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 definitive agreements to effect a multi-step acquisition of all the outstanding common shares and warrants of PARIS RE Holdings Limited (Paris Re), a French-listed, Swiss-based diversified reinsurer and its operating subsidiaries. In July 2009, the Company purchased approximately 6.1% of the outstanding Paris Re common shares.

On October 2, 2009, the Company closed the Block Purchase and the associated purchases of 62.1 million Paris Re common shares and 8.4 million warrants to purchase common shares of Paris Re by issuing 20.0 million of its common shares. The Company's shareholders approved the issuance of these shares at a Special General Meeting on September 24, 2009. The Paris Re common shares acquired in these purchases represent in the aggregate approximately 76.9% of the outstanding Paris Re common shares. Following the closing of the Block Purchase, in late October 2009, the Company entered into a number of separate securities purchase agreements pursuant to which the Company acquired in the aggregate approximately 4.6 million Paris Re common shares held by certain Paris Re shareholders (collectively, the Subsequent Purchases), representing approximately 5.7% of the outstanding Paris Re common shares. In the Subsequent Purchases, the Company issued approximately 1.4 million of its common shares to the holders of Paris Re common shares. As a result of the Block Purchase and associated purchases that closed on October 2, 2009 and the Subsequent Purchases, the Company's ownership of Paris Re has increased from approximately 6.1% as of September 30, 2009, to approximately 88.7% of Paris Re's outstanding common shares.

On October 21, 2009, all the members of the Paris Re management board other than Hans-Peter Gerhardt, the chief executive officer of Paris Re, entered into voting agreements with the Company, pursuant to which they agreed to vote certain of their Paris Re common shares in favor of, among other things, the Merger. By virtue of these voting agreements and the similar voting commitment previously made by Mr. Gerhardt to the Company on September 28, 2009, a total of 1.7 million Paris Re common shares, representing approximately 2.2% of the outstanding Paris Re common shares, are committed to be voted in favor of the Merger. Accordingly, the Company has secured, through its ownership of Paris Re common shares and the binding voting commitments, more than 90% of the currently outstanding Paris Re voting rights in favor of the Merger.

On November 2, 2009, Paris Re, having met all of the conditions precedent to the payment of its previously announced 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), effected the Share Capital Repayment. The Paris Re shareholders that previously sold their Paris Re common shares to the Company in July 2009, received a payment of $3.85 at the closing of the Block Purchase for each Paris Re common share sold (net of dividends paid on the Company's common shares with respect to the period after such sale and prior to the closing of the Block Purchase). All other Paris Re shareholders who sold their common shares to the Company prior to the Share Capital Repayment received a payment of CHF 4.17 for each Paris Re common share sold either in cash or in the form of a promissory note issued by the Company at the time of the acquisition of their Paris Re common shares. On November 3, 2009, the Company paid in full all promissory notes issued to sellers of Paris Re common shares.

Following the closing of the Block Purchase, and in accordance with the Transaction Agreement, the Paris Re board of directors was reconstituted to give designees of the Company majority representation on the Paris Re board of directors. In addition, pursuant to the terms of the Transaction Agreement, following the closing of the Block Purchase, Roberto Mendoza, an existing director on the Paris Re board of directors, was appointed to the Company's board of directors.

In connection with each of the purchases of Paris Re shares, the Company provided registration rights to the Paris Re shareholders who exchanged their Paris Re shares for common shares of the Company.

