2012 Financial Highlights 42

Executive Summary 43

Underwriting Results - Group 48

Results by Segment: Years ended December 31, 2012, 2011 and 2010 56

i) Insurance Segment                                               56

ii) Reinsurance Segment                                            59

Other Expenses (Revenues), Net                                     62

Net Investment Income and Net Realized Investment Gains/Losses     63

Cash and Investments                                               67

Liquidity and Capital Resources                                    77

Critical Accounting Estimates                                      83

i) Reserves for Losses and Loss Expenses                           84

ii) Reinsurance Recoverable                                        94

iii) Premiums                                                      95

iv) Fair Value Measurements                                        97

v) Other-Than-Temporary Impairments                                99

Recent Accounting Pronouncements                                   101

Off-Balance Sheet and Special Purpose Entity Arrangements          101

Non-GAAP Financial Measures                                        101

• Net income available to common shareholders of $495 million, or $4.05 per share basic and $4.00 per diluted share

• Operating income of $422 million, or $3.41 per diluted share(1)

• Gross premiums written of $4.1 billion

• Net premiums written of $3.3 billion

• Net premiums earned of $3.4 billion

• Net favorable prior year reserve development of $245 million

• Significant catastrophe and weather-related losses included:

•         Pre-tax net losses (net of related reinstatement premiums) of $331
          million in relation to Storm Sandy


•         Aggregate pre-tax net losses (net of related reinstatement premiums) of
          $105 million for other notable events of 2012 (including the impact of
          severe drought conditions on U.S. crops, Hurricane Isaac and first and
          second quarter U.S. weather events)


•    Net financial impact of Storm Sandy of $301 million, after consideration of
     reinstatement premiums, ceding commissions and the associated income tax
     benefit


•    No material change in our aggregate estimate for losses related to 2011 and
     2010 calendar year natural catastrophe and weather-related events

• Underwriting income of $263 million and combined ratio of 96.2%

• Net investment income of $381 million

• Net realized investment gains of $127 million

• Senior leadership transition in the second quarter resulted in separation payments and accelerated and incremental share-based compensation expenses totaling $34 million

2012 Consolidated Financial Condition

• Total cash and investments of $14.4 billion; fixed maturities, cash and short-term securities comprise 90% of total cash and investments and have an average credit rating of AA-

• Total assets of $18.9 billion

• Reserve for losses and loss expenses of $9.1 billion and reinsurance recoverable of $1.9 billion

• Total debt of $995 million and a debt to total capital ratio of 14.7%

• Repurchased 9.4 million common shares for total cost of $318 million; remaining authorization under the repurchase program approved by our Board of Directors of $634 million at February 21, 2013

• Common shareholders' equity of $5.3 billion; diluted book value per common share of $42.97

(1) Operating income (loss) is a non-GAAP financial measure as defined in SEC Regulation G. See 'Non-GAAP Financial Measures' for reconciliation to nearest GAAP financial measure (net income available to common shareholders).

• the continuing growth of our new accident & health line, focused on specialty accident and health products; and

• the focus on lines of business with attractive rates, generating premium growth in our insurance segment.

In addition, we effectively lowered the weighted average annual dividend rate on our preferred equity capital base by 42 basis points, to 6.953%, at a book value cost of $7 million. This was achieved via the issuance of $400 million of 6.875% Series C shares, in conjunction with the redemption of $150 million of our 7.25% Series A preferred shares and the repurchase of $247 million of our 7.50% Series B preferred shares via tender offer.

Results of Operations

  Year ended December 31,            2012       % Change       2011       % Change      2010

  Underwriting income (loss):
  Insurance                       $  65,477       87%      $   35,034      (83%)     $ 210,039
  Reinsurance                       197,660        nm        (362,260 )      nm        199,164
  Net investment income             380,957        5%         362,430      (11%)       406,892
  Net realized investment gains     127,469        5%         121,439      (38%)       195,098
  Other expenses, net              (224,322 )     103%       (110,338 )    (29%)      (154,470 )
  Net income                        547,241        nm          46,305      (95%)       856,723
  Preferred share dividends         (38,228 )      4%         (36,875 )      -%        (36,875 )
  Loss on repurchase of preferred   (14,009 )      -%               -        -%              -
  shares
  Net income available to common  $ 495,004        nm      $    9,430      (99%)     $ 819,848
  shareholders

