Alterra Capital 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 000-33047

ALTERRA CAPITAL HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

Bermuda	98-0584464
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

Alterra House

2 Front Street

Hamilton, HM 11

Bermuda

(Address of principal executive offices) (Zip Code)

(441) 295-8800

(Registrant’s telephone number, including area code)

(Former name, former address or former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “small reporting company,” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

The number of the registrant’s common shares (par value $1.00 per share) outstanding as of October 29, 2010 was 115,374,775.

ALTERRA CAPITAL HOLDINGS LIMITED

INDEX

		PAGE
PART I—FINANCIAL INFORMATION			3
ITEM 1.	Financial Statements		3
	Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009		3
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)		4
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)		5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)		6
	Notes to the Interim Consolidated Financial Statements (Unaudited)		7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		63
ITEM 4.	Controls and Procedures		64
PART II—OTHER INFORMATION			64
ITEM 1.	Legal Proceedings		64
ITEM 1A.	Risk Factors		65
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		65
ITEM 3.	Defaults Upon Senior Securities		65
ITEM 4.	Removed and Reserved		65
ITEM 5.	Other Information		66
ITEM 6.	Exhibits		66
SIGNATURES			67

2

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

(Expressed in thousands of U.S. Dollars, except share amounts)

	September 30, 2010		December 31, 2009
	(Unaudited)
ASSETS
Cash and cash equivalents	$	925,752	$	702,278
Fixed maturities, trading, at fair value (amortized cost: 2010 - $243,613; 2009 - $226,007)		243,158		228,696
Fixed maturities, available for sale, at fair value (amortized cost: 2010 - $5,218,349; 2009 - $2,974,938)		5,425,955		3,007,356
Fixed maturities, held to maturity, at amortized cost (fair value: 2010 - $1,106,057; 2009 - $1,033,551)		954,623		1,005,947
Other investments, at fair value		411,275		318,073
Accrued interest income		73,622		57,215
Premiums receivable		664,603		567,301
Losses and benefits recoverable from reinsurers		976,819		1,001,373
Deferred acquisition costs		106,728		65,648
Prepaid reinsurance premiums		173,140		190,613
Trades pending settlement		24,364		76,031
Goodwill and intangible assets		60,670		48,686
Other assets		78,225		70,529
Total assets	$	10,118,934	$	7,339,746
LIABILITIES
Property and casualty losses	$	3,847,366	$	3,178,094
Life and annuity benefits		1,299,190		1,372,513
Deposit liabilities		147,212		152,629
Funds withheld from reinsurers		119,859		140,079
Unearned property and casualty premiums		1,015,831		628,161
Reinsurance balances payable		122,184		146,085
Accounts payable and accrued expenses		90,282		67,088
Senior notes		440,473		90,464
Total liabilities		7,082,397		5,775,113
SHAREHOLDERS’ EQUITY
Preferred shares (par value $1.00 per share) 20,000,000 shares authorized; no shares issued or outstanding		—		—
Common shares (par value $1.00 per share) 200,000,000 shares authorized; 115,898,860 (2009 - 55,867,125) shares issued and outstanding		115,899		55,867
Additional paid-in capital		2,113,732		752,309
Accumulated other comprehensive income		190,325		25,431
Retained earnings		616,581		731,026
Total shareholders’ equity		3,036,537		1,564,633
Total liabilities and shareholders’ equity	$	10,118,934	$	7,339,746

See accompanying notes to unaudited interim consolidated financial statements.

3

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

(Expressed in thousands of U.S. Dollars, except share and per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
REVENUES
Gross premiums written	$	325,213		$	265,886		$	1,095,333		$	1,096,668
Reinsurance premiums ceded		(60,611	)		(83,290	)		(293,546	)		(377,338	)
Net premiums written	$	264,602		$	182,596		$	801,787		$	719,330
Earned premiums	$	436,244		$	329,869		$	1,132,964		$	993,871
Earned premiums ceded		(93,812	)		(121,853	)		(303,032	)		(366,788	)
Net premiums earned		342,432			208,016			829,932			627,083
Net investment income		59,711			42,830			161,378			125,073
Net realized and unrealized gains (losses) on investments		15,411			24,528			7,047			64,440
Total other-than-temporary impairment losses		(90	)		—			(1,955	)		(5,190	)
Portion of loss recognized in other comprehensive income (loss), before taxes		(61	)		(139	)		1,084			3,037
Net impairment losses recognized in earnings		(151	)		(139	)		(871	)		(2,153	)
Other income		1,327			819			1,946			3,099
Total revenues		418,730			276,054			999,432			817,542
LOSSES AND EXPENSES
Net losses and loss expenses		191,012			131,778			475,794			378,729
Claims and policy benefits		15,060			14,378			46,662			84,117
Acquisition costs		60,859			27,997			133,901			73,686
Interest expense		7,551			5,971			20,409			14,654
Net foreign exchange gains (losses)		3,353			406			267			(6,474	)
Merger and acquisition expenses		550			(41,350	)		(49,276	)		(31,342	)
General and administrative expenses		56,650			40,372			143,827			115,537
Total losses and expenses		335,035			179,552			771,584			628,907
INCOME BEFORE TAXES		83,695			96,502			227,848			188,635
Income tax expense		858			1,176			5,183			5,012
NET INCOME		82,837			95,326			222,665			183,623
Change in net unrealized gains and losses of fixed maturities, net of tax		74,383			95,794			169,039			66,629
Foreign currency translation adjustment		13,224			(4,462	)		(4,145	)		20,372
COMPREHENSIVE INCOME	$	170,444		$	186,658		$	387,559		$	270,624
Basic earnings per share	$	0.71		$	1.67		$	2.52		$	3.22
Diluted earnings per share	$	0.70		$	1.64		$	2.50		$	3.18
Weighted average common shares outstanding—basic		117,200,505			57,233,115			88,253,609			56,978,901
Weighted average common shares outstanding—diluted		117,957,942			58,210,501			89,001,515			57,677,996

See accompanying notes to unaudited interim consolidated financial statements.

4

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Expressed in thousands of U.S. Dollars)

	Nine Months Ended September 30,
	2010			2009
Common shares
Balance, beginning of period	$	55,867		$	55,806
Issuance of common shares, net		65,084			1,529
Repurchase of shares		(5,052	)		(322	)
Balance, end of period		115,899			57,013
Additional paid-in capital
Balance, beginning of period		752,309			763,391
Issuance of common shares, net		1,418,214			457
Stock based compensation expense		36,600			16,124
Repurchase of shares		(93,391	)		(6,049	)
Balance, end of period		2,113,732			773,923
Accumulated other comprehensive income (loss)
Balance, beginning of period		25,431			(45,399	)
Holding gains on available for sale fixed maturities arising in period, net of tax		179,482			66,650
Net realized (gains) losses on available for sale securities included in net income, net of tax		(9,359	)		3,016
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of tax		(1,084	)		(3,037	)
Foreign currency translation adjustment		(4,145	)		20,372
Balance, end of period		190,325			41,602
Retained earnings
Balance, beginning of period		731,026			506,533
Net income		222,665			183,623
Dividends		(337,110	)		(16,020	)
Balance, end of period		616,581			674,136
Total shareholders’ equity	$	3,036,537		$	1,546,674

See accompanying notes to unaudited interim consolidated financial statements.

5

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Expressed in thousands of U.S. Dollars)

	September 30,
	2010			2009
OPERATING ACTIVITIES
Net income	$	222,665		$	183,623
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation		36,600			16,124
Amortization of premium on fixed maturities		10,973			2,503
Accretion of deposit liabilities		3,940			2,078
Net realized and unrealized gains on investments		(7,047	)		(64,440	)
Net impairment losses recognized in earnings		871			2,153
Negative goodwill gain		(95,788	)		—
Changes in:
Accrued interest income		(822	)		820
Premiums receivable		266,878			12,894
Losses and benefits recoverable from reinsurers		(9,975	)		(130,985	)
Deferred acquisition costs		(38,485	)		(13,645	)
Prepaid reinsurance premiums		10,865			(11,907	)
Other assets		3,407			(2,624	)
Property and casualty losses		(166,930	)		183,163
Life and annuity benefits		(24,819	)		508
Funds withheld from reinsurers		(20,220	)		(21,773	)
Unearned property and casualty premiums		12,092			92,046
Reinsurance balances payable		(28,025	)		(10,515	)
Accounts payable and accrued expenses		(7,167	)		9,828
Cash provided by operating activities		169,013			249,851
INVESTING ACTIVITIES
Purchases of available for sale securities		(1,752,420	)		(783,451	)
Sales of available for sale securities		892,465			175,465
Redemptions/maturities of available for sale securities		702,506			479,310
Purchases of trading securities		(55,812	)		(40,691	)
Sales of trading securities		14,097			28,887
Redemptions/maturities of trading securities		19,361			5,094
Purchases of held to maturity securities		(16,961	)		(33,647	)
Redemptions/maturities of held to maturity securities		23,599			—
Net sales of other investments		78,985			462,501
Acquisition of subsidiary, net of cash acquired		446,819			—
Cash provided by investing activities		352,639			293,468
FINANCING ACTIVITIES
Net proceeds from issuance of common shares		1,478			1,986
Repurchase of common shares		(98,443	)		(6,371	)
Net proceeds from issuance of senior notes		349,997			—
Net repayments of bank loans		(200,000	)		(375,000	)
Dividends paid		(335,560	)		(16,020	)
Additions to deposit liabilities		3,453			12,422
Payments of deposit liabilities		(12,747	)		(80,748	)
Cash used in financing activities		(291,822	)		(463,731	)
Effect of exchange rate changes on foreign currency cash and cash equivalents		(6,356	)		27,019
Net increase in cash and cash equivalents		223,474			106,607
Cash and cash equivalents, beginning of period		702,278			949,404
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	925,752		$	1,056,011

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid totaled $5,394 and $4,943 for the nine months ended September 30, 2010 and 2009, respectively.

Income taxes paid totaled $4,068 and $310 for the nine months ended September 30, 2010 and 2009, respectively.

See accompanying notes to unaudited interim consolidated financial statements.

6

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. GENERAL

Alterra Capital Holdings Limited (“Alterra” and, collectively with its subsidiaries, the “Company”), formerly known as Max Capital Group Ltd. (“Max”), is a Bermuda headquartered global enterprise dedicated to providing diversified specialty insurance and reinsurance products to corporations, public entities and property and casualty insurers. Alterra was incorporated on July 8, 1999 under the laws of Bermuda.

On March 3, 2010, Alterra entered into an Agreement and Plan of Amalgamation (the “Amalgamation Agreement”) with Alterra Holdings Limited (“Alterra Holdings”), a direct wholly-owned subsidiary of Alterra, and Harbor Point Limited (“Harbor Point”), a privately held company, pursuant to which Alterra Holdings amalgamated with Harbor Point (the “Amalgamation”). The Amalgamation was consummated on May 12, 2010. The results of operations of Harbor Point are included in the consolidated results of operations for the period from May 12, 2010.

Alterra has changed or commenced the process of changing the names of its subsidiaries to include the name Alterra. Unless otherwise indicated or unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to entity names are as set forth in the following table:

Reference	Entity’s legal name
Alterra	Alterra Capital Holdings Limited (formerly Max Capital Group Ltd.)
Alterra America	Alterra America Insurance Company (formerly Max America Insurance Company)
Alterra at Lloyd’s	Alterra at Lloyd’s Limited (formerly Max at Lloyd’s Ltd.)
Alterra Diversified	Alterra Diversified Strategies Limited (formerly Max Diversified Strategies Ltd.)
Alterra Capital Europe	Alterra Capital Europe Limited (formerly Max Europe Holdings Limited)
Alterra Finance	Alterra Finance LLC
Alterra Holdings	Alterra Holdings Limited (formed from the amalgamation of Harbor Point Limited and Alterra Holdings Limited)
Alterra Bermuda	Alterra Bermuda Limited (formed from the amalgamation of Alterra Insurance Limited and Alterra Re)
Alterra Insurance	Alterra Insurance Limited (formerly Max Bermuda Ltd.)
Alterra Insurance Europe	Alterra Insurance Europe Limited (formerly Max Insurance Europe Limited)
Alterra Managers	Alterra Managers Limited (formerly Max Managers Ltd.)
Alterra Re	Harbor Point Re Limited
Alterra Re Europe	Alterra Reinsurance Europe Limited (formerly Max Re Europe Limited)
Alterra Re UK	Alterra Re UK (formerly Harbor Point Re UK)
Alterra Re USA	Alterra Reinsurance USA Inc. (formerly Harbor Point Reinsurance U.S., Inc.)
Alterra E&S	Alterra Excess & Surplus Insurance Company (formerly Max Specialty Insurance Company)
Alterra Capital UK	Alterra Capital UK Limited (formerly Max UK Holdings Ltd.)
Alterra USA	Alterra USA Holdings Limited (formerly Max USA Holdings Ltd.)
Alterra USA Holdings	Alterra Holdings USA Inc. (formerly Harbor Point U.S. Holdings, Inc.)

The Company’s Bermuda insurance and reinsurance operations are conducted through Alterra Bermuda, which is registered as a Class 4 insurer under the insurance laws of Bermuda. Alterra Bermuda is also registered as a long-term insurer under the insurance laws of Bermuda. Alterra Bermuda was formed by the amalgamation of Alterra Insurance and Alterra Re on September 1, 2010.

The Company’s non-Lloyd’s European operations are conducted from Dublin, Ireland through Alterra Capital Europe and its two wholly-owned operating subsidiaries, Alterra Re Europe and Alterra Insurance Europe. In addition, Alterra Bermuda operates a branch, Alterra Re UK, in the United Kingdom.

