ (1,649,024 )
Earnings (loss) per ordinary share - basic                 $   (0.03 )      $      (6.04 )
Earnings (loss) per ordinary share - diluted               $   (0.03 )      $      (6.04 )
Weighted average number of ordinary shares and
ordinary share equivalents - basic                           342,118             273,084
Weighted average number of ordinary shares and
ordinary share equivalents - diluted                         342,620             273,084

Change in fully diluted book value per share (2)           $    4.95        $     (21.74 )

The following table presents an analysis of the Company's net income available to ordinary shareholders and other financial measures (described below) for the nine months ended September 30, 2009 and 2008:

                                                                    (Unaudited)
                                                                 Nine Months Ended
                                                                   September 30,
(U.S. dollars and shares in thousands, except per share
amounts)                                                       2009          2008 (1)
Net income (loss) available to ordinary shareholders         $ 246,926     $ (1,199,300 )
Earnings per ordinary share - basic                          $    0.73     $      (5.70 )
Earnings per ordinary share - diluted                        $    0.73     $      (5.70 )
Weighted average number of ordinary shares and ordinary
share equivalents - basic                                      339,095          210,387
Weighted average number of ordinary shares and ordinary
share equivalents - diluted                                    330,349          210,387

Change in fully diluted book value per share (2)             $    8.38     $     (28.64 )

(1) Basic and diluted earnings per ordinary share were adjusted for 2008. For further information, see Note 14 to the Consolidated Financial Statements, "Computation of Earnings per Ordinary Share and Ordinary Share Equivalents."

(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.

The Company's net income and other financial measures as shown below for the three and nine months ended September 30, 2009 have been affected by, among other things, the following significant items:

1) Impact of credit market movements on the Company's investment portfolio;

2) Factors impacting the underwriting environment;

3) Favorable prior year reserve development; and

4) Redemption of a portion of the Company's Series C Preference Ordinary Shares.

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

During the three months ended September 30, 2009, financial market conditions continued the significant improvement that started in the second quarter.

During the three month period ended September 30, 2009, credit spreads across most classes of fixed maturity investments tightened significantly combined with decreases in global interest rates. The net impact of the market conditions on the Company's investment portfolio for the quarter resulted in a decrease in net unrealized losses on available-for-sale investments of $1.8 billion. This represents approximately a 3.6% appreciation on average assets for the quarter ended September 30, 2009. For the nine month period ended September 30, 2009, deterioration in the first three months was more than offset by large improvements for the remainder of the year to date. 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 the Company's 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.

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

                        Interest Rate Movement                  Credit Spread Movement
                         for the quarter ended                   for the quarter ended
                        September 30, 2009 (1)                  September 30, 2009 (2)
                        ('+'/'-' represents an                   ('+'/'-' represents a
                 increase/decreases in interest rates)   widening/narrowing of credit spreads)

United States                                            - 104 basis points (US Corporate A
                 -24 basis points (5 year Treasury)      rated)
                                                         - 9 basis points (US Agency RMBS, AAA
                                                         rated)
                                                         - 273 basis points (US CMBS, AAA
                                                         rated)
United Kingdom                                           - 82 basis points (UK Corporate, AA
                 -10 basis points (10 year Gilt)         rated)
Euro-zone                                                - 95 basis points (Europe Corporate,
                 -9 basis points (5 year Bund)           A rated)

(1) Source: Bloomberg Finance L.P.

(2) Source: Merrill Lynch Global Indices

Net realized losses on investments of $325.5 million in the three months ended September 30, 2009 included net realized losses of approximately $321.7 million related to the write-down of certain of the Company's fixed income, equity and other investments, where the Company determined that there was an other than temporary decline in the value of those investments. See below for further information.

$209.5 million in net realized losses related to impairments of medium term notes backed primarily by investment grade European corporate bonds, $5.6 million of impairments related to the impairments on certain Tier One and Upper Tier Two securities and $51.1 million related to credit impairments on securities with sub-prime and Alt-A collateral following indications that recovery rates on underlying mortgages were lower than previously estimated. The remaining impairment during the third quarter of 2009 was spread across the portfolio including equities, structured credit 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.

2) Factors Impacting the Underwriting Environment

Market concerns around the Company's financial condition continue to dissipate, although market conditions in general remain challenging due to general economic conditions and continuation of "soft market" pricing, seen over the last year.