  Operating income (loss)         $ 421,523        nm      $ (153,912 )      nm      $ 611,342

nm - not meaningful
Underwriting Results
2012 versus 2011: The $590 million improvement in our underwriting result during 2012 was largely due to a reduction in the frequency and severity of natural catastrophe and weather-related losses. During 2011, we recognized aggregate pre-tax net losses (net of related reinstatement premiums) of $931 million for numerous catastrophe and weather events, including: the February Christchurch, New Zealand earthquake ("New Zealand II"), the Japanese earthquake and tsunami, the series of severe U.S. storms and tornadoes in April/May, first quarter Australian weather events (January floods and Cyclone Yasi), the Thai floods, the June Christchurch aftershock ("New Zealand III"), the Danish floods, Hurricane Irene and Tropical Storm Lee; these events impacted our reinsurance segment to a greater extent. Comparatively, in 2012, we recognized pre-tax net losses (net of related reinstatement premiums) of $331 million for Storm Sandy and an aggregate $105 million for the impact

of severe drought conditions on U.S. crops, Hurricane Isaac and first and second quarter U.S. weather events. Growth in net premiums earned in our insurance segment and improvements in the current accident year loss ratios exclusive of the catastrophe and weather-related losses for both segments further contributed to the improvement in 2012; this was partially offset by a $13 million reduction in net favorable prior year reserve development and growth in general and administrative expenses.
Our insurance segment's underwriting income for 2011 included aggregate pre-tax net losses (inclusive of premiums to reinstate reinsurance protection) of $157 million related to the 2011 events noted above. Comparatively, underwriting income for 2012 included pre-tax net losses (inclusive of related premiums to reinstate reinsurance protection) of $178 million for Storm Sandy and an aggregate $44 million for Hurricane Isaac and first and second quarter 2012 U.S. weather events. Despite increased catastrophe and weather-related losses in 2012, underwriting income for the segment improved due to growth in net premiums earned (driven by the expansion of our business over the past year), an improvement in the current accident year loss ratio exclusive of catastrophe and weather activity and a $19 million increase in net favorable prior year reserve development. This was partially offset by commensurate growth in acquisition costs and general and administrative expenses.
The $560 million improvement in the reinsurance segment's underwriting result was primarily attributable to the significantly lower level of natural catastrophe and weather-related losses; the majority of our 2011 natural catastrophe and weather-related losses emanated from our reinsurance segment and drove the underwriting loss for that year. The segment's underwriting loss for 2011 included aggregate pre-tax net losses (net of related reinstatement premiums) of $774 million for the events noted above, with the most significant amounts being for New Zealand II, the Japanese earthquake and tsunami and the first quarter Australian weather events. Comparatively, in 2012, we recognized pre-tax net losses (net of related reinstatement premiums) of $153 million for Storm Sandy and an aggregate $60 million for the impact of severe drought conditions on U.S. crops, Hurricane Isaac and first and second quarter 2012 U.S. weather events. An improvement in the current accident year loss ratio, exclusive of these catastrophe and weather-related losses, further contributed to the improvement in 2012. Partially offsetting these improvements was a $32 million reduction in net favorable prior year reserve development, a reduction in net premiums earned and increases in acquisition costs and general and administrative expenses.
2011 versus 2010: The significantly high frequency and severity of natural catastrophe activity in 2011, described above, was the primary driver of the deterioration in underwriting results in that year. However, natural catastrophe activity also impacted underwriting results for 2010. In comparison to the $931 million for 2011 noted above, during 2010 we recognized aggregate pre-tax net losses (net of related reinstatement premiums) of $248 million for the September New Zealand earthquake ("New Zealand I") and the Chilean earthquake, with substantially all of this emanating from our reinsurance segment. Further contributing to the reduction in underwriting income was a $56 million decrease in net favorable prior year reserve development.
Our insurance segment's 2011 underwriting income included $157 million in pre-tax net losses (inclusive of related premiums to reinstate reinsurance protection) related to the events of 2011 noted above, while catastrophe losses in 2010 were insignificant. A $15 million reduction in net favorable prior year reserve development and an increase in acquisition costs also contributed to the reduction in underwriting income; reductions in ceded reinsurance costs and increases in gross premiums written contributed to higher net premiums earned and partially offset these reductions.
Our reinsurance segment's 2011 underwriting loss included aggregate pre-tax net losses (net of related reinstatement premiums) of $774 million for the events of 2011 noted above. Substantially all of our natural catastrophe-related pre-tax net losses in 2010 emanated from the reinsurance segment. A $40 million reduction in net favorable prior period reserve development also contributed to the variance in the underwriting result between periods. Net Investment Income
The variability in our net investment income for 2010 through 2012 was largely attributable to our alternative investment portfolio ("other investments"). Income from this portfolio increased by $56 million in 2012, driven by improved performance for our hedge funds (reflective of global equity market performance) and credit funds (driven by pricing improvement in underlying bank loans). Comparatively, income from these investments decreased $33 million in 2011, reflective of the underperformance of both global equities and bank loans during in that year.
Excluding income from our other investments, net investment income decreased by $12 million and $37 million, respectively, in 2011 and 2012. These decreases were primarily attributable our fixed maturity portfolio, where lower reinvestment yields drove reductions in income despite higher investment balances.