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

                                            Limit at               Utilized at              Utilized at
Risk                                   September 30, 2009       September 30, 2009       December 31, 2008
Catastrophe risk - largest zonal
limit                                 $        1.6 billion     $        1.5 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              2.7 billion             2.8 billion
Equity investment risk - value of
equity and equity-like securities              2.4 billion              1.3 billion             920 million

The risk appetite at September 30, 2009 and modeled economic loss at September 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                                   September 30, 2009       September 30, 2009       December 31, 2008
Catastrophe risk - 1 in 75 year
annual aggregate loss                 $        960 million     $        900 million     $       810 million
Casualty reserving risk -
casualty and other long-tail
lines 1 in 15 year prior years'
reserve development                            480 million              340 million             350 million
Equity investment risk - 1 in 75
year decline in value                          720 million              380 million             280 million

Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates of the Company at September 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 nine months ended September 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 nine months ended September 30, 2009 and 2008 (in millions of U.S. dollars):

                                     For the three        For the three        For the nine         For the nine
                                     months ended         months ended         months ended         months ended
                                     September 30,        September 30,        September 30,        September 30,
                                         2009                 2008                 2009                 2008
Prior year favorable loss
development:
Non-life segment
U.S.                                $            43      $            16      $           120      $            54
Global (Non-U.S.) P&C                            46                   41                  133                  150
Global (Non-U.S.) Specialty                      18                   21                   74                   86
Catastrophe                                      15                   25                   38                   60

Total Non-life prior year net
favorable reserve development       $           122      $           103      $           365      $           350

The net favorable reserve development on prior accident years for the three and nine months ended September 30, 2009 and 2008 was driven by the following factors (in millions of U.S. dollars):

                                    For the three           For the three           For the nine         For the nine
                                    months ended            months ended            months ended         months ended
                                    September 30,           September 30,           September 30,        September 30,
                                        2009                    2008                    2009                 2008
Prior year favorable
(adverse) loss development:
Non-life segment
Net prior year reserve
development due to changes in
premiums                           $           (12 )       $            (7 )       $            15      $            16
Net prior year reserve
development due to all other
factors(1)                                     134                     110                     350                  334

Total Non-life prior year net
favorable reserve development      $           122         $           103         $           365      $           350

(1) Net prior year reserve development due to all other factors includes but is not limited to loss experience, changes in assumptions and changes in methodology.

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 gross and net loss reserves recorded as of September 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.                              $           737   $ 140   $    1,878   $         2,755   $       (28 )    $         2,727
Global (Non-U.S.) P&C                       1,270       8        1,013             2,291           (36 )              2,255
Global (Non-U.S.) Specialty                 1,163      26        1,072             2,261           (60 )              2,201
Catastrophe                                   123      96           32               251            -                   251

Total Non-life                    $         3,293   $ 270   $    3,995   $         7,558   $      (124 )    $         7,434

The net loss reserves represent the Company's best estimate of future losses and loss expense amounts based on information available as of September 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, and 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 September 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.                                      $          2,727   $ 2,978   $ 2,122
     Global (Non-U.S.) P&C                                2,255     2,399     1,973
     Global (Non-U.S.) Specialty                          2,201     2,318     1,926
     Catastrophe                                            251       269       227

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.

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 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 long duration products, a reserve adequacy test is performed at least once a year based on the latest best estimate assumptions by line of business, including an experience analysis and a review of likely future experience. If such review produces reserves in excess of those currently held, then the locked-in assumptions will be revised and a loss recognized.

See Critical Accounting Policies and Estimates-Losses and Loss Expenses and Life Policy Benefits - 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 for its longevity and mortality lines.

The Life segment reported net favorable development on prior accident years of $14 million during the three months ended September 30, 2009 and net favorable development of $11 million during the nine months ended September 30, 2009, primarily due to certain GMDB treaties where the payout is linked to the performance of the underlying capital markets. For the three months and nine months ended September 30, 2008, the Life segment reported net adverse development on prior accident years of $5 million and $10 million, respectively, primarily due to certain GMDB treaties. See Results by Segment below.

The Company may be exposed to claims in its life portfolio that may be significantly higher than expected as a result of large increases in mortality due to causes such as the H1N1 flu pandemic. However, the composition of the Company's mortality and longevity business, as well as retrocessional protection, serve to partially mitigate the impact of such exposures to the Company.

Fair Value Measurements

The Company defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company measures the fair value of its financial instruments according to a fair value hierarchy that prioritizes the information used to measure fair value into three broad levels based on the reliability of inputs.

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