Insurance

To date, 2009 renewal pricing in the Insurance segment has experienced a modest overall increase of 1% across the entire book as compared to a 6% decrease in rates for the same period a year ago. There has been a steady improvement in pricing throughout the year, resulting in full year increases in specialty lines of 2% and casualty lines of 1% being offset by a decrease of 1% in property lines while professional lines pricing has been flat. The impact of the ratings downgrade by Standard & Poors ("S&P") in December 2008 has affected premiums particularly in certain longer tail lines, but this impact has continued to lessen throughout the year. Premium volumes have also been negatively impacted by global economic conditions, which drove ratable exposure bases down and reduced mergers and acquisitions activity. Additionally, the Company has exited certain lines of business and has been exposed to the ongoing efforts of risk managers to reduce concentrations of risk (limits) with all of their insurers. Partially offsetting these negative impacts has been the continued strengthening of retentions broadly in the Insurance segment during the third quarter, in particular in our professional lines and property books, coupled with solid new business growth.

The following table provides an analysis of gross premiums written, net premiums written and net premiums earned for the Insurance segment for the nine month periods ended September 30, 2009 and 2008:

                                                (Unaudited)                                    (Unaudited)
                                             Nine Months Ended                              Nine Months Ended
                                             September 30, 2009                            September 30, 2008
                                    Gross             Net           Net          Gross             Net              Net
                                  Premiums         Premiums      Premiums      Premiums         Premiums         Premiums
(U.S. dollars in thousands)        Written          Written       Earned        Written          Written          Earned
Casualty - professional lines    $   975,088      $   911,130   $   945,737   $ 1,076,150      $   981,802      $ 1,028,254
Casualty - other lines               772,826          463,732       492,507     1,076,292          671,775          645,873
Property catastrophe                     (30 )          1,758         1,758           (72 )         (2,177 )            268
Other property                       519,105          262,110       325,870       765,042          411,413          390,081
Marine, energy, aviation, and
satellite                            508,039          402,215       431,412       594,577          472,630          480,527
Other specialty lines (1)            450,046          367,045       475,332       645,832          544,907          492,337
Other (2)                              9,109            5,568        14,705        18,482          (23,894 )        (20,184 )
Structured indemnity                   3,460            3,460         9,630        54,808           52,004           51,336

Total                            $ 3,237,643      $ 2,417,018   $ 2,696,951   $ 4,231,111      $ 3,108,460      $ 3,068,492

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

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

Reinsurance

Across the Reinsurance segment, market conditions during the first nine months of 2009 remained stable, with the majority of classes experiencing flat rate movement. US property catastrophe margins improved as rates increased by 11% on an exposure adjusted basis. Non-US catastrophe rates were flat to up 5%, however Asia rates increased 25% following recent loss activity. Non-catastrophe property lines of business showed flat rates for the year to date. Loss activity provided momentum to increase aviation rates by 15% across the sector.

US casualty rates were flat to down 5%, while non-US casualty rates were flat where the market remained disciplined. July 1 is one of the main renewal periods for Latin American business and substantial capacity in the market for most lines, terms and conditions remained firm in the region.

The following table provides an analysis of gross premiums written, net premiums written and net premiums earned for the Reinsurance segment for the nine month periods ended September 30, 2009 and 2008:

                                             (Unaudited)                               (Unaudited)
                                          Nine Months Ended                         Nine Months Ended
                                         September 30, 2009                        September 30, 2008
                                  Gross          Net           Net          Gross          Net           Net
                                Premiums      Premiums      Premiums      Premiums      Premiums      Premiums
(U.S. dollars in thousands)      Written       Written       Earned        Written       Written       Earned
Casualty - professional
lines                          $   146,073   $   146,073   $   156,364   $   205,409   $   205,388   $   194,593
Casualty - other lines             190,567       185,197       192,896       317,083       308,310       328,581
Property catastrophe               353,073       301,346       231,471       390,943       275,948       243,988
Other property                     797,309       516,981       417,898       878,114       527,322       491,607
Marine, energy, aviation,
and satellite                       83,821        80,062        64,011       105,984        99,467        95,551
Other (1)                          147,741       124,631       131,519       220,827       191,410       159,129
Structured indemnity                 7,400         7,400         6,205        37,629        37,629         4,649

Total                          $ 1,725,984   $ 1,361,690   $ 1,200,364   $ 2,155,989   $ 1,645,474   $ 1,518,098

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

3) Favorable prior year reserve development

The Company incurred net favorable prior year reserve development in property and casualty operations for the three and nine month periods ended September 30, 2009 of $74.3 million and $254.0 million, respectively, compared to $92.8 million and $342.4 million, respectively, for the same periods in 2008. Reinsurance segment favorable development for the three and nine month periods ended September 30, 2009 accounted for $65.9 million and $204.5 million, respectively, of the favorable development in 2009, with the balance from the Insurance segment. For further details see the segment results in "Income Statement Analysis" below.

4) Redemption of a portion of the Company's 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 to ordinary shareholders of approximately $211.8 million was recorded.