Net Realized Investment Gains
During each period presented, we realized net investment gains largely due to the sale of fixed maturities. Other-than-temporary impairment ("OTTI") charges were $24 million, $16 million and $18 million in 2012, 2011 and 2010, respectively.
Other (Expenses) Revenues, Net
Appreciation in the Sterling and euro against the U.S. dollar drove foreign exchange losses of $30 million in 2012, related to the remeasurement of our foreign-denominated net insurance-related liabilities. In 2011 and 2010, depreciation in these currencies resulted in foreign exchange gains of $45 million and $16 million, respectively. Excluding these foreign exchange-related amounts, other expenses were $170 million, $155 million and $195 million, respectively in 2010, 2011 and 2012.
The $15 million decrease in 2011 was driven by a $23 million reduction in income tax expense, as taxable income declined due to the significant catastrophe activity previously noted. This was partially offset by an increase in interest expense following our March 2010 senior note issuance.
A $53 million increase in corporate expenses drove the increase in other expenses in 2012. Separation payments and accelerated and incremental share-based compensation costs related to our second quarter 2012 senior leadership transition totaled $34 million and were the primary driver of this increase. Partially offsetting the increase in corporate expenses was a $12 million reduction in tax expense, as the impact of Storm Sandy led to minimal taxable income in the U.S. for 2012.
Loss on Repurchase of Preferred Shares

In conjunction with the effective reduction of the dividend rate on our preferred equity base previously discussed, we repurchased $150 million of our 7.25% Series A preferred shares and $247 million of our 7.50% Series B preferred shares during the first half of 2012. While the Series A shares were redeemed at liquidation value, we paid a $7 million premium to repurchase the Series B shares in advance of the first eligible redemption date. This premium, combined with the recognition of the proportionate share of issue costs for both series as an expense, resulted in a $14 million loss. As the issue costs for these shares were recognized in shareholders' equity in the period the shares were originally issued, the only impact on book value related to the $7 million premium on the Series B repurchase. Refer to Item 8, Note 13 to the Consolidated Financial Statements for further details. Outlook

Management expects gross premiums written to increase across both of our segments in 2013. The primary insurance market continues to see favorable pricing momentum. We see ongoing improvement across most classes and geographies within our insurance segment and will pursue opportunities to expand our reach in areas where we believe returns are most attractive.

We believe that the global reinsurance market is generally at equilibrium with acceptable levels of profitability. There is some pressure in lines that have shown strong profitability and have attracted new capacity in recent years. On the other hand, there is some upside pressure on pricing for loss-affected property treaties and lines with recent major loss activity, including Sandy-affected treaties, agriculture and marine, and Management expects that these areas will contribute to growth in reinsurance premiums.

Financial Measures
We believe that the following financial indicators are important in evaluating
our performance and measuring the overall growth in value generated for our
common shareholders:

  Year ended and at December 31,             2012         2011        2010

  ROACE(1)                                     9.7 %       0.2 %       16.2 %
  Operating ROACE(2)                           8.2 %      (3.1 %)      12.1 %
  Diluted book value per common share(3)   $ 42.97     $ 38.08      $ 39.37
  Cash dividends declared per common share    0.97        0.93         0.86
  Value creation(4)                        $  5.86     $ (0.36 )    $  6.58

(1) Return on average common equity ("ROACE") is calculated by dividing net income available to common shareholders for the period by the average shareholders' equity determined by using the common shareholders' equity balances at the beginning and end of the period.

(2) Operating ROACE is calculated by dividing operating income (loss) for the period by the average common shareholders' equity determined by using the common shareholders' equity balances at the beginning and end of the period. Operating ROACE is a non-GAAP financial measure, as defined in SEC Regulation G. See 'Non-GAAP Financial Measures' for additional information and a reconciliation to the nearest GAAP financial measure (ROACE).

(3) Diluted book value per common share represents total common shareholders' equity divided by the number of common shares and diluted common share equivalents outstanding, determined using the treasury stock method.

(4) Value creation represents the change in diluted book value per common share and dividends declared during the period.