The Company’s Lloyd’s operations are conducted by Alterra Capital UK, which, through Lloyd’s Syndicates 1400, 2525 and 2526 (collectively, the “Syndicates”), underwrites a diverse portfolio of specialty risks in Europe, the United States and Latin America. Alterra Capital UK’s operations are based primarily in London, England. The Company’s proportionate share of Syndicates 1400, 2525 and 2526, are 100%, approximately 2% and approximately 36%, respectively.

The Company’s U.S. reinsurance operations are conducted through Alterra USA Holdings and its operating subsidiary, Alterra Re USA, a Connecticut-domiciled reinsurance company. The Company’s U.S. insurance operations are conducted through Alterra USA and its operating subsidiaries, Alterra E&S, a Delaware-domiciled excess and surplus insurance company, and Alterra America, a Delaware-domiciled insurance company. Through Alterra E&S and Alterra America, the Company writes both admitted and non-admitted business throughout the United States and Puerto Rico.

7

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2009.

The consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. All significant intercompany accounts and transactions have been eliminated from these statements.

Certain reclassifications, which did not impact net income, have been made to prior period amounts to conform to the current period presentation. These include the reclassification of certain derivative instruments from other assets to other investments in the consolidated balance sheets.

2. RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2010-06, Fair Value Measurements and Disclosures (820) – Improving Disclosures about Fair Value Measurements

ASU 2010-06 requires additional disclosure, and clarifies existing disclosure requirements, about fair value measurements. The additional requirements include disclosure regarding the amounts and reasons for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and also separate presentation of purchases, sales, issuances and settlements of items measured using significant unobservable inputs (i.e. Level 3). The guidance clarifies existing disclosure requirements regarding the inputs and valuation techniques used to measure fair value for measurements that fall in either Level 2 or Level 3 of the hierarchy. The requirements are effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company has reflected the disclosure requirements effective for the current interim period in its interim consolidated financial statements.

ASU 2010-20, Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses

ASU 2010-20 requires additional disclosures about the credit quality of financing receivables and allowances for credit losses. The additional requirements include disclosure of the nature of credit risks inherent in financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.

ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

ASU 2010-26 specifies how insurance companies should recognize costs that meet the definition of acquisition costs as defined in FASB guidance. ASU 2010-26 modifies the existing guidance to require that only costs that are associated with the successful acquisition of a new or renewal insurance contract should be capitalized as deferred acquisition costs. Costs that fall outside the proposed definition, such as indirect costs or salaries related to unsuccessful efforts, should be expensed as incurred. ASU 2010-26 will be effective for fiscal periods beginning on or after December 15, 2011 with prospective or retrospective application permitted. The Company does not expect this standard to have a material impact on the Company’s consolidated financial statements.

3. SEGMENT INFORMATION

The Company accounts for its operations in five segments: insurance, reinsurance, U.S. specialty, Alterra at Lloyd’s and life and annuity reinsurance.

Insurance Segment

The Company’s insurance segment offers property and casualty excess of loss insurance from its Bermuda and Dublin offices primarily to Fortune 1000 companies. Principal lines of business include professional liability, excess liability, aviation and property.

8

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

Reinsurance Segment

The Company’s reinsurance segment offers property and casualty quota share and excess of loss reinsurance from its offices in Bermuda, Bogota, Dublin, London and the United States to insurance companies worldwide. The underwriting activities of Alterra Re, Alterra Re USA and Alterra Re UK are included within the reinsurance segment for the period from May 12, 2010. Principal lines of business include agriculture, auto, aviation, credit/surety, general casualty, medical malpractice, professional liability, property, whole account and workers’ compensation.

U.S. Specialty Segment

The Company’s U.S. specialty segment offers property and casualty insurance coverage from offices in the United States primarily to small- to medium sized companies. Principal lines of business include general liability, inland marine, ocean marine, professional liability and property.

Alterra at Lloyd’s Segment

The Company’s Alterra at Lloyd’s segment offers property and casualty quota share and excess of loss insurance and reinsurance from its offices in London and Copenhagen, primarily to medium to large sized international clients. It also provides reinsurance to clients in Latin America, operating locally in Rio de Janeiro, Brazil, using Lloyd’s admitted status. This segment comprises the Company’s proportionate share of the underwriting results of the Syndicates, and the results of its managing agent, Alterra at Lloyd’s. The Syndicates underwrite a diverse portfolio of specialty risks, including accident & health, aviation, financial institutions, international casualty, professional liability and property.

Life and Annuity Reinsurance Segment

The Company’s life and annuity reinsurance segment operates out of Bermuda and offers reinsurance products focusing on existing blocks of life and annuity business, which take the form of co-insurance transactions whereby the risks are reinsured on the same basis as the original policies. The Company has determined not to write any new life and annuity contracts in the foreseeable future.

The Company also has a corporate function that includes the Company’s investment and financing activities.

Invested assets relating to the insurance, reinsurance (other than invested assets of the U.S. companies within the reinsurance segment) and life and annuity reinsurance segments are managed on an aggregated basis. Consequently, investment income on this consolidated portfolio and gains on other investments are not directly reflected in any one of these segments. However, because of the longer duration of liabilities on casualty insurance and reinsurance business (as compared to property) and life and annuity reinsurance business, investment returns are important in evaluating the profitability of these segments. Accordingly, the Company allocates investment returns from the consolidated portfolio to each of these three segments. The allocation is based on a notional allocation of invested assets from the consolidated portfolio using durations that are determined based on estimated cash flows for each segment. The balance of investment returns from this consolidated portfolio is allocated to the corporate function for the purposes of segment reporting.

The U.S. specialty segment, Alterra at Lloyd’s segment and the U.S companies within the reinsurance segment have their own portfolios of fixed maturities investments. As a result, the investment income earned by each of these portfolios is reported in its respective segment. These portfolios, however, are managed on a consolidated basis together with the invested assets of the insurance, reinsurance and life and annuity segments.

A summary of operations by segment for the three and nine months ended September 30, 2010 and 2009 follows:

(Expressed in thousands of U.S. Dollars)

9

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

	Three Months Ended September 30, 2010
	Property & Casualty															Life & Annuity
	Insurance			Reinsurance			U.S. Specialty			Alterra  at Lloyd’s			Total			Reinsurance (a)			Corporate			Consolidated
Gross premiums written	$	70,271		$	124,004		$	71,871		$	57,734		$	323,880		$	1,333		$	—		$	325,213
Reinsurance premiums ceded		(34,075	)		(2,524	)		(21,513	)		(2,397	)		(60,509	)		(102	)		—			(60,611	)
Net premiums written	$	36,196		$	121,480		$	50,358		$	55,337		$	263,371		$	1,231		$	—		$	264,602
Earned premiums	$	96,777		$	213,510		$	79,200		$	45,424		$	434,911		$	1,333		$	—		$	436,244
Earned premiums ceded		(41,097	)		(15,533	)		(27,770	)		(9,310	)		(93,710	)		(102	)		—			(93,812	)
Net premiums earned		55,680			197,977			51,430			36,114			341,201			1,231			—			342,432
Net investment income		6,209			17,495			1,295			2,256			27,255			12,182			20,274			59,711
Net realized and unrealized gains on investments		188			197			30			883			1,298			3,321			10,792			15,411
Net impairment losses recognized in earnings		—			—			—			—			—			—			(151	)		(151	)
Other income		771			61			337			177			1,346			(43	)		24			1,327
Total revenues		62,848			215,730			53,092			39,430			371,100			16,691			30,939			418,730
Net losses and loss expenses		23,775			117,671			32,199			17,367			191,012			—			—			191,012
Claims and policy benefits		—			—			—			—			—			15,060			—			15,060
Acquisition costs		1,265			45,069			6,880			7,474			60,688			171			—			60,859
Interest expense		80			1,149			—			—			1,229			2,311			4,011			7,551
Net foreign exchange losses (gains)		—			1,478			—			2,089			3,567			—			(214	)		3,353
Merger and acquisition expenses		—			—			—			—			—			—			550			550
General and administrative expenses		6,435			17,580			9,975			7,806			41,796			577			14,277			56,650
Total losses and expenses		31,555			182,947			49,054			34,736			298,292			18,119			18,624			335,035
Income (loss) before taxes	$	31,293		$	32,783		$	4,038		$	4,694		$	72,808		$	(1,428	)	$	12,315		$	83,695
Loss ratio (b)		42.7	%		59.4	%		62.6	%		48.1	%		56.0	%
Combined ratio (c)		56.5	%		91.1	%		95.4	%		90.4	%		86.0	%

(a) Loss ratio and combined ratio are not provided for the life and annuity reinsurance segment as the Company believes these ratios are not appropriate measures for evaluating the profitability of life and annuity underwriting.

(b) Loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(c) Combined ratio is calculated by dividing the sum of net losses and loss expenses, acquisition costs and general and administrative expenses by net premiums earned.

10

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

	Nine Months Ended September 30, 2010
	Property & Casualty															Life & Annuity
	Insurance			Reinsurance (a)			U.S. Specialty			Alterra at Lloyd’s			Total			Reinsurance (b)			Corporate (a)			Consolidated
Gross premiums written	$	269,004		$	398,433		$	246,245		$	178,653		$	1,092,335		$	2,998		$	—		$	1,095,333
Reinsurance premiums ceded		(118,908	)		(61,223	)		(77,592	)		(35,589	)		(293,312	)		(234	)		—			(293,546	)
Net premiums written	$	150,096		$	337,210		$	168,653		$	143,064		$	799,023		$	2,764		$	—		$	801,787
Earned premiums	$	293,692		$	483,982		$	229,122		$	123,170		$	1,129,966		$	2,998		$	—		$	1,132,964
Earned premiums ceded		(132,019	)		(50,545	)		(96,335	)		(23,899	)		(302,798	)		(234	)		—			(303,032	)
Net premiums earned		161,673			433,437			132,787			99,271			827,168			2,764			—			829,932
Net investment income		18,639			42,107			3,951			7,308			72,005			37,701			51,672			161,378
Net realized and unrealized gains (losses) on investments		391			418			29			(583	)		255			7,377			(585	)		7,047
Net impairment losses recognized in earnings		—			—			—			—			—			—			(871	)		(871	)
Other income		760			216			439			528			1,943			(71	)		74			1,946
Total revenues		181,463			476,178			137,206			106,524			901,371			47,771			50,290			999,432
Net losses and loss expenses		96,981			250,177			82,614			46,022			475,794			—			—			475,794
Claims and policy benefits		—			—			—			—			—			46,662			—			46,662
Acquisition costs		1,753			92,708			19,689			19,311			133,461			440			—			133,901
Interest expense		554			6,207			—			—			6,761			6,350			7,298			20,409
Net foreign exchange losses (gains)		—			1,967			—			(1,802	)		165			—			102			267
Merger and acquisition expenses		—			—			—			—			—			—			(49,276	)		(49,276	)
General and administrative expenses		18,833			41,359			26,433			16,345			102,970			1,876			38,981			143,827
Total losses and expenses		118,121			392,418			128,736			79,876			719,151			55,328			(2,895	)		771,584
Income (loss) before taxes	$	63,342		$	83,760		$	8,470		$	26,648		$	182,220		$	(7,557	)	$	53,185		$	227,848
Loss ratio (c)		60.0	%		57.7	%		62.2	%		46.4	%		57.5	%
Combined ratio (d)		72.7	%		88.7	%		96.9	%		82.3	%		86.1	%

(a) The results of operations of Harbor Point are included for the period from May 12, 2010.

(b) Loss ratio and combined ratio are not provided for the life and annuity reinsurance segment as the Company believes these ratios are not appropriate measures for evaluating the profitability of life and annuity underwriting.

(c) Loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(d) Combined ratio is calculated by dividing the sum of net losses and loss expenses, acquisition costs and general and administrative expenses by net premiums earned.

11

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

	Three Months Ended September 30, 2009
	Property & Casualty															Life & Annuity
	Insurance			Reinsurance			U.S. Specialty			Alterra at Lloyd’s			Total			Reinsurance (a)			Corporate			Consolidated
Gross premiums written	$	81,134		$	94,118		$	69,419		$	21,087		$	265,758		$	128		$	—		$	265,886
Reinsurance premiums ceded		(41,884	)		(11,106	)		(26,259	)		(4,015	)		(83,264	)		(26	)		—			(83,290	)
Net premiums written	$	39,250		$	83,012		$	43,160		$	17,072		$	182,494		$	102		$	—		$	182,596
Earned premiums	$	103,961		$	128,458		$	68,175		$	29,147		$	329,741		$	128		$	—		$	329,869
Earned premiums ceded		(54,814	)		(25,367	)		(37,074	)		(4,572	)		(121,827	)		(26	)		—			(121,853	)
Net premiums earned		49,147			103,091			31,101			24,575			207,914			102			—			208,016
Net investment income		5,898			10,404			1,461			1,749			19,512			13,143			10,175			42,830
Net realized and unrealized losses on investments		1,298			3,040			—			1,400			5,738			11,932			6,858			24,528
Net impairment losses recognized in earnings		—			—			—			—			—			—			(139	)		(139	)
Other income		91			—			52			(33	)		110			—			709			819
Total revenues		56,434			116,535			32,614			27,691			233,274			25,177			17,603			276,054
Net losses and loss expenses		31,756			68,728			21,266			10,028			131,778			—			—			131,778
Claims and policy benefits		—			—			—			—			—			14,378			—			14,378
Acquisition costs		369			20,299			1,926			5,250			27,844			153			—			27,997
Interest expense		—			1,706			—			—			1,706			2,349			1,916			5,971
Net foreign exchange losses (gains)		—			—			—			42			42			—			364			406
Merger and acquisition expenses		—			—			—			—		��	—			—			(41,350	)		(41,350	)
General and administrative expenses		7,281			8,857			7,804			5,423			29,365			829			10,178			40,372
Total losses and expenses		39,406			99,590			30,996			20,743			190,735			17,709			(28,892	)		179,552
Income (loss) before taxes	$	17,028		$	16,945		$	1,618		$	6,948		$	42,539		$	7,468		$	46,495		$	96,502
Loss ratio (b)		64.6	%		66.7	%		68.4	%		40.8	%		63.4	%
Combined ratio (c)		80.2	%		94.9	%		99.7	%		84.2	%		90.9	%

(a) Loss ratio and combined ratio are not provided for the life and annuity reinsurance segment as the Company believes these ratios are not appropriate measures for evaluating the profitability of life and annuity underwriting.

