General

The following is a discussion and analysis of our results of operations for the three month periods ended March 31, 2012 and 2011, and our financial condition as of March 31, 2012 and December 31, 2011. 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, 2011, 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 our control. See Item 1A "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission, for specific important factors that could cause actual results to differ materially from those contained in forward looking statements. In particular, statements using words such as "may," "should," "estimate," "expect," "anticipate," "intend," "believe," "predict," "potential," or words of similar meaning generally involve forward-looking statements.

Important events and uncertainties that could cause our actual results, future dividends on, or repurchases of, Common Shares or Preferred Shares to differ include, but are not necessarily limited to: market conditions affecting the prices of our Common Shares or Preferred Shares; the possibility of severe or unanticipated losses from natural or man-made catastrophes, including those that may result from changes in climate conditions, including, but not limited to, global temperatures and expected sea levels; the effectiveness of our loss limitation methods; our dependence on principal employees; our ability to execute the business plans of the Company and its subsidiaries effectively; the cyclical nature of the insurance and reinsurance business; the levels of new and renewal business achieved; opportunities to increase writings in our core property and specialty insurance and reinsurance 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 written premium estimates reported by cedants and brokers on pro-rata contracts and certain excess-of-loss contracts where a deposit or minimum premium is not specified in the contract; the inherent uncertainties

of establishing reserves for loss and loss adjustment expenses, 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; changes in and the impact of governmental legislation or regulation, including changes in tax laws in the jurisdictions where we conduct business; 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 our 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 operating subsidiaries; and the impact of foreign currency fluctuations.

We undertake no obligation to publicly update 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 cyclical in nature and the high level of natural catastrophe activity experienced during 2011 led to improved property catastrophe pricing conditions into 2012. In connection with January 1, 2012 renewals, our Property Catastrophe -Treaty line of business achieved overall price increases of approximately 10%, including increases within our U.S. portfolio of approximately 15%. These rate improvements, along with the increased utilization of our privately placed underwriting partnerships, enabled us to grow our catastrophe-exposed premium writings during the first quarter of 2012, as compared to the first quarter of 2011, while decreasing our net catastrophe limits. As a result, and as we enter the mid-year renewal period, we have additional capacity to take advantage of a pricing environment that we expect will show further improvement.

Our strong capital position also provides us with the continued ability to repurchase our Common Shares. Due to the current market valuation of our Common Shares relative to their underlying net asset value, Common Share repurchases represent an alternative means of increasing shareholder value, as measured by our growth in fully converted book value per Common Share.

Natural Catastrophe Risk Management

We insure and reinsure exposures throughout the world against various natural catastrophe perils. We manage our exposure to these perils using a combination of methods, including underwriting judgment, CATM (our proprietary risk management system), third-party vendor models and third-party protection such as purchases of outwards reinsurance and derivative instruments.

Our multi-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 an aggregation of modeled underwriting, investment and other risks. The Board regularly reviews the outputs from this process, and we routinely seek to refine and improve our risk management process.

The following discussion should be read in conjunction with Item 1A "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission, in particular the specific risk factor 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 monitor our net reinsurance treaty contract limits that we believe are exposed to a single natural catastrophe occurrence within certain broadly defined major catastrophe zones. We provide these limits as a measure of our relative potential loss exposure across major zones in the event a natural catastrophe occurs.

                   Net Reinsurance Treaty Limits by Zone (1)



                            Treaty Limits    Percentage of March 31, 2012
                             (Millions)          Shareholders' Equity
U.S. Hurricane:
Mid-Atlantic hurricane     $           489                             30 %
Northeast hurricane                    366                             23 %
Gulf hurricane                         303                             19 %
Florida hurricane                      302                             19 %
Hawaii hurricane                       173                             11 %

U.S. Earthquake:
New Madrid earthquake      $           541                             34 %
California earthquake                  369                             23 %
Northwest earthquake                   360                             22 %

Europe Windstorm:
Western Europe windstorm   $           329                             20 %
UK & Ireland windstorm                 303                             19 %
Scandinavia windstorm                  111                              7 %