Financial Measures

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



                                                                    (Unaudited)
                                                                 Three Months Ended
                                                                   September 30,
(U.S. dollars and shares in thousands, except ratios
and per share amounts)                                        2009               2008
Underwriting profit (loss) - property and casualty
operations                                                  $  88,279          $ (95,392 )
Combined ratio - property and casualty operations                93.2 %            106.3 %
Net investment income - property and casualty
operations (1)                                              $ 211,781          $ 293,109
Annualized return on average shareholders' equity                (0.6 )%              NM *

* NM - not meaningful

                                                               Nine Months Ended
                                                                 September 30,
(U.S. dollars and shares in thousands, except
ratios and per share amounts)                            2009                     2008
Underwriting profit - property and casualty
operations                                          $       281,570          $      140,820
Combined ratio - property and casualty
operations                                                     92.8 %                  96.9 %
Net investment income - property and casualty
operations (1)                                      $       672,437          $      899,278
Annualized return on average shareholders'
equity                                                          5.0 %                    NM *

                                                      (Unaudited)
                                                     September 30,            December 31,
                                                         2009                     2008
Book value per ordinary share                       $         23.88          $        15.46
Fully diluted book value per ordinary share
(2)                                                 $         23.84          $        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.

* NM - not meaningful

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 nine month period ended September 30, 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 the nine months ended September 30, 2009, is slightly lower than the same period in the previous year, primarily as a result of a decrease in the loss and loss expense ratio, partially offset by an increase in the underwriting expense ratio. The loss and loss expense ratio has declined as a result of lower levels of catastrophe losses in both the insurance and reinsurance segments and lower current year professional lines losses in the insurance segment partially offset by larger prior year reserve releases reported in 2008. The increased underwriting expense ratio has been driven largely by increases in operating expenses against lower net premiums earned. Operating expenses increased mainly as a result of the Company's restructuring activities as described further below.

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. 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 $226.8 million during the first nine months of 2009 as compared to same period in the prior year. Overall, portfolio yields have decreased because the portfolio mix has changed as a result of the settlement of the Company's GIC liabilities during 2008. The property and casualty operations assumed a number of the floating rate securities that previously supported this business, which are more sensitive to the year-on-year decline in U.S. dollar short-term interest rates. In addition, the Company increased its allocation to lower yielding U.S. Treasuries, cash and agencies as a result of the continued de-risking of the portfolio and to increase liquidity.

Book value per ordinary share

Management also views the change in the Company's book value per ordinary share as an additional measure of the Company's performance. Book value per share is calculated by dividing ordinary shareholders' equity by the number of outstanding ordinary shares at any period end. Book value per ordinary share is affected primarily by the Company's net income (loss), by any changes in the net unrealized gains and losses on its investment portfolio, currency translation adjustments and also the impact of any share repurchase or issuance activity. Book value per ordinary share increased by $8.38 in the first nine months of 2009 as compared to a decrease of $28.64 in the first nine months of 2008. During the nine months ended September 30, 2009, there was a decrease in net unrealized losses of $2.1 billion, net of tax. Although there was significant quarter-to-quarter volatility, in aggregate the impact of tightening credit spreads combined with the benefit from declining interest rates resulted in overall increased book value. Book value was further increased by the issuance of 11,461,080 shares issued at $65.0 per share upon the maturity of the purchase contracts associated with the 7.0% Units, as such issuance was accretive to book value. In addition, book value per ordinary share increased as a result of net income available to ordinary shareholders of $246.9 million which included a $211.8 million gain associated with the purchase of a portion of the Company's Series C Preference Ordinary Shares.

Annualized return on average ordinary shareholders' equity

Annualized return on average ordinary shareholder's equity ("ROE") is another financial measure that management considers important in evaluating the Company's operating performance. ROE is calculated by dividing the net income for any period by the average of the opening and closing ordinary shareholders' equity. The Company establishes minimum target ROEs for its total operations, segments and lines of business. If the Company's minimum ROE targets over the longer term are not met with respect to any line of business, the Company seeks to modify and/or exit these lines. In addition, the Company's compensation of its senior officers is significantly dependent on the achievement of the Company's performance goals to enhance shareholder value as measured by ROE (adjusted for certain items considered to be 'non-operating' in nature). For the first nine months of 2009, ROE was 13.7%, significantly higher than the same period in the prior year when it was negative, mainly as a result of the closing of the Master Agreement in August 2008 as described above. Shareholders' equity increased over the past twelve months mainly as a result of the decreases in unrealized losses on investments and favorable foreign exchange translation adjustments during this period.

Other Key Focuses of Management

See the discussion of the Other Key Focuses of Management in Item 7 of the Company's Form 10-K for the year ended December 31, 2008. That discussion is updated with the disclosures set forth below.

Throughout the latter part of 2008 and into 2009, the Company remains focused on, among other things, simplifying the Company's business model to focus on core property and casualty business and enhancing its enterprise risk management . . .