(b) Loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(c) Combined ratio is calculated by dividing the sum of net losses and loss expenses, acquisition costs and general and administrative expenses by net premiums earned.

12

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

	Nine Months Ended September 30, 2009
	Property & Casualty															Life & Annuity			Corporate			Consolidated
	Insurance			Reinsurance			U.S. Specialty			Alterra at Lloyd’s			Total			Reinsurance (a)
Gross premiums written	$	302,727		$	422,296		$	219,268		$	110,629		$	1,054,920		$	41,748		$	—		$	1,096,668
Reinsurance premiums ceded		(146,076	)		(80,574	)		(118,579	)		(31,963	)		(377,192	)		(146	)		—			(377,338	)
Net premiums written	$	156,651		$	341,722		$	100,689		$	78,666		$	677,728		$	41,602		$	—		$	719,330
Earned premiums	$	307,709		$	364,994		$	185,609		$	93,811		$	952,123		$	41,748		$	—		$	993,871
Earned premiums ceded		(157,710	)		(74,711	)		(111,682	)		(22,539	)		(366,642	)		(146	)		—			(366,788	)
Net premiums earned		149,999			290,283			73,927			71,272			585,481			41,602			—			627,083
Net investment income		16,861			29,607			4,549			3,216			54,233			37,626			33,214			125,073
Net realized and unrealized gains (losses) on investments		3,537			8,467			148			2,587			14,739			29,146			20,555			64,440
Net impairment losses recognized in earnings		—			—			—			—			—			—			(2,153	)		(2,153	)
Other income		1,238			12			272			475			1,997			—			1,102			3,099
Total revenues		171,635			328,369			78,896			77,550			656,450			108,374			52,718			817,542
Net losses and loss expenses		106,029			192,756			46,500			33,444			378,729			—			—			378,729
Claims and policy benefits		—			—			—			—			—			84,117			—			84,117
Acquisition costs		(1,503	)		53,496			5,873			14,797			72,663			1,023			—			73,686
Interest expense		—			2,400			—			—			2,400			2,803			9,451			14,654
Net foreign exchange losses (gains)		—			—			—			(5,124	)		(5,124	)		—			(1,350	)		(6,474	)
Merger and acquisition expenses		—			—			—			—			—			—			(31,342	)		(31,342	)
General and administrative expenses		17,825			23,604			21,195			15,856			78,480			2,180			34,877			115,537
Total losses and expenses		122,351			272,256			73,568			58,973			527,148			90,123			11,636			628,907
Income (loss) before taxes	$	49,284		$	56,113		$	5,328		$	18,577		$	129,302		$	18,251		$	41,082		$	188,635
Loss ratio (b)		70.7	%		66.4	%		62.9	%		46.9	%		64.7	%
Combined ratio (c)		81.6	%		93.0	%		99.5	%		89.9	%		90.5	%

(a) Loss ratio and combined ratio are not provided for the life and annuity reinsurance segment as the Company believes these ratios are not appropriate measures for evaluating the profitability of life and annuity underwriting.

(b) Loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(c) Combined ratio is calculated by dividing the sum of net losses and loss expenses, acquisition costs and general and administrative expenses by net premiums earned.

13

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

The Company’s clients are located in three geographic regions: North America, Europe and the rest of the world. Property and casualty gross premiums written and reinsurance premiums ceded by geographic region for the nine months ended September 30, 2010 were:

(Expressed in thousands of U.S dollars)	North America			Europe			Rest of the world			Total
Gross premiums written	$	817,470		$	166,850		$	108,015		$	1,092,335
Reinsurance ceded		(222,996	)		(51,765	)		(18,551	)		(293,312	)
	$	594,474		$	115,085		$	89,464		$	799,023

Property and casualty gross premiums written and reinsurance premiums ceded by geographic region for the nine months ended September 30, 2009 were:

(Expressed in thousands of U.S dollars)	North America			Europe			Rest of the world			Total
Gross premiums written	$	844,638		$	128,722		$	81,560		$	1,054,920
Reinsurance ceded		(300,087	)		(64,289	)		(12,816	)		(377,192	)
	$	544,551		$	64,433		$	68,744		$	677,728

The largest client in each of the nine months ended September 30, 2010 and 2009 accounted for less than 6.0% of the Company’s property and casualty gross premiums written, respectively.

All of the life and annuity gross premiums written and reinsurance premiums ceded, by geographic region, for the nine months ended September 30, 2010 and 2009 were from North America.

There were no new life and annuity transactions written in the nine months ended September 30, 2010, and one contract written in the nine months ended September 30, 2009. The largest client in the nine months ended 2009 accounted for 97.9% of the Company’s life and annuity gross premiums written.

4. BUSINESS COMBINATION

On May 12, 2010, pursuant to the terms of the Amalgamation Agreement, Harbor Point amalgamated with Alterra Holdings, a direct, wholly-owned subsidiary of Alterra. Upon consummation of the Amalgamation, Max Capital Group Ltd. was renamed Alterra Capital Holdings Limited. The purpose of the Amalgamation was to create a larger, more diversified entity with access to more markets and more underwriting opportunities than either company had prior to the Amalgamation.

The Amalgamation has been accounted for as a business combination, with Alterra the accounting acquirer. The Company has recorded the acquired assets and liabilities of Harbor Point at their fair values with the difference between the purchase price and the fair values being recorded as a negative goodwill gain.

Each outstanding Class A voting common share of Harbor Point was converted into Alterra common shares at a fixed exchange ratio of 3.7769 and cash in lieu of fractional shares. The aggregate purchase price consideration was $1,481.8 million for the tangible net assets acquired of $1,565.4 million and intangible assets of $12.2 million. The negative goodwill gain recognized was $95.8 million. During the past year, Alterra common shares have traded in the market at a discount to book value. This discount, together with the fixed share exchange ratio, were the principal factors responsible for the negative goodwill gain.

The fair value of Harbor Point’s net assets acquired and the allocation of the purchase price is summarized as follows:

14

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

(Expressed in thousands of U.S. Dollars, except shares and per share amounts)
Number of Harbor Point common shares (including unvested restricted Harbor Point common shares) outstanding at May 12, 2010				16,542,489
Exchange ratio				3.7769
Total Alterra common shares issued (1)				62,479,281
Closing price of Alterra common shares on May 12, 2010			$	22.98
Purchase price before adjustments for stock based compensation			$	1,435,774
Fair value of Harbor Point options and Harbor Point warrants outstanding at May 12, 2010				74,278
Unrecognized compensation on unvested Harbor Point options and restricted Harbor Point common shares				(28,265	)
Total purchase price			$	1,481,787
Fair value of assets acquired:
Cash and investments	$	2,662,968
Net premiums receivables		354,496
Other assets		30,149
Tangible assets acquired				3,047,613
Fair value of intangible assets				12,200
Fair value of liabilities acquired:
Net loss reserves		836,677
Net unearned premiums		370,500
Other liabilities		275,061
Liabilities acquired				1,482,238
Negative goodwill gain			$	95,788

⁽¹⁾ Adjusted for rounding.

As of September 30, 2010, the Company had not completed the process of determining the fair value of the intangible asset for customer and broker relationships. As a result, the fair value recorded is a provisional estimate. The provisional fair value of the separately identifiable intangible assets acquired and the period over which the intangible assets will be amortized, if applicable, is as follows:

(Expressed in thousands of U.S. Dollars)	Fair Value		Amortization Period
Definite-lived intangible asset:
Customer and broker relationships	$	6,000		4 years
Indefinite-lived intangible asset:
U.S. insurance licenses	$	6,200		Not applicable

The net loss reserves acquired include an increase of $91.0 million to adjust net loss reserves to fair value. This fair value adjustment is included within property and casualty losses on the consolidated balance sheet. This amount will be amortized to net losses and loss expenses in the consolidated statements of income and comprehensive income over a weighted average period of 4.0 years, based on the estimated settlement of underlying losses. As of September 30, 2010, the unamortized balance of this fair value adjustment was $82.8 million.

The net unearned premiums acquired include a decrease of $127.2 million to adjust net unearned premiums to fair value. This fair value adjustment is included within unearned property and casualty premiums on the consolidated balance sheet. This amount will be amortized to acquisition costs in the consolidated statements of income and comprehensive income over the next two years. The amortization approximates the amount of Harbor Point’s deferred acquisition costs that would have been recorded as acquisition costs had they not been fair valued under acquisition accounting. As of September 30, 2010, the unamortized balance of this fair value adjustment was $80.9 million.

The transaction expenses incurred relating to the Amalgamation primarily related to advisory, legal and other professional fees, the acceleration of stock-based compensation, and other merger-related expenses. These expenses have been presented along with the negative goodwill gain in the merger and acquisition expenses line in the Company’s consolidated statements of income and comprehensive income, and is composed of the following:

15

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

(Expressed in thousands of U.S. Dollars)	Three Months Ended September 30, 2010		Nine Months Ended September 30, 2010
Negative goodwill gain	$	—	$	(95,788	)
Transaction expenses		550		27,631
Acceleration of stock-based compensation		—		18,881
Merger and acquisition expenses	$	550	$	(49,276	)

Supplemental Pro Forma Information

Operating results of Harbor Point have been included in the consolidated financial statements from the May 12, 2010 date of the Amalgamation. The following selected unaudited pro forma financial information for the three and nine months ended September 30, 2010 and 2009 is provided, for informational purposes only, to present a summary of the combined results of the Company and Harbor Point assuming the Amalgamation occurred on January 1, 2010 and January 1, 2009, respectively. The unaudited pro forma data does not necessarily represent results that would have occurred if the Amalgamation had taken place at the beginning of each period presented, nor is it necessarily indicative of future results.

(Expressed in thousands of U.S dollars, except per share amounts)	Three Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,		Nine Months Ended September 30,
	2010		2009		2010		2009
Gross premiums written	$	325,213	$	382,650	$	1,478,668	$	1,609,333
Net premiums earned		342,432		351,245		1,048,825		1,034,973
Total revenue		418,730		441,760		1,250,913		1,288,229
Net income		82,837		161,921		212,896		344,587
Basic earnings per share	$	0.71	$	1.36	$	1.80	$	2.90
Diluted earnings per share	$	0.70	$	1.35	$	1.79	$	2.88

5. INVESTMENTS

Fixed Maturities—Available for Sale

The fair values and amortized cost of available for sale fixed maturities as of September 30, 2010 and December 31, 2009 were:

			Included in Accumulated Other Comprehensive Income (“AOCI”)
					Gross Unrealized Losses
September 30, 2010 (Expressed in thousands of U.S. Dollars)	Amortized Cost		Gross Unrealized Gain		Non-OTTI Unrealized Loss			OTTI Unrealized Loss			Fair Value
U.S. government and agencies	$	913,798	$	28,952	$	(341	)	$	—		$	942,409
Non-U.S. governments		72,219		9,659		—			—			81,878
Corporate securities		2,533,770		114,689		(1,594	)		(394	)		2,646,471
Municipal securities		218,590		9,044		(688	)		—			226,946
Asset-backed securities		90,180		1,014		(10,173	)		(431	)		80,590
Residential mortgage-backed securities(1)		1,081,930		34,231		(1,939	)		(3,472	)		1,110,750
Commercial mortgage-backed securities		307,862		31,829		(2,780	)		—			336,911
	$	5,218,349	$	229,418	$	(17,515	)	$	(4,297	)	$	5,425,955

16

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

			Included in Accumulated Other Comprehensive Income (“AOCI”)
					Gross Unrealized Losses
December 31, 2009 (Expressed in thousands of U.S. Dollars)	Amortized Cost		Gross Unrealized Gain		Non-OTTI Unrealized Loss			OTTI Unrealized Loss			Fair Value
U.S. government and agencies	$	411,596	$	9,291	$	(2,756	)	$	—		$	418,131
Non-U.S. governments		81,654		2,278		(1,905	)		—			82,027
Corporate securities		1,246,815		36,070		(10,373	)		(1,096	)		1,271,416
Municipal securities		83,780		1,366		(1,488	)		—			83,658
Asset-backed securities		113,531		1,168		(13,982	)		(1,007	)		99,710
Residential mortgage-backed securities(1)		752,618		21,451		(7,319	)		(3,651	)		763,099
Commercial mortgage-backed securities		284,944		14,552		(10,181	)		—			289,315
	$	2,974,938	$	86,176	$	(48,004	)	$	(5,754	)	$	3,007,356

⁽¹⁾ Included within residential mortgage-backed securities are securities issued by U.S. agencies with a fair value of $1,015,250 (December 31, 2009—$689,468).

The following table sets forth certain information regarding the investment ratings (provided by major rating agencies) of the Company’s available for sale fixed maturities as of September 30, 2010 and December 31, 2009.