Other Countries:
Japan earthquake           $           295                             18 %
Canada earthquake                      233                             14 %
Australia earthquake                   177                             11 %
Australia cyclone                      171                             11 %
Turkey earthquake                      162                             10 %
New Zealand earthquake                 161                             10 %
Japan windstorm                        156                             10 %
Chile earthquake                       112                              7 %

The treaty limits presented are shown net of any outward reinsurance or other third-party protection we purchase but have not been reduced by any expected reinstatement premiums. The treaty limits include all business coded as property catastrophe reinsurance (including retrocessional business), property pro-rata reinsurance, workers compensation catastrophe reinsurance and event-linked derivative securities, but do not include individual risk business and other reinsurance classes.

For U.S. earthquake, the regional limits shown are for earthquake ground motion damage only, i.e., excluding limits for contracts that do not specifically cover earthquake damage but may provide coverage for fire following an earthquake event. Contracts which provide coverage for multiple regions are included in the totals for each potentially exposed zone, therefore the limits for a single multi-zone policy may be included within several different zone limits.

These treaty limits are a snapshot of our exposure as of January 1, 2012. As of that date, New Madrid earthquake represents our largest concentration of net reinsurance treaty limits among the selected zones. The relative comparison between zones and the absolute level of exposure may change materially at any time due to changes in the composition of our portfolio and changes in our outward reinsurance program.

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 property catastrophe reinsurance (including retrocessional business), property pro-rata reinsurance, workers compensation catastrophe reinsurance, event-linked derivative securities and individual risk business, offset by the net benefit of any reinsurance or derivative protections we purchase and the benefit of reinstatement premiums.

There is no single standard methodology or set of assumptions utilized industry-wide in estimating property catastrophe losses. As a result, it may be difficult to accurately compare estimates of risk exposure among different insurance and reinsurance companies, due to, among other things, differences in modeling, modeling assumptions, portfolio composition and concentrations, and selected event scenarios.

The table below details the projected net impact from single event losses as of January 1, 2012 for selected zones at selected return period levels using AIR Worldwide Corporation's CLASIC/2 model version 13.0, one of several industry-recognized third-party vendor models. It is important to note that each catastrophe model contains its own assumptions as to the frequency and severity of loss events, and results may vary significantly from model to model.

As we utilize a combination of third-party models, CATM and underwriting judgement to project the net impact from single event losses, our internal projections may be higher or lower than those presented in the table below.

      Net Impact From Single Event Losses by Return Period (in years) (1)



                         Net Impact           Percentage of March 31, 2012
                         (Millions)               Shareholders' Equity
                    100-year    250-year       100-year          250-year

U.S. Hurricane     $      247   $     302               15 %              19 %

U.S. Earthquake           197         252               12 %              16 %

Europe Windstorm          166         190               10 %              12 %

As of January 1, 2012, our three largest modeled exposures to a single event loss at a 250-year return period were U.S. Hurricane, U.S. Earthquake and Europe Windstorm.

Our net impact from single event losses 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. For example, our net impact from a large windstorm in Europe may differ materially depending on whether the majority of loss comes from the U.K. & Ireland or from Continental Europe.

Given the limited availability of reliable historical data, there is a great deal of uncertainty with regard to the accuracy of any catastrophe model, especially when contemplating longer return periods.

Our single event loss estimates represent snapshots as of January 1, 2012. The composition of our in-force portfolio may change materially at any time due to the acceptance of new policies, the expiration of existing policies, and changes in our outwards reinsurance and derivative protections.

Annual Operating Result

In addition to monitoring treaty contract limits and single event accumulation potential, we attempt to simulate our annual operating result to reflect an aggregation of modeled underwriting, investment and other risks. This approach estimates a net operating result over simulated twelve month 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 both natural catastrophe and other circumstances and attempts to take into account certain risks which are unrelated to our underwriting activities. Through our modeling, we endeavor to take into account many risks that we face as an enterprise. However, by the very nature of the insurance and reinsurance business, and due to limitations associated with the use of models in general, our simulated result does not cover every potential risk.