Return on equity
Our objective is to generate superior returns on capital that appropriately reward our common shareholders for the risks we assume and to grow revenue only when we expect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any one year may make it difficult to achieve a profitability target in any specific period and, therefore, established a ROACE target of 15% over the full underwriting cycle. Our average annual ROACE since inception is approximately 14%, tracking closely to our long-term goal.
2012 versus 2011: The improvement in our underwriting result, driven by the lower level of catastrophe and weather-related losses previously discussed, was the primary contributor to the improved operating ROACE; the increase in net investment income also contributed. These favorable variances were partially offset by the increase in corporate expenses previously discussed.
In addition to the items noted above for operating ROACE, ROACE is also impacted by net realized investment gains, foreign exchange losses (gains) and the loss on repurchase of preferred shares. The magnitude of our net realized investment gains resulted in these amounts contributing favorably, in aggregate, to our results for both periods; thus ROACE exceeded operating ROACE. 2011 versus 2010: Our underwriting loss, driven by catastrophe and weather-related losses, was the primary driver of the negative operating ROACE for 2011; reductions in net favorable prior year reserve development and net investment income also contributed to a lower return when compared to 2010. Our combined net realized investment gains and foreign exchange gains for 2011 were sufficient for us to recognize net income for the period; as such, our ROACE for the year was marginally positive. Net realized investment gains and foreign exchange gains in 2010 also contributed to a higher ROACE, in comparison to operating ROACE.
Diluted book value per common share
We consider diluted book value per common share to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis will ultimately translate into appreciation of our stock price. The previously described impact of catastrophe and weather-related losses on our 2011 net income available to common shareholders was the primary driver of the 3% reduction in our diluted book value per common share for the 2011 fiscal year. During 2012, our diluted book value per common share appreciated by 13%, driven by $495 million in net income available

to common shareholders, an overall improvement in valuations for our available-for-sale securities and, to a lesser extent, the execution of common share repurchases at a discount to book value. Cash dividends per common share
We believe in returning excess capital to our shareholders by way of dividends (as well as share repurchases) and, accordingly, our dividend policy is an integral part of the value we create for our shareholders. Our cumulatively strong earnings have permitted our Board of Directors to approve nine successive annual increases in quarterly common share dividends. Value creation
Taken together, we believe that growth in diluted book value per common share and common share dividends declared represent the total value created for our common shareholders. Despite the impact of catastrophe events, our net income combined with valuation improvements on our available-for-sale securities and common share repurchases executed at a discount to book value led to an increases in diluted book value per common share during 2010 and 2012; dividends declared provided additional value for our shareholders. The global frequency and severity of catastrophe activity in 2011 drove a small reduction in shareholder value for that year.

UNDERWRITING RESULTS - GROUP
--------------------------------------------------------------------------------
The following table provides our group underwriting results for the periods
indicated. Underwriting income (loss) is a pre-tax measure of underwriting
profitability that takes into account net premiums earned and other insurance
related income as revenues and net losses and loss expenses, acquisition costs
and underwriting-related general and administrative costs as expenses.

  Year ended December 31,                    2012        % Change       2011        % Change       2010

  Revenues:
  Gross premiums written                 $ 4,139,643        1%      $ 4,096,153        9%      $ 3,750,536
  Net premiums written                     3,337,456       (2%)       3,419,434        9%        3,147,540
  Net premiums earned                      3,415,463        3%        3,314,961       12%        2,947,410
  Other insurance related income               2,676                      2,396                      2,073

  Expenses:
  Current year net losses and loss        (2,340,868 )               (2,932,513 )               (1,990,187 )
  expenses
  Prior year reserve development             244,840                    257,461                    313,055
  Acquisition costs                         (627,653 )                 (587,469 )                 (488,712 )
  Underwriting-related general and          (431,321 )                 (382,062 )                 (374,436 )
  administrative expenses(1)

  Underwriting income (loss)(2)          $   263,137        nm      $  (327,226 )      nm      $   409,203


  General and administrative             $   560,981                $   459,151                $   449,885
  expenses(1)
  Income before income taxes(2)          $   550,528                $    61,538                $   895,403

nm - not meaningful
(1) Underwriting-related general and administrative expenses is a non-GAAP measure as defined in SEC Regulation G. Our total general and administrative expenses also included $129,660, $77,089 and $75,449 of corporate expenses for 2012, 2011 and 2010, respectively; refer to 'Other Expenses (Revenues), Net' for additional information related to these corporate expenses. Also, refer to 'Non-GAAP Financial Measures' for further information.

(2) Group (or consolidated) underwriting income (loss) is a non-GAAP financial measure as defined in SEC Regulation G. Refer to Item 8, Note 3 to the Consolidated Financial Statements, for a reconciliation of consolidated underwriting income (loss) to the nearest GAAP financial measures (income before income taxes) for the periods indicated above. Also, refer to 'Non-GAAP Financial Measures' for additional information related to the presentation of consolidated underwriting income (loss).

UNDERWRITING REVENUES
Premiums Written:
Gross and net premiums written, by segment, were as follows:

. . .