	September 30, 2010				December 31, 2009
(Expressed in thousands of U.S. Dollars)	Fair Value		%		Fair Value		%
U.S. government and agencies(1)	$	1,957,659		36.1	$	1,107,599		36.8
AAA		1,094,808		20.2		648,163		21.6
AA		595,779		11.0		288,158		9.6
A		1,327,876		24.5		721,596		24.0
BBB		226,655		4.2		100,235		3.3
BB		33,378		0.6		34,781		1.2
B or lower		189,800		3.4		106,824		3.5
	$	5,425,955		100.0	$	3,007,356		100.0

⁽¹⁾ Included within U.S. government and agencies are residential mortgage-backed securities issued by U.S. agencies with a fair value of $1,015,250 (December 31, 2009—$689,468).

The maturity distribution for available for sale fixed maturities held as of September 30, 2010 was:

(Expressed in thousands of U.S. Dollars)	Amortized Cost		Fair Value
Within one year	$	418,804	$	422,668
After one year through five years		2,246,348		2,320,376
After five years through ten years		712,678		764,341
More than ten years		360,547		390,319
		3,738,377		3,897,704
Asset-backed securities		90,180		80,590
Mortgage-backed securities		1,389,792		1,447,661
	$	5,218,349	$	5,425,955

Actual maturities could differ from expected contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

Fixed Maturities—Held to Maturity

The fair values and amortized cost of held to maturity fixed maturities as of September 30, 2010 and December 31, 2009 were:

September 30, 2010 (Expressed in thousands of U.S. Dollars)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
U.S. government and agencies	$	22,690	$	2,061	$	—	$	24,751
Non-U.S. governments		549,238		104,286		—		653,524
Corporate securities		381,695		45,082		—		426,777
Asset-backed securities		1,000		5		—		1,005
	$	954,623	$	151,434	$	—	$	1,106,057

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

December 31, 2009 (Expressed in thousands of U.S. Dollars)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
U.S. government and agencies	$	14,050	$	—	$	(515	)	$	13,535
Non-U.S. governments		573,250		11,034		—			584,284
Corporate securities		418,647		17,085		—			435,732
	$	1,005,947	$	28,119	$	(515	)	$	1,033,551

The following table sets forth certain information regarding the investment ratings (provided by major rating agencies) of the Company’s held to maturity fixed maturities as of September 30, 2010 and December 31, 2009.

September 30, 2010 (Expressed in thousands of U.S. Dollars)	Amortized Cost		%		Fair Value		%
U.S. government and agencies	$	22,690		2.4	$	24,751		2.2
AAA		654,700		68.6		775,537		70.1
AA		113,634		11.9		123,442		11.2
A		149,422		15.7		165,392		14.9
BBB		12,749		1.3		15,209		1.4
BB		—		—		—		—
B or lower		1,428		0.1		1,726		0.2
	$	954,623		100.0	$	1,106,057		100.0

December 31, 2009 (Expressed in thousands of U.S. Dollars)	Amortized Cost		%		Fair Value		%
U.S. government and agencies	$	14,050		1.4	$	13,535		1.3
AAA		717,954		71.4		734,595		71.1
AA		101,675		10.1		105,296		10.2
A		158,141		15.7		165,172		16.0
BBB		12,672		1.3		13,478		1.3
B or lower		1,455		0.1		1,475		0.1
	$	1,005,947		100.0	$	1,033,551		100.0

The maturity distribution for held to maturity fixed maturities held as of September 30, 2010 was as follows:

(Expressed in thousands of U.S. Dollars)	Amortized Cost		Fair Value
Within one year	$	23,215	$	23,370
After one year through five years		134,283		140,298
After five years through ten years		142,860		158,648
More than ten years		653,265		782,736
		953,623		1,105,052
Asset-backed securities		1,000		1,005
	$	954,623	$	1,106,057

Actual maturities could differ from expected contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

Investment Income

Investment income earned for the nine months ended September 30, 2010 and 2009 was:

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

	Nine Months Ended September 30,
(Expressed in thousands of U.S. Dollars)	2010			2009
Interest earned on investments and cash and cash equivalents	$	173,473		$	130,058
Interest earned on funds withheld		3,267			516
Amortization of premium on fixed maturities		(10,973	)		(2,503	)
Investment expenses		(4,389	)		(2,998	)
	$	161,378		$	125,073

Net Realized and Unrealized Gains and Losses

The net realized and unrealized gains and losses on investments for the nine months ended September 30, 2010 and 2009 were:

	Nine Months Ended September 30,
(Expressed in thousands of U.S. Dollars)	2010			2009
Gross realized gains on available for sale securities	$	14,665		$	6,550
Gross realized losses on available for sale securities		(5,008	)		(7,898	)
Net realized and unrealized (losses) gains on trading securities		(583	)		2,587
Change in fair value of other investments		(2,027	)		63,201
Net realized and unrealized (losses) gains on investments	$	7,047		$	64,440
Net other-than-temporary impairment losses recognized in earnings	$	(871	)	$	(2,153	)
Change in net unrealized gains (losses) on available for sale fixed maturities, before tax	$	175,188		$	65,055

Included in net realized and unrealized gains (losses) on trading securities were $0.3 million of net realized losses recognized on trading securities sold during the nine months ended September 30, 2010 ($nil in the nine months ended September 30, 2009).

Other-Than-Temporary Impairment

The Company attempts to match the maturities of its fixed maturities portfolio to the expected timing of its loss and benefit payments. Due to fluctuations in interest rates, it is likely that over the period a security is held there will be periods, perhaps greater than twelve months, when the investment’s fair value is less than its cost, resulting in unrealized losses.

Any other-than-temporary impairment (“OTTI”) related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors (e.g. interest rates, market conditions, etc.) is recorded as a component of other comprehensive income. If no credit loss exists but either: (a) the Company has the intent to sell the debt security or (b) it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, the entire unrealized loss is recognized in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. This policy was adopted as of April 1, 2009 and did not result in a cumulative effect adjustment.

The Company has reviewed all debt securities in an unrealized loss position at the end of the period to identify any securities for which there is an intention to sell those securities after the period end. For those securities where there is such an intention, the OTTI charge (being the difference between the amortized cost and the fair value of the security) was recognized in net income. The Company has reviewed debt securities in an unrealized loss position to determine whether it is more likely than not that it will be required to sell those securities. The Company has considered its liquidity and working capital needs and determined that it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position. The Company has also performed a review of debt securities, which considers various indicators of potential credit losses. These indicators include the length of time and extent of the unrealized loss, any specific adverse conditions, historic and implied volatility of the security, failure of the issuer of the security to make scheduled interest payments, expected cash flow analysis, significant rating changes and recoveries or additional declines in fair value subsequent to the balance sheet date. The consideration of these indicators and the estimation of credit losses involve significant management judgment.

The Company recorded $0.2 million of OTTI in earnings for the three months ended September 30, 2010, all of which related to estimated credit losses ($0.1 million in the three months ended September 30, 2009, all of which related to estimated credit losses).

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

The Company recorded $0.9 million of OTTI in earnings for the nine months ended September 30, 2010, all of which related to estimated credit losses ($2.2 million in the nine months ended September 30, 2009, of which $1.9 million related to estimated credit losses).

The following methodology and significant inputs were used to determine the estimated credit losses on mortgage-backed securities ($0.2 million and $0.7 million credit loss recognized for the three and nine months ended September 30, 2010) and asset- backed securities ($nil and $0.2 million credit loss recognized for the three and nine months ended September 30, 2010) during the three and nine months ended September 30, 2010:

• The Company utilized underlying data for each security provided by its investment managers in order to determine an expected recovery value for each security. The analysis includes expected cash flow projections under base case and stress case scenarios, which modify expected default expectations, loss severities and prepayment assumptions. The significant inputs in the models include expected default rates, delinquency rates and foreclosure costs. The Company reviews the process used by each investment manager in developing its analysis, reviews the results of the analysis and then determines what the expected recovery values are for each security, which incorporates both base case and stress case scenarios.

Fixed maturities with unrealized losses, and the duration of such conditions as of September 30, 2010 and as of December 31, 2009, were:

	Less Than 12 Months				12 Months or Longer				Total
September 30, 2010 (Expressed in thousands of U.S. Dollars)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government and agencies	$	4,600	$	341	$	—	$	—	$	4,600	$	341
Corporate securities		106,025		1,988		—		—		106,025		1,988
Municipal securities		10,473		688		—		—		10,473		688
Asset-backed securities		29,130		10,101		545		503		29,675		10,604
Residential mortgage-backed securities		155,315		5,386		2,236		25		157,551		5,411
Commercial mortgage-backed securities		41,370		2,765		1,160		15		42,530		2,780
	$	346,913	$	21,269	$	3,941	$	543	$	350,854	$	21,812
	Less Than 12 Months				12 Months or Longer				Total
December 31, 2009 (Expressed in thousands of U.S. Dollars)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government and agencies	$	122,515	$	2,756	$	—	$	—	$	122,515	$	2,756
Non-U.S. governments		24,457		1,905		—		—		24,457		1,905
Corporate securities		334,212		11,469		—		—		334,212		11,469
Municipal securities		54,212		1,488		—		—		54,212		1,488
Asset-backed securities		61,499		14,254		1,805		735		63,304		14,989
Residential mortgage-backed securities		211,344		10,957		1,802		13		213,146		10,970
Commercial mortgage-backed securities		111,598		10,169		951		12		112,549		10,181
	$	919,837	$	52,998	$	4,558	$	760	$	924,395	$	53,758

Of the total holding of 2,770 (as of December 31, 2009 – 1,495) available for sale securities, 199 (as of December 31, 2009 – 400) had unrealized losses as of September 30, 2010.

The following table provides a roll-forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income for the three and nine months ended September 30, 2010 and 2009:

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

(Expressed in thousands of U.S. Dollars)	2010		2009
Beginning balance at July 1	$	2,250	$	466
Addition for credit loss impairment recognized in the current period on securities not previously impaired		78		—
Addition for credit loss impairment recognized in the current period on securities previously impaired		—		139
Ending balance at September 30	$	2,328	$	605

(Expressed in thousands of U.S. Dollars)	2010		2009
Beginning balance at January 1	$	1,530	$	—
Addition for credit loss impairment recognized in the current period on securities not previously impaired		252		605
Addition for credit loss impairment recognized in the current period on securities previously impaired		546		—
Ending balance at September 30	$	2,328	$	605

Other Investments

The following is a summary of other investments as of September 30, 2010 and December 31, 2009:

	September 30, 2010				December 31, 2009
(Expressed in thousands of U.S. Dollars)	Fair Value		Allocation %		Fair Value		Allocation %
Hedge funds, at fair value	$	329,876		80.2	$	312,077		98.1
Catastrophe bonds, at fair value		47,364		11.5		—		—
Structured deposits, at fair value		25,036		6.1		—		—
Equity method investments		5,237		1.3		2,772		0.9
Derivatives, at fair value		3,762		0.9		3,224		1.0
	$	411,275		100.0	$	318,073		100.0

Hedge Funds

The Company has investments in various underlying trading entities across various investment strategies, together, the “hedge fund portfolio”. The distribution of the hedge fund portfolio by investment strategy as of September 30, 2010 and December 31, 2009 was:

	September 30, 2010				December 31, 2009
(Expressed in thousands of U.S. Dollars)	Fair Value		Allocation %		Fair Value		Allocation %
Distressed securities	$	58,575		17.8	$	62,897		20.1
Diversified arbitrage		30,808		9.3		34,503		11.1
Emerging markets		14,259		4.3		26,211		8.4
Event-driven arbitrage		33,581		10.2		41,724		13.4
Fixed income arbitrage		—		—		14,351		4.6
Fund of funds		41,642		12.6		—		—
Global macro		47,647		14.4		34,299		11.0
Long/short credit		9,817		3.0		9,426		3.0
Long/short equity		90,866		27.5		85,901		27.5
Opportunistic		2,681		0.9		2,765		0.9
Total hedge fund portfolio	$	329,876		100.0	$	312,077		100.0

Cash and cash equivalent balances of $0.6 million and $22.3 million held within the hedge fund portfolio are excluded from the above table and are presented within cash and cash equivalents on the consolidated balance sheets as of September 30, 2010 and December 31, 2009, respectively. Redemptions receivable of $28.9 million and $79.1 million held within the hedge fund portfolio are excluded from the above table and are presented within trades pending settlement on the consolidated balance sheets as of September 30, 2010, and December 31, 2009, respectively.

As of September 30, 2010, the hedge fund portfolio employed nine strategies invested in 30 underlying funds. The fund of funds strategy comprises two fund of funds that were acquired as part of the Amalgamation with Harbor Point. The Company is able to redeem the hedge funds on the same terms that the underlying funds can be redeemed. In general, the funds in which the Company is invested require at least 30 days notice of redemption, and may be redeemed on a monthly, quarterly, semi-annual, annual or longer basis, depending on the fund.

21

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

Certain funds have a lock-up period. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. Funds that do provide for periodic redemptions may, depending on the funds’ governing documents, have the ability to deny or delay a redemption request, called a “gate”. The fund may implement this restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the fund’s net assets. The gate is a method for executing an orderly redemption process that allows for redemption requests to be executed in a timely manner to reduce the possibility of adversely affecting the remaining investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash sometime after the redemption date.

Of the Company’s September 30, 2010 outstanding redemptions receivable of $28.9 million, none of which is gated, $27.2 million was received in cash prior to November 3, 2010. The fair value of the Company’s holdings in funds with gates imposed as of September 30, 2010 was $36.4 million (December 31, 2009—$41.8 million).