Summary Financial Results

Quarter Ended March 31, 2012

We ended the first quarter of 2012 with a FCBVPCS of $24.30, an increase of 7.5% for the period after taking into account dividends declared on Common Shares. The increase in our FCBVPCS was primarily the result of strong underwriting and investment results. Our comprehensive income for the first quarter of 2012 was $110.8 million and our GAAP combined ratio was 58.9%.

Our underwriting results for the first quarter of 2012 contained no significant catastrophe losses and benefitted by $28.7 million in prior year favorable loss reserve development. Our investment results for the first quarter of 2012 included $32.4 million of net realized and unrealized investment gains which were comprised of $22.5 million in net gains from fixed maturities, $7.2 million in net gains from equity securities and $2.7 million in net gains from other investments.

Quarter Ended March 31, 2011

We ended the first quarter of 2011 with a FCBVPCS of $23.10, a decrease of 5.7% for the period after taking into account dividends declared on Common Shares. The decrease in our FCBVPCS was primarily the result of significant natural catastrophe losses offsetting our investment results. Our comprehensive loss for the first quarter of 2011 was $103.8 million and our GAAP combined ratio was 178.8%.

Our underwriting results for the first quarter of 2011 included $214.3 million of net catastrophe losses (not including the benefit of reinstatement premiums) from earthquakes in New Zealand and Japan, flooding in Australia and Cyclone Yasi. These losses were partially offset by $33.6 million of prior year favorable loss reserve development and $16.6 million of reinstatement premiums. Our investment results for the first quarter of 2011 included $16.6 million of net realized and unrealized investment gains which were comprised of $3.3 million in net gains from fixed maturities, $12.6 million in net gains from equity securities and $0.7 million in net gains from other investments.

Book Value Per Common Share



The following table presents our computation of book value per Common Share,
fully converted book value per Common Share (or FCBVPCS) and fully converted
tangible book value per Common Share:



                                                 March 31,      Dec. 31,      March 31,
                                                   2012           2011          2011
Book value numerators (in millions):

Shareholders' Equity                            $   1,615.1    $  1,549.3    $   1,472.1
Preferred Shares                                     (150.0 )      (150.0 )            -
[A] Common Shareholders' Equity                     1,465.1       1,399.3        1,472.1
Intangible asset (1)                                      -             -           (4.7 )
[B] Tangible Common Shareholders' Equity        $   1,465.1    $  1,399.3    $   1,467.4

Book value denominators (in thousands):

[C] Common Shares outstanding                        58,923        60,864         62,347
RSU obligations under benefit plans                   1,377           761          1,378
[D] Common Shares and RSUs outstanding               60,300        61,625         63,725

Book value per Common Share [A] / [C]           $     24.86    $    22.99    $     23.61
Fully converted book value per Common Share
[A] / [D]                                             24.30         22.71          23.10
Fully converted tangible book value per
Common Share [B] / [D]                                24.30         22.71          23.03

Increase in FCBVPCS: (2)

From December 31, 2011                                  7.5 %
From March 31, 2011                                     7.0 %

(2) Computed as the change in our FCBVPCS after taking into account dividends declared on Common Shares of $0.105, and $0.41 during the three and twelve month periods ended March 31, 2012, respectively.

Our computations of FCBVPCS and the increase or decrease in FCBVPCS are non-GAAP measures which we believe 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.

Further, the Compensation Committee has determined that for 2012 both our annual cash bonus opportunities and our Variable RSU awards will incorporate an "increase in FCBVPCS" performance measure, rather than our former ROE-based performance measure. We believe that this refinement of the performance measure:
(i) more directly aligns our interests and motivations with those of shareholders, since it encompasses both our actual underwriting results and our actual investment results; and (ii) provides our employees with the ability to more easily understand, and identify with, their incentive hurdle, since we present our calculations of FCBVPCS and the increase or decrease in our FCBVPCS in our quarterly earnings releases and filings with the Securities and Exchange Commission. See Note 13.