Certain funds may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible debt. In such cases, a common mechanism used is a side-pocket, whereby the illiquid security is assigned to a separate memorandum capital account or designated account. Typically, the investor loses its redemption rights in the designated account. Only when the illiquid security is sold, or otherwise deemed liquid by the fund, may investors redeem their interest. As of September 30, 2010, the fair value of hedge funds held in side-pockets was $67.1 million (December 31, 2009—$99.8 million).

Further details regarding the redemption of the hedge fund portfolio as of September 30, 2010 is as follows:

(Expressed in thousands of U.S. Dollars)	Fair Value		Gated/Side Pocket Investments (1)		Investments without Gates or Side Pockets		Redemption Frequency (2)		Redemption Notice Period (2)
Distressed securities	$	58,575	$	18,414	$	40,161		Biannually(3)		180 days
Diversified arbitrage		30,808		30,808		—
Emerging markets		14,259		14,259		—
Event-driven arbitrage		33,581		23,810		9,771		Quarterly		60 days
Fund of funds		41,642		—		41,642		(4)		45-370 days
Global macro		47,647		3,152		44,495		Monthly - Quarterly		60 days
Long/short credit		9,817		—		9,817		Quarterly		56 days
Long/short equity		90,866		10,317		80,549		Monthly -Annually(5)		30-90 days
Opportunistic		2,681		2,681		—
Total hedge funds	$	329,876	$	103,441	$	226,435

(1) For those investments that are restricted by gates or are invested in side pockets, the Company can not reasonably estimate as of September 30, 2010 when it will be able to redeem the investment.

(2) The redemption frequency and notice periods apply to the investments that are not gated or invested in side pockets.

(3) The next available redemption date for investments totaling $33.2 million is December 31, 2010, and for the remaining $7.0 million is September 30, 2011.

(4) The fund of funds investments are subject to redemption periods ranging from full redemption with 45 days notice to 50% of the value of the investment with 95 days notice and the remaining 50% of the value of the investment with 370 days notice. The total value of investments with 50% at a 95 day notice period and 50% at 370 days notice period is $30.5 million as of September 30, 2010.

(5) The next available redemption date for investments totaling $10.9 million is December 31, 2011.

As of September 30, 2010, the Company had no unfunded commitments related to its hedge fund portfolio.

An increase in market volatility and an increase in volatility of hedge funds in general, as well as a decrease in market liquidity, could lead to a higher risk of a large decline in value of the hedge funds in any given time period.

Catastrophe Bonds

As of September 30, 2010, the Company had invested $47.4 million in catastrophe bonds. The Company receives quarterly interest payments on the catastrophe bonds based on variable interest rates ranging from 3.7% to 14.6% as of September 30, 2010. The catastrophe bonds are scheduled to mature at various dates between May 24, 2011 and October 19, 2012. The redemption value of the bonds will adjust based on the occurrence of covered events, such as windstorms and earthquakes, across a number of geographic regions, including Japan, Europe, Mexico and the United States.

22

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

For the three and nine months ended September 30, 2010, the Company recorded $0.9 million of net investment income from catastrophe bonds. For the three and nine months ended September 30, 2010, the Company recorded a $0.7 million increase and a $0.4 million increase, respectively, in the estimated fair value of the catastrophe bonds. The changes in estimated fair value are included in net realized and unrealized investment gains (losses) on investments in the consolidated statement of income and comprehensive income.

Structured deposits

The Company holds an index-linked structured deposit with a guaranteed minimum redemption amount of $24.3 million. The deposit has a scheduled redemption date of December 18, 2013. The interest earned on the deposit is a function of the performance of the reference indices over the term of the deposit. The Company elected to account for this structured deposit at fair value. As at September 30, 2010, the estimated fair value of the deposit was $25.0 million and $0.8 was recorded in net realized and unrealized investment gains (losses) on investments in the consolidated statement of income and comprehensive income for the three and nine months ended September 30, 2010.

Derivatives

The Company holds convertible bond securities within its available for sale fixed maturity portfolio and uses various other derivative instruments, including interest rate swaps, swaptions, futures, futures call and put options, to adjust the curve and/or duration positioning of the investment portfolio, to obtain risk neutral substitutes for physical securities and to manage the overall risk exposure of the investment portfolio.

Restricted assets

As of September 30, 2010 and December 31, 2009, $3,031.7 million and $2,536.4 million, respectively, of cash and cash equivalents and investments were on deposit with various state or government insurance departments or pledged in favor of ceding companies. The Company also has issued secured letters of credit collateralized against the Company’s investment portfolio. As of September 30, 2010 and December 31, 2009, $1,164.0 million and $569.2 million, respectively, of cash and cash equivalents and investments were pledged as security in favor of letters of credit issued.

The total restricted assets as of September 30, 2010 and December 31, 2009 are as follows:

(Expressed in thousands of U.S. Dollars)	September 30, 2010		December 31, 2009
Restricted assets included in cash and cash equivalents	$	326,458	$	224,382
Restricted assets included in fixed maturities		3,869,225		2,881,217
Total	$	4,195,683	$	3,105,599

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value hierarchy, which is based on the quality of inputs used to measure fair value, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 and 2) and unobservable (Level 3).

The Company determines the existence of an active market based on its judgment as to whether transactions for the financial instrument occur in such market with sufficient frequency and volume to provide reliable pricing information.

23

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

At September 30, 2010, the Company determined that U.S. government securities are classified as Level 1. Securities classified as Level 2 include U.S. government-sponsored agency securities, non-U.S. government securities, corporate debt securities, municipal securities, asset-backed securities, and residential and commercial mortgage-backed securities.

Fair value prices for all securities in the fixed maturities portfolio are independently provided by the investment custodian, investment accounting service provider and the investment managers, which each utilize internationally recognized independent pricing services. The Company records the unadjusted price provided by the investment custodian or the investment accounting service provider and validates this price through a process that includes, but is not limited to: (i) comparison to the price provided by the investment manager, with significant differences investigated; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to calculate fair value; and (iv) comparing the price to the Company’s knowledge of the current investment market.

The independent pricing services used by the investment custodian, investment accounting service provider and investment managers obtain actual transaction prices for securities that have quoted prices in active markets. Each pricing service has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of “matrix pricing” in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker/dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.

For all assets classified as Level 2, the market approach is utilized. The significant inputs used to determine the fair value of those assets classified as Level 2 are as follows:

• U.S government agency securities consist of securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. The fair values of these securities are determined using the spread above the risk-free yield curve and reported trades. These are considered to be observable market inputs and therefore the fair values of these securities are classified within Level 2.

• Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs include the spread above the risk-free yield curve, reported trades and broker/ dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

• Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker/ dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair value of these securities are classified within Level 2.

• Municipal securities consist primarily of bonds issued by U.S. domiciled state and municipality entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker/ dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair value of these securities are classified within Level 2.

• Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. The significant inputs used to determine the fair value of these securities includes the spread above the risk-free yield curve, reported trades, benchmark yields, broker/dealer quotes, prepayment speeds, and default rates. These are considered observable market inputs and, therefore, the fair value of these securities are classified within Level 2.

• Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities includes the spread above the risk-free yield curve, reported trades, benchmark yields, broker/dealer quotes, prepayment speeds, and default rates. These are considered observable market inputs and, therefore, the fair value of these securities are classified within Level 2.

• Derivatives consist of convertible bond equity call options, interest rate linked derivative instruments and foreign exchange forward contracts. The fair value of the equity call options is determined using an option adjusted spread model, the significant inputs for which include equity prices, interest rates, and benchmark yields. The other derivative instruments are priced based on quoted market prices for similar securities. These are considered observable market inputs and, therefore, the fair value of these securities are classified within Level 2.

• Catastrophe bonds are recorded at fair value based on dealer quotes and trade prices. These inputs are observable and therefore the investments in catastrophe bonds are classified within Level 2.

24

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

• Structured deposits are recorded at fair value based on quoted indexes that are observable, and, therefore, the investments in structured deposits are classified within Level 2.

The ability to obtain quoted market prices is reduced in periods of decreasing liquidity, which generally increases the use of matrix pricing methods and generally increases the uncertainty surrounding the fair value estimates. This could result in the reclassification of a security between levels of the fair value hierarchy.

Investments in hedge funds are carried at fair value. The change in fair value is included in net realized and unrealized gains (losses) on investments and recognized in net income. The units of account that are valued by the Company are its interests in the funds and not the underlying holdings of such funds. Thus, the inputs used by the Company to value its investments in each of the funds may differ from the inputs used to value the underlying holdings of such funds. These funds are stated at fair value, which ordinarily will be the most recently reported net asset value as advised by the fund manager or administrator. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. Certain of the Company’s funds have either imposed a gate on redemptions, or have segregated a portion of the underlying assets into a side-pocket. The investments in these funds are classified as Level 3 in the fair value hierarchy as the Company can not reasonably estimate at September 30, 2010, the time period in which it will be able to redeem its investment. Certain hedge fund investments have a redemption notice period and frequency that is not considered to be in the near term; these investments are also classified as Level 3 in the hierarchy. The remaining hedge fund portfolio investments are classified as Level 2 in the fair value hierarchy as of September 30, 2010, the Company can reasonably estimate when it will be able to redeem its investments at the net asset value, and the redemption period is considered to be in the near term.

The Company has ongoing due diligence processes with respect to funds and their managers. These processes are designed to assist the Company in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements for every fund annually, and regularly reviews and discusses the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, the Company may incorporate adjustments to the reported net asset value and not use the permitted practical expedient on an investment by investment basis. Such adjustments may involve significant management judgment.

Based on the review process applied by management, the permitted practical expedient has not been applied to one hedge fund investment and a reduction of $0.7 million was made to the net asset value reported by the fund manager as of September 30, 2010 (December 31, 2009—$0.7 million) to adjust the carrying value of the fund to the Company’s best estimate of fair value.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets and liabilities. Reclassifications between Level 1, 2 and 3 of the fair value hierarchy are reported as transfers in and/or out as of the beginning of the quarter in which the reclassifications occur.

The following table presents the Company’s fair value hierarchy for those assets or liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009. The Company has no assets or liabilities measured at fair value on a non-recurring basis as of September 30, 2010.

September 30, 2010 (Expressed in thousands of U.S. Dollars)	Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Other Unobservable Inputs Level 3		Total
U.S. government and agencies	$	382,029	$	667,216	$	—	$	1,049,245
Non-U.S. governments		—		81,878		—		81,878
Corporate securities		—		2,766,645		—		2,766,645
Municipal securities		—		226,946		—		226,946
Asset-backed securities		—		82,982		—		82,982
Residential mortgage-backed securities		—		1,112,602		—		1,112,602
Commercial mortgage-backed securities		—		348,815		—		348,815
Total fixed maturities		382,029		5,287,084		—		5,669,113
Hedge funds		—		185,031		144,845		329,876
Structured deposit		—		25,036		—		25,036
Catastrophe bonds		—		47,364		—		47,364
Derivative assets		—		3,762		—		3,762
Other investments		—		261,193		144,845		406,038
	$	382,029	$	5,548,277	$	144,845	$	6,075,151

25

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

December 31, 2009 (Expressed in thousands of U.S. Dollars)	Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2		Significant Other Unobservable Inputs Level 3		Total
U.S. government and agencies	$	126,760	$	398,667	$	—	$	525,427
Non-U.S. governments		—		82,027		—		82,027
Corporate securities		—		1,375,999		—		1,375,999
Municipal securities		—		83,658		—		83,658
Asset-backed securities		—		102,006		—		102,006
Residential mortgage-backed securities		—		763,974		—		763,974
Commercial mortgage-backed securities		—		302,961		—		302,961
Total fixed maturities		126,760		3,109,292		—		3,236,052
Hedge funds		—		135,148		176,929		312,077
Derivative assets		—		3,224		—		3,224
Other investments		—		138,372		176,929		315,301
	$	126,760	$	3,247,664	$	176,929	$	3,551,353

The other investments above do not include equity investments of $5.2 million and $2.8 million as of September 30, 2010 and December 31, 2009, respectively, in which the Company is deemed to have significant influence and as such are accounted for under the equity method.

The following tables provides a summary of the changes in fair value of the Company’s Level 3 financial assets (and liabilities) for the three months ended September 30, 2010 and 2009, and nine months ended September 30, 2010 and 2009.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Other Investments
(Expressed in thousands of U.S. Dollars)	2010			2009
Beginning balance at July 1	$	149,952		$	434,149
Total gains or losses (realized/unrealized)
Included in net income		(72	)		23,307
Purchases, issuances and settlements		(8,757	)		(70,469	)
Transfers in and/or out of Level 3		3,722			—
Ending balance at September 30	$	144,845		$	386,987
The amount of total (losses) gains for the three months ended September 30, included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30	$	(217	)	$	23,223
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Other Investments
(Expressed in thousands of U.S. Dollars)	2010			2009
Beginning balance at January 1	$	176,929		$	749,208
Total gains or losses (realized/unrealized)
Included in net income		(768	)		62,178
Purchases, issuances and settlements		(6,026	)		(424,399	)
Transfers in and/or out of Level 3		(25,290	)		—
Ending balance at September 30	$	144,845		$	386,987
The amount of total (losses) gains for the nine months ended September 30, included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30	$	(913	)	$	55,129

26

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

7. DERIVATIVE INSTRUMENTS

The Company recognizes all derivative instruments as either assets or liabilities in the consolidated balance sheets and measures them at fair value.

As of September 30, 2010, the Company held $73.2 million (December 31, 2009—$35.0 million) of convertible bond securities, including the fair value of the equity call options embedded therein. A convertible bond is a debt instrument that can be converted into a predetermined amount of the issuer’s equity at certain times prior to the bond maturity. The Company purchases convertible bond securities for their total return potential and not for the specific call option feature. The equity call option is an embedded derivative. These derivative instruments were not designated as hedging instruments. The fair value of the embedded call option is estimated by determining the fair value of the convertible bond with and without the call option, the difference being the estimated fair value of the call option. The fair value of the convertible bond with the call option is determined using a matrix pricing methodology as described in Note 6. The fair value of the convertible bond without the call option is estimated using an option adjusted spread model using observable inputs for similar securities. The host instrument is classified within available for sale fixed maturity investments and the derivative asset within other investments in the consolidated balance sheets.

The Company has entered into various interest rate-linked derivatives, including swaptions, swaps and futures during the three and nine months ended September 30, 2010. The Company uses these instruments to manage the interest rate exposure of its fixed maturity investment portfolio. These derivatives were not designated as hedging instruments. During the three months ended June 30, 2010, the Company considered replacing its current revolving bank loan with longer term debt. In contemplation of this plan, the Company entered into two interest rate forward contracts indexed to the U.S. treasury rate. Due to market volatility during the period, the Company elected not to replace its current revolving bank loan and the forward contracts were settled for a loss of $10.4 million.

Prior to the Amalgamation, Harbor Point used foreign exchange derivatives to hedge the economic impact of underlying non-U.S. dollar exposures. The fair values of these derivatives are based on prevailing foreign exchange rates. On October 23, 2009, Harbor Point entered into a forward contract that requires the Company to sell 2.75 million Euros for $4.1 million on April 13, 2012. As of September 30, 2010, this forward contract had a fair value of $0.4 million. The Company has elected not to designate these derivatives as hedges.

On April 23, 2009, the Company closed the derivative positions it had previously held in equity futures contracts denominated in U.S. dollars, Japanese yen and Canadian dollars, for which the primary purpose was to manage the Company’s economic exposure to changes in the fair value of hedge fund redemptions requested but not yet received. These derivative instruments were not designated as hedging instruments. These derivatives were exchange-traded and the fair value was measured based on the later of the final traded price or the mid-point of the last bid-ask spread on the measurement date.

The fair values of derivative instruments as of September 30, 2010 were:

Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	Derivative assets Fair Value			Derivative liabilities Fair Value
Convertible bond equity call options	$	3,905		$	—
Interest rate-linked derivatives		(510	)		—
Foreign exchange forward contracts		367			—
Total derivatives	$	3,762		$	—

The fair values of derivative instruments as of December 31, 2009 were:

Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	Derivative assets Fair Value		Derivative liabilities Fair Value
Convertible bond equity call options	$	3,224	$	—
Total derivatives	$	3,224	$	—

27

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

The derivative assets are included within other investments in the consolidated balance sheets as of September 30, 2010 and December 31, 2009.

The impact of derivative instruments on the consolidated statement of income and comprehensive income for the three months ended September 30, was:

Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	2010 Amount of Gain or (Loss) Recognized in Income on Derivative			2009 Amount of Gain or (Loss) Recognized in Income on Derivative
Convertible bond equity call options	$	1,926		$	508
Interest rate-linked derivatives		(77	)		— ��
Foreign exchange forward contracts		(386	)		—
Total derivatives	$	1,463		$	508

The impact of derivative instruments on the consolidated statement of income and comprehensive income for the nine months ended September 30, was:

Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	2010 Amount of Gain or (Loss) Recognized in Income on Derivative			2009 Amount of Gain or (Loss) Recognized in Income on Derivative
Convertible bond equity call options	$	(1,245	)	$	508
Interest rate-linked derivatives		(10,950	)		—
Foreign exchange forward contracts		(231	)		—
Equity contracts		—			6,287
Total derivatives	$	(12,426	)	$	6,795

The gain (loss) on all derivative instruments is included within net realized and unrealized gains (losses) on investments in the consolidated statement of income and comprehensive income.

8. SENIOR NOTES

On September 27, 2010, Alterra Finance, a wholly-owned indirect subsidiary of Alterra, issued $350.0 million principal amount of 6.25% senior notes due September 30, 2020 with interest payable on March 30 and September 30 of each year (the “6.25% senior notes”). The 6.25% senior notes are Alterra Finance’s senior unsecured obligations and rank equally in right of payment with all of Alterra Finance’s future unsecured and unsubordinated indebtedness and rank senior to all of Alterra Finance’s future subordinated indebtedness. The 6.25% senior notes are fully and unconditionally guaranteed by Alterra on a senior unsecured basis. The guarantee ranks equally with all of Alterra’s existing and future unsecured and unsubordinated indebtedness and ranks senior to all of Alterra’s future subordinated indebtedness. The effective interest rate related to the 6.25% senior notes, based on the net proceeds received, was 6.37%. The proceeds, net of issuance costs, from the sale of the 6.25% senior notes were $346.9 million and were used to repay a $200.0 million revolving bank loan outstanding under a credit facility, with the remainder to be used for general corporate purposes.

Alterra Finance is a finance subsidiary and has no independent activities, assets or operations other than in connection with the 6.25% senior notes.

On April 16, 2007, Alterra USA privately issued $100.0 million principal amount of 7.20% senior notes due April 14, 2017 with interest payable on April 16 and October 16 of each year (the “7.20% senior notes”). The 7.20% senior notes are Alterra USA’s senior unsecured obligations and rank equally in right of payment with all existing and future senior unsecured indebtedness of Alterra USA. The 7.20% senior notes are fully and unconditionally guaranteed by Alterra. The effective interest rate related to the 7.20% senior notes, based on the net proceeds received, was 7.27%. The net proceeds from the sale of the 7.20% senior notes were $99.5 million, which were used to repay a bank loan used to acquire Alterra E&S. Following repurchases of $8.5 million and $0.9 million principal amount in December 2008 and December 2009, respectively, the principal amount of the 7.20% senior notes outstanding as of September 30, 2010 was $90.6 million.

28

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

The fair value of the 6.25% senior notes and 7.20% senior notes was $351.4 million and $95.8 million, respectively, as of September 30, 2010, measured based on an independent pricing service using a matrix pricing methodology. Interest expense in connection with the senior notes was $1.9 million and $1.7 million for the three months ended September 30, 2010 and 2009, respectively, and $5.2 million and $5.0 million for the nine months ended September 30, 2010 and 2009, respectively.

9. INCOME TAXES

Alterra and Alterra Bermuda are incorporated in Bermuda, and pursuant to Bermuda law are not taxed on either income or capital gains. They have each received an assurance from the Bermuda Minister of Finance under the Exempted Undertaking Tax Protection Act, 1966 of Bermuda that if there is enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, then the imposition of any such tax will not be applicable until March 2016. The Company’s subsidiaries that are based in jurisdictions other than Bermuda are subject to the tax laws of those jurisdictions and the jurisdictions in which they operate.

The Company records income taxes during the period on the estimated effective annual rates for each of the years ended December 31, 2010 and 2009. Interest and penalties related to uncertain tax positions, of which there have been none, would be recognized in income tax expense.

10. EQUITY CAPITAL

On May 12, 2010, as a result of the Amalgamation, the Company issued 3.7769 Alterra common shares (and cash in lieu of fractional shares) for each outstanding Class A voting common share of Harbor Point, resulting in 62,479,281 Alterra common shares being issued to the former holders of Class A voting common shares of Harbor Point. Based on the closing price of Alterra common shares on May 12, 2010, these common shares had an aggregate value of $1,435.8 million.

The Board of Directors of the Company declared the following dividends during 2010 and 2009:

Date Declared	Dividend per share		Dividend to be paid to shareholders of record on	Payable On
November 2, 2010	$	0.12	November 16, 2010	November 30, 2010
August 3, 2010	$	0.12	August 17, 2010	August 31, 2010
May 20, 2010	$	2.50	June 2, 2010	June 16, 2010
May 3, 2010	$	0.10	May 24, 2010	June 4, 2010
February 9, 2010	$	0.10	February 23, 2010	March 9, 2010
November 3, 2009	$	0.10	November 16, 2009	November 30, 2009
August 4, 2009	$	0.10	August 18, 2009	September 1, 2009
May 4, 2009	$	0.09	May 18, 2009	June 1, 2009
February 10, 2009	$	0.09	February 24, 2009	March 10, 2009

During the nine months ended September 30, 2010, under the Board-approved share repurchase authorization, the Company repurchased 5,052,349 common shares at an average price of $19.48 per common share for a total amount of $98.4 million, including the costs incurred to effect the repurchases. Of the amount repurchased during the nine months ended September 30, 2010, 2,022,574 common shares were acquired pursuant to privately negotiated stock purchase agreements. As of September 30, 2010, the remaining authorization under the Company’s previously authorized share repurchase program was $37.1 million. On November 2, 2010, the Board of Directors authorized a $200.0 million increase to the share repurchase plan.

11. EARNINGS PER SHARE

Basic earnings per share is based on weighted average common shares outstanding and excludes any dilutive effect of warrants, options and convertible securities. Diluted earnings per share assumes the conversion of dilutive convertible securities and the exercise of all dilutive stock warrants and options.

29

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

The following table sets forth the computation of basic and diluted earnings per share for the three months ended September 30, 2010 and 2009:

	Three Months Ended September 30,
(Expressed in thousands U.S. Dollars, except share and per share amounts)	2010		2009
Basic earnings per share:
Net income	$	82,837	$	95,326
Weighted average common shares outstanding—basic		117,200,505		57,233,115
Basic earnings per share	$	0.71	$	1.67
Diluted earnings per share:
Net income	$	82,837	$	95,326
Weighted average common shares outstanding—basic		117,200,505		57,233,115
Conversion of warrants		492,718		787,738
Conversion of options		154,142		189,648
Conversion of employee stock purchase plan		2,301		—
Participating restricted shares		108,276		—
Weighted average common shares outstanding—diluted		117,957,942		58,210,501
Diluted earnings per share	$	0.70	$	1.64

The following table sets forth the computation of basic and diluted earnings per share for the nine months ended September 30, 2010 and 2009:

	Nine Months Ended September 30,
(Expressed in thousands U.S. Dollars, except share and per share amounts)	2010		2009
Basic earnings per share:
Net income	$	222,665	$	183,623
Weighted average common shares outstanding—basic		88,253,609		56,978,901
Basic earnings per share	$	2.52	$	3.22
Diluted earnings per share:
Net income	$	222,665	$	183,623
Weighted average common shares outstanding—basic		88,253,609		56,978,901
Conversion of warrants		515,265		570,871
Conversion of options		194,219		127,413
Conversion of employee stock purchase plan		2,330		811
Participating restricted shares		36,092		—
Weighted average common shares outstanding—diluted		89,001,515		57,677,996
Diluted earnings per share	$	2.50	$	3.18

12. RELATED PARTIES

The Chubb Corporation

Effective December 15, 2005, Harbor Point acquired the continuing operations and certain assets of Chubb Re, Inc. (“Chubb Re”), the assumed reinsurance division of The Chubb Corporation (“Chubb”), a significant shareholder of Harbor Point at the time, and now a significant shareholder of Alterra. Pursuant to the transaction, Harbor Point and Federal Insurance Company (“Federal”), the principal operating subsidiary of Chubb, entered into a runoff services agreement.

30

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

Under the runoff services agreement, the Company provides claims management services on Federal’s behalf with respect to reinsurance business of Federal produced by Chubb Re from December 7, 1998 to December 31, 2005. This agreement may be terminated at any time at the sole discretion of Federal. Except for certain direct claims costs, there is no consideration paid by Federal or Chubb Re to the Company under this agreement. As of September 30, 2010, $2.6 million is included in accounts payable and accrued expenses on the consolidated balance sheet related to the estimated remaining obligation for the run off services agreement.

The Company has entered into several reinsurance agreements with Federal and Chubb Re. The following is a summary of the amounts recognized in the accompanying consolidated balance sheets and consolidated statements of income and comprehensive income related to these agreements:

	As of September 30, 2010
	(Expressed in thousands of U.S. Dollars)
Balance Sheet
Unearned property and casualty premiums	$	19,859
Reinsurance balances receivable		8,846
Reinsurance recoverable		14,791
Property and casualty losses		314,351
Funds withheld from reinsurers		1,803

	Three Months Ended September 30, 2010		Period From May 12 to September 30, 2010
	(Expressed in thousands of U.S. Dollars)
Income Statement
Gross premiums written	$	7,430	$	3,757
Earned premiums		4,727		5,132
Net losses and loss expenses		4,312		(2,297	)
Acquisition costs		1,133		1,750

Grand Central Re Limited

In May 2001, the Company made an equity investment in Grand Central Re Limited (“Grand Central Re”), a Bermuda domiciled reinsurance company managed by Alterra Managers. The Company owns 7.5% of the ordinary shares of Grand Central Re. Alterra Bermuda entered into a quota share retrocession agreement with Grand Central Re, effective January 1, 2002, amending the quota share arrangement with Grand Central Re that commenced January 1, 2001. The 2002 quota share reinsurance agreement with Grand Central Re requires each of Alterra Bermuda and Grand Central Re to retrocede a portion of their respective gross premiums written from certain transactions to the other party in order to participate on a quota share basis. Alterra Bermuda has not ceded any new business to Grand Central Re since 2003.

The accompanying consolidated balance sheets and consolidated statements of income and comprehensive income include, or are net of, the following amounts related to the quota share retrocession agreement with Grand Central Re:

	As of September 30, 2010			As of December 31, 2009
	(Expressed in thousands of U.S. Dollars)
Balance Sheet
Losses and benefits recoverable from reinsurers	$	49,344		$	101,438
Deposit liabilities		12,976			15,429
Funds withheld from reinsurers		89,579			109,626
Reinsurance balance payable		(276	)		26,385

	Three Months Ended						Nine Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
	(Expressed in thousands of U.S. Dollars)
Income Statement
Reinsurance premiums ceded	$	1,573		$	(407	)	$	659		$	(1,198	)
Earned premiums ceded		1,573			(407	)		659			(1,198	)
Other income		25			200			75			600
Net losses and loss expenses		1,931			—			2,273			383
Claims and policy benefits		(465	)		(316	)		(1,433	)		(3,008	)
Interest expense (benefit)		2,561			3,202			7,858			2,265

31

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

The variable quota share retrocession agreement with Grand Central Re is principally collateralized on a funds withheld basis. The rate of return on funds withheld is based on the average of two total return fixed maturity indices. The interest expense recognized by the Company will vary from period to period due to changes in the indices. The Company records the change in interest expense through the statement of income and comprehensive income on a monthly basis.

Bay Point Holdings Limited

The Company owns 13.8% of the common shares of Bay Point Holdings Limited (“Bay Point”). In conjunction with this investment, Alterra Bermuda entered into a quota share reinsurance agreement to cede 30% of its property-related lines of business to Bay Point Re Limited, a wholly-owned subsidiary of Bay Point. This quota share reinsurance agreement expired on December 31, 2007. As of September 30, 2010, $2.5 million was included in reinsurance balances receivable and $8.2 million in reinsurance losses recoverable related to this agreement.

Hedge Fund Managers

Alstra Capital Management, LLC (“Alstra”), an affiliate of Mr. Zack H. Bacon III, one of Alterra’s directors until November 2, 2009, served as the investment advisor for Alterra Diversified from April 1, 2004 until January 31, 2009. For the nine months ended September 30, 2009, Alstra received investment advisor fees of $0.7 million. During the nine months ended September 30, 2009, the Company terminated its investment advisor agreement with Alstra, resulting in a termination fee of $2.0 million.

In addition, Moore Capital Management, LLC (“Moore Capital”), an affiliate of one of Alterra’s significant shareholders, received aggregate management and incentive fees of $0.4 million and $1.9 million, respectively, in respect of Alterra Diversified’s assets invested in an underlying fund managed by Moore Capital for the nine months ended September 30, 2010 and 2009, respectively.

Investment fees incurred on the Company’s hedge funds are included in net realized and unrealized gains (losses) on investments in the consolidated statements of income and comprehensive income.

The Company believes that the terms of its related party transactions are comparable to terms that the Company would expect to negotiate in similar transactions with unrelated parties.

13. COMMITMENTS AND CONTINGENCIES

Credit Facilities

On June 12, 2007, Harbor Point entered into an $850.0 million five-year senior credit facility (the “$850.0 million Credit Facility”) with Bank of America and various other financial institutions. The $850.0 million Credit Facility allows Alterra Holdings, Alterra Bermuda, Alterra Re USA and Alterra USA Holdings to issue secured letters of credit up to the full amount of the facility and to borrow up to $250.0 million on an unsecured basis for general corporate purposes. In addition, there is a $50.0 million sublimit for the issuance of secured letters of credit for Alterra Holdings investment affiliates. An increase in the credit facility of up to $150.0 million may be requested, subject to there being sufficient participation by the syndicate of participating banks.

On August 7, 2007, Alterra Bermuda entered into a $450.0 million five-year senior credit facility (the “$450.0 million Credit Facility”) with Bank of America and various other financial institutions. The $450.0 million Credit Facility provides for letters of credit to be issued for the account of Alterra Bermuda and certain of its insurance subsidiaries and a $150.0 million five-year unsecured senior credit facility for letters of credit to be issued for the account of Alterra Bermuda and certain of its insurance subsidiaries and loans to Alterra Bermuda and Alterra. Subject to certain conditions and at the request of Alterra Bermuda, the aggregate commitments of the lenders under the $450.0 million Credit Facility may be increased up to a total of $800.0 million, provided that the unsecured commitments may not exceed 25% of the aggregate commitments under the $450.0 million Credit Facility.

32

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

On October 13, 2008, Alterra entered into a credit facility agreement with ING Bank N.V., London Branch (“ING”). This credit facility provides up to GBP 90.0 million for the issuance of letters of credit to provide capital (“Funds at Lloyd’s” or “FAL”) to support Lloyd’s syndicate commitments of Alterra Capital UK and its subsidiaries. The facility may be terminated by ING at any time after January 1, 2010, subject to a four year notice requirement for any outstanding letters of credit.

In July 2009, Alterra Bermuda entered into a GBP 20.0 million letter of credit facility with Citibank N.A. to issue secured letters of credit in support of the operations of Alterra Re UK.

In December 2009, Alterra Bermuda renewed a $75.0 million letter of credit facility with The Bank of Nova Scotia, which expires on December 16, 2010.

On September 30, 2010 the Company fully repaid an outstanding loan for $200.0 million under the $850.0 million Credit Facility. This loan bore interest at LIBOR plus 2.40%, with the effective rate being 2.66% at the time it was repaid. Interest expense in connection with this loan for the three and nine months ended September 30, 2010 was $1.4 million and $2.1 million, respectively.

The following table provides a summary of the credit facilities and the amounts pledged as collateral for the issued and outstanding letters of credit as of September 30, 2010 and December 31, 2009:

	Credit Facilities (expressed in thousands of U.S. Dollars  or Great Britain Pounds, as applicable)
	U.S Dollar Facilities		Great Britain Pound Facilities
Letter of credit facility capacity as of:
September 30, 2010	$	1,525,000		GBP110,000
December 31, 2009	$	675,000		GBP90,000
Letters of credit issued and outstanding as of:
September 30, 2010	$	900,527		GBP80,089
December 31, 2009	$	461,255		GBP63,614
Cash and fixed maturities at fair value pledged as collateral as of:
September 30, 2010	$	1,123,909		GBP25,476
December 31, 2009	$	563,334		GBP3,623

Each of the credit facilities requires that the Company and/or certain of its subsidiaries comply with certain financial covenants, which may include a minimum consolidated tangible net worth covenant, a minimum issuer financial strength rating and restrictions on the payment of dividends. The Company was in compliance with all of the financial covenants of each of its letter of credit facilities as of November 5, 2010.

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

14. SHARE BASED EQUITY AWARDS

At the Company’s May 5, 2008 Annual General Meeting of Shareholders, Alterra’s shareholders approved the adoption of the 2008 Stock Incentive Plan (the “2008 Plan”) under which the Company may award, subject to certain restrictions, incentive stock options, non-qualified stock options, restricted stock, restricted stock units, share awards or other awards. The 2008 Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”).

Prior to adoption of the 2008 Plan, the Company made awards of equity compensation under a stock incentive plan approved by the shareholders in June 2000, and amended in each of May 2002 and April 2005 (the “2000 Plan”). Effective upon the adoption of the 2008 Plan, unused shares from the 2000 Plan became unavailable for future awards and instead are used only to fulfill obligations from outstanding option, restricted stock unit awards or reload obligations pursuant to grants originally made under the 2000 Plan.

In May 2010, in connection with the Amalgamation, the Company issued replacement warrants, options and restricted stock awards to holders of Harbor Point warrants, options and restricted stock awards. In accordance with the terms of the Amalgamation Agreement, the replacement warrants were issued in connection with the surrender of the original warrants and the replacement options and restricted stock awards were issued under the terms and conditions of the Harbor Point Limited Amended and Restated 2006 Equity Incentive Plan, as amended on May 20, 2010 (the “2006 Plan”, and together with the 2008 Plan and the 2000 Plan, the “Plans”). The 2006 Plan was approved by Harbor Point’s shareholders on November 17, 2006 and is administered by the Committee. The 2006 Plan was amended and restated on November 30, 2007 and on March 3, 2010, and amended again on May 20, 2010.

The Committee concluded that the Amalgamation constituted a change of control under the 2000 Plan and the 2008 Plan. In accordance with these plans, except in the case of awards granted after December 31, 2009 and awards held by certain officers who waived their right to accelerated vesting in connection with the Amalgamation, unvested stock options, restricted shares and restricted share units vested upon consummation of the Amalgamation.

The Board of Directors of Harbor Point concluded that the Amalgamation constituted a merger of equals under the terms of certain award agreements issued under the 2006 Plan. In accordance with these agreements, the vesting of all restricted stock awards issued in 2008 and 2009 accelerate to May 12, 2012, the second anniversary of the closing date of the Amalgamation.

Warrants

The Company has issued warrants to purchase the Company’s common shares. The warrants may be exercised at any time up to their expiration dates, which range from January 1, 2011 to August 17, 2011. Warrants were issued with exercise prices approximating their fair value on the date of issuance.

In conjunction with the Amalgamation, some of the warrant agreements were modified. The warrants held by founding shareholders of Max were modified to include an anti-dilution provision which, in the event of certain specified events including payment of cash dividends, provides the holder of the warrant the option to have the exercise price and number of warrants adjusted such that the holder of the warrants is in the same economic position as if the warrant had been exercised immediately prior to such event, or receive the cash dividend upon exercise of the warrant. Similarly, the warrants held by employees of Max were modified to include a provision that provides for the payment of accumulated cash dividends upon exercise of the warrants.

On May 12, 2010, the Company issued 8,911,449 replacement warrants in connection with the Amalgamation. The warrants were originally issued by Harbor Point to founding shareholders and employees in connection with the purchase of shares at the time of the formation of Harbor Point. The warrants held by founding shareholders of Harbor Point are subject to anti-dilution provisions consistent with those described above. The warrant expiration dates range from December 15, 2015 to May 15, 2016.

The fair value of the replacement warrants issued pursuant to the Amalgamation was estimated using the Black Scholes option pricing model with the following weighted average assumptions:

Warrant valuation assumptions:
Expected remaining warrant life	3.7 years
Expected dividend yield	0.00	%
Expected volatility	37.70	%
Risk-free interest rate	1.82	%
Forfeiture rate	0.00	%

34

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

Warrant related activity is as follows:

	Warrants Outstanding			Warrants Exercisable		Weighted Average Exercise Price		Weighted Average Fair Value		Range of Exercise Prices
Balance, December 31, 2009		2,296,470			2,296,470	$	15.67	$	5.60	$	15.00-$18.00
Warrants exercised		(1,564,173	)			$	15.50	$	5.56	$	15.00-$18.00
Replacement warrants issued upon consummation of the Amalgamation		8,911,449				$	22.67	$	7.03	$	22.54-$26.48
Additional warrants issued as a result of dividends declared		1,331,328				$	19.46	$	6.99	$	13.96-$22.44
Balance, September 30, 2010		10,975,074			10,975,074	$	19.47	$	6.94	$	13.96-$26.48

On May 3, 2010, May 21, 2010, and August 3, 2010 the Company declared dividends of $0.10, $2.50 and $0.12 per share, respectively. These dividends resulted in a reduction in the weighted average exercise price of $2.69 and an increase in the number of warrants outstanding of 1,331,328. A deferred dividend liability of $2.8 million is included in accounts payable and accrued expenses in the consolidated balance sheets for employee warrant holders and those founding shareholder warrant holders who chose the deferred cash option for dividends declared rather than the anti-dilution adjustment.

The warrants contain a “cashless exercise” provision that allows the warrant holder to surrender the warrants with notice of cashless exercise and receive a number of shares based on the market value of the Company’s shares. The cashless exercise provision results in a lower number of shares being issued than the number of warrants exercised. The warrants exercised during the nine months ended September 30, 2010 were exercised pursuant to the cashless exercise provision, which resulted in 545,074 shares being issued for the exercise of 1,564,173 warrants.

Stock Option Awards

Options that have been granted under the Plans have an exercise price equal to or greater than the fair market value of Alterra’s common shares on the date of grant and have a maximum ten-year term. The fair value of awards granted under the Plans are measured as of the grant date and expensed ratably over the vesting period of the award. All awards provide for accelerated vesting upon a change in control of Alterra. Shares issued under the Plans are made available from authorized but unissued shares.

On May 12, 2010, the Company issued 2,186,986 replacement options in connection with the Amalgamation. These awards were originally issued under the 2006 Plan. The fair value of these replacement awards was estimated using the Black-Scholes option pricing model with the weighted average assumptions detailed below. There were no other options granted during the nine months ended September 30, 2010.

	2010			2009
Option valuation assumptions:
Expected remaining option life		3.9 years			7.0 years
Expected dividend yield		2.27	%		2.32	%
Expected volatility		37.70	%		34.30	%
Risk-free interest rate		1.84	%		2.99	%
Forfeiture rate		0.00	%		0.00	%

The Company recognized $0.4 million and $0.2 million of stock-based compensation expense related to stock option awards for the three months ended September 30, 2010 and 2009, respectively. The Company recognized $5.2 million and $0.5 million of stock-based compensation expense related to stock option awards for the nine months ended September 30, 2010 and 2009, respectively. Of these amounts, $4.5 million for the nine months ended September 30, 2010 was recorded in merger and acquisition expenses. The remainder of the expense for the three and nine months ended September 30, 2010 and the expense for the three and nine months ended September 30, 2009 was recorded in general and administrative expenses. The Company did not capitalize any cost of stock-based option award compensation. As of September 30, 2010, the total compensation cost related to non-vested stock option awards not yet recognized was $1.0 million, which is expected to be recognized over a weighted average period of 0.8 years.

The total intrinsic value of stock options exercised during the nine months ended September 30, 2010 was $1.0 million.

A summary of the 2000 Plan related activity follows:

35

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

	Options Outstanding			Options Exercisable		Weighted Average Exercise Price		Fair Value of Options		Range  of Exercise Prices
Balance, December 31, 2009		1,625,805			1,324,138	$	22.58	$	6.13	$	10.95 -36.26
Options exercised		(121,702	)			$	12.17	$	4.70	$	9.00 -18.53
Options forfeited		(33,895	)			$	25.05	$	6.81	$	12.48 -26.70
Balance, September 30, 2010		1,470,208			1,170,208	$	20.72	$	6.24	$	8.45-33.76

A summary of the 2008 Plan related activity follows:

	Awards Available for Grant			Options Outstanding		Options Exercisable		Weighted Average Exercise Price		Fair Value of Options		Range of Exercise Prices
Balance, December 31, 2009		3,396,927			108,333		54,167	$	18.25	$	6.01	$	18.25
Restricted stock issued		(1,225,622	)		—
Restricted stock forfeited		7,555			—
Restricted stock units granted		(201,618	)		—
Restricted stock units forfeited		3,630
Balance, September 30, 2010		1,980,872			108,333		54,167	$	15.75	$	6.01	$	15.75

A summary of the 2006 Plan related activity follows, from the consummation of the Amalgamation:

	Awards Available for Grant			Options Outstanding			Options Exercisable		Weighted Average Exercise Price		Fair Value of Options		Range of Exercise Prices
Balance, May 12, 2010		1,722,622			2,186,986			1,686,489	$	26.64	$	5.20	$	26.48-30.82
Option cancellation		2,266			(2,266	)			$	27.82	$	5.26	$	26.48-29.15
Restricted stock issued		(303,371	)		—
Restricted stock forfeited		113
Balance, September 30, 2010		1,421,630			2,184,720			1,710,133	$	26.64	$	5.20	$	26.48-30.82

As a result of the special dividend declared by the Company on May 21, 2010 of $2.50 per share, the exercise prices of options issued under the 2008 Plan and 2000 Plan were reduced effective June 16, 2010 by $2.50 per option in accordance with the terms of the respective option agreements.

Restricted Stock Awards

Restricted stock and restricted stock units (“RSUs”) issued under the Plans have terms set by the Committee. These shares and RSUs contain certain restrictions relating to, among other things, vesting, forfeiture in the event of termination of employment and transferability. Restricted stock and RSU awards are valued equal to the market price of the Company’s common stock on the date of grant. At the time of grant, the fair value of the shares and RSUs awarded is recorded as unearned stock grant compensation. The unearned compensation is charged to income over the vesting period. Generally, restricted stock awards vest between three and five years after the date of grant.

In accordance with the accelerated vesting provisions in the event of a change in control, 1,339,982 restricted stock awards vested in May 2010 following the Amalgamation. Total compensation cost recognized for restricted stock awards was $5.9 million and $5.2 million for the three months ended September 30, 2010 and 2009, respectively, and was $31.3 million and $15.4 million for the nine months ended September 30, 2010 and 2009, respectively. Of these amounts, $14.4 million for the nine months ended September 30, 2010 was recorded in merger and acquisition expenses. The remainder of the expense for the three and nine months

36

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)

ended September 30, 2010 and the expense for the three and nine months ended September 30, 2009 was recorded in general and administrative expenses.

In conjunction with the Amalgamation, the Company issued 1,624,567 replacement restricted stock awards. The replacement awards were issued at a fair value of $22.98 per share.

A summary of the Company’s unvested restricted stock awards as of December 31, 2009 and changes during the nine months ended September 30, 2010 follow:

	Non-vested Restricted Stock			Weighted - Average Grant - Date Fair Value		Non-vested RSUs			Weighted - Average Grant - Date Fair Value
Balance, December 31, 2009		2,226,811		$	23.49		406,514		$	23.75
Awards Granted		1,528,993		$	22.05		201,618		$	22.83
Replacement awards issued upon consummation of the Amalgamation		1,624,567		$	22.98		—			—
Awards Vested		(1,981,577	)	$	23.60		(406,514	)	$	23.75
Awards Forfeited(1)		(9,796	)	$	23.31		(3,630	)	$	23.97
Balance, September 30 2010		3,388,998		$	22.53		197,988		$	22.81

⁽¹⁾ Includes 2,128 shares forfeited from the 2000 Plan that do not increase the awards available for grant.

Employee Stock Purchase Plan

On July 1, 2008, the Company introduced an employee stock purchase plan (“ESPP”). The ESPP gives participating employees the right to purchase common shares through payroll deductions during consecutive subscription periods (“Subscription Periods”). The Subscription Periods run from January 1 to June 30 and from July 1 to December 31 each year. The Company recorded an expense for the ESPP of $0.1 million and $0.1 million for the three months ended September 30, 2010 and 2009, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2010 and 2009, respectively.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated or unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and similar expressions are references to Alterra and its consolidated subsidiaries.

The following is a discussion and analysis of our results of operations for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009 and our financial condition as of September 30, 2010. We completed the Amalgamation of Alterra Holdings and Harbor Point on May 12, 2010 and the results of operations of Alterra Holdings (as the amalgamated entity) have been included in our consolidated results only from that date. This discussion and analysis should be read in conjunction with the attached unaudited interim consolidated financial statements and related notes and the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2009.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, or Exchange Act. We intend that the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 apply to these forward-looking statements. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events.

Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “will,” “may” and similar statements of a future or forward-looking nature identify forward-looking statements. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and you should not place undue reliance on any such statements. These factors include, but are not limited to, the following:

• the adequacy of loss reserves and the need to adjust such reserves as claims develop over time;

• the failure of any of the loss limitation methods employed;

• the effects of emerging claims and coverage issues;

• changes in general economic conditions, including changes in capital and credit markets;

• the effect of competition and cyclical trends, including with respect to demand and pricing in the insurance and reinsurance markets;

• any lowering or loss of financial ratings;

• the occurrence of natural or man-made catastrophic events with a frequency or severity exceeding expectations;

• the loss of business provided by our major brokers;

• the effect on our investment portfolio of changing financial market conditions, including inflation, interest rates, liquidity and other factors;

• tax and regulatory changes and conditions;

• the integration of Harbor Point or new business ventures we may enter into; and

• retention of key personnel, as well as our response to any of the aforementioned factors.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein and elsewhere, including the risk factors included in our most recent reports on Form 10-K and Form 10-Q and other documents on file with the Securities and Exchange Commission. Any forward-looking statements made in this Quarterly Report on Form 10-Q are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, our business or operations. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Generally, our policy is to communicate events that we believe may have a material adverse impact on our operations or financial position, including property and casualty catastrophic events and material losses in our investment portfolio, in a timely manner through a public announcement. It is also our policy not to make public announcements regarding events that we believe have no material impact on our operations or financial position based on management’s current estimates and available information, other than through regularly scheduled calls, press releases or filings.

Overview

We are a Bermuda headquartered global enterprise dedicated to providing diversified specialty insurance and reinsurance products to corporations, public entities and property and casualty insurers.

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We have $3,036.5 million in consolidated shareholders’ equity as of September 30, 2010. We conduct our Bermuda insurance and reinsurance operations through Alterra Bermuda. We conduct our non-Lloyd’s European operations through Alterra Re Europe and Alterra Insurance Europe. In addition, Alterra Bermuda operates a branch, Alterra Re UK, in the United Kingdom. We conduct our U.S. reinsurance operations through Alterra Re USA and our U.S. specialty insurance operations through Alterra E&S and Alterra America. Our United Kingdom Lloyd’s operations are conducted through Alterra at Lloyd’s. We provide reinsurance to clients in Latin America through Alterra at Lloyd’s operating locally in Rio de Janeiro, Brazil, using Lloyd’s admitted status, and through Alterra Re Europe using a representative office in Bogota, Colombia. We hold the majority of our hedge fund portfolio in Alterra Diversified. We house certain personnel and assets within our global service companies incorporated in Ireland, Bermuda, the United Kingdom and the United States, which we believe improves the efficiency of certain corporate services across the group.

To manage our insurance and reinsurance liability exposure, make our investment decisions and assess our overall enterprise risk, we model our underwriting and investing activities on an integrated basis. The integration of the Alterra at Lloyd’s operations into this framework is in its final stages of completion and the integration of the former Harbor Point companies is in progress. Our integrated risk management, as well as terms and conditions of our products, provide flexibility in making decisions regarding investments. Our investments comprise three high grade fixed maturities securities portfolios (one held for trading, one held as available for sale and one held to maturity) and a diversified alternative asset portfolio. Our investment portfolio is designed to provide diversification and to generate positive returns while attempting to reduce the frequency and severity of credit losses. Based on carrying values as of September 30, 2010, the allocation of invested assets was 94.8% in cash and fixed maturities and 5.2% in other investments, principally hedge funds.

Key Performance Indicators

Our objective as a specialty insurance and reinsurance company is to meet all obligations to policyholders, while generating returns on capital that appropriately reward our shareholders for the risk that we assume under our insurance and reinsurance contracts. In an effort to achieve our objective, we assess the potential losses associated with the risks that we insure and reinsure, diversify our risk exposure by product class and by geographic location, manage our investment portfolio risk appropriately and control costs throughout our organization. The financial measures that we believe are most meaningful in analyzing our performance and assessing whether we are achieving our objectives are growth in book value per share, net operating income, combined ratio, annualized return on average shareholders’ equity and annualized net operating return on average shareholders’ equity.

The table below shows the key performance indicators as of September 30, 2010, June 30, 2010 and December 31, 2009 and for the quarters and nine months ended September 30, 2010 and 2009:

	As of September 30, 2010		As of June 30, 2010		As of December 31, 2009
Book value per share(1)	$	26.20	$	24.67	$	28.01
Diluted book value per share(1)	$	25.88	$	24.55	$	27.36

	Quarter Ended September 30, 2010			Quarter Ended September 30, 2009			Nine  Months Ended September 30, 2010			Nine  Months Ended September 30, 2009
	(in millions of U.S. Dollars)
Net operating income (2)	$	76.0		$	53.7		$	175.5		$	148.4
Combined ratio (3)		86.0	%		90.9	%		86.1	%		90.5	%
Annualized return on average shareholders’ equity (4)		11.1	%		26.2	%		12.9	%		18.2	%
Annualized net operating return on average shareholders’ equity (2) (4)		10.2	%		14.8	%		10.2	%		14.7	%

(1) Book value per share is calculated as shareholders’ equity divided by the number of common shares outstanding. Diluted book value per share is calculated as shareholders’ equity divided by the number of diluted common shares outstanding using the treasury stock method.

(2) Net operating income and annualized net operating return on average shareholders’ equity are non-GAAP financial measures as defined by SEC Regulation G. See “Non-GAAP financial measures” for reconciliation to the nearest U.S. GAAP financial measure.

(3) Combined ratio is the sum of the loss ratio, the acquisition cost ratio and the general and administrative expense ratio for the property and casualty business.

(4) Annualized return on average shareholders’ equity and annualized net operating return on average shareholders’ equity are calculated by dividing net income and net operating income, respectively, by average shareholders’ equity (determined using the shareholders’ equity balances at the beginning and end of the quarterly period, and the average of the quarterly average shareholders’ equity balance for the nine month period).

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We consider growth in book value per share to be the most important financial performance measure in assessing whether we are meeting our business objectives. During the quarter ended September 30, 2010, our book value per share on a basic and diluted basis increased by 6.2% and 5.4%, respectively. The increase in book value per share was driven by a combination of operating results and unrealized gains on our investment portfolio, plus a contribution from the repurchase of our shares at a discount to book value per share. The decrease in book value per share from December 31, 2009 to June 30, 2010 and September 30, 2010 was principally due to the special dividend of $2.50 per share paid to shareholders in the second quarter of 2010.

The quarter ended September 30, 2010 was the first full quarter in which the results of operations of the former Harbor Point companies were included in our consolidated results of operations. This contributed to an increase in net operating income for the quarter and nine months ended September 30, 2010 as the results of operations of Harbor Point are included in our consolidated results of operations for the period from May 12, 2010 and are not reflected in our financial results for the prior year period. This also had a favorable impact on our combined ratio for the quarter and nine months ended September 30, 2010 as the Harbor Point portfolio of contracts had a larger proportion of property catastrophe-exposed contracts and there were few significant property catastrophe losses during the period from May 12, 2010 to September 30, 2010.

Our combined ratio decreased in the quarter and nine months ended September 30, 2010 primarily as a result of the addition of the Harbor Point portfolio of contracts to our business mix. Losses incurred from the New Zealand earthquake during the quarter, and losses related to the Deepwater Horizon oil spill, Chilean earthquake, European windstorm Xynthia, and Australian hailstorms in the first six months of the year, were well within our risk tolerances. The property catastrophe and significant per-risk losses experienced during the nine months ended September 30, 2010 represented less than 1.3% of our shareholders’ equity as of September 30, 2010. Given the multi-billion dollar estimated industry losses from these combined events, we believe this demonstrates the effectiveness of our conservative underwriting strategy and our product line and geographic diversification.

We continued to actively manage our capital during the quarter, maintaining our program of share repurchases. We spent $54.1 million repurchasing 2.8 million shares during the quarter at an average price of $19.00, a 22.6% discount to our June 30, 2010 diluted book value per share. As long as the market price of our shares trades below book value per share, we expect to continue to consider share repurchases as an effective tool for increasing book value per share for our shareholders.

We also took advantage of favorable market conditions in the current quarter to issue $350.0 million of long-term debt at an attractive fixed rate of interest of 6.25%, replacing our $200.0 million revolving short-term borrowing. Over the long-term, we believe this will be accretive to our return on shareholders’ equity by lowering our weighted average cost of capital and providing us greater capital flexibility.

We target a long-term annualized net operating return on average shareholders’ equity of 13-15% over the cycle. During the quarter and nine months ended September 30, 2010, our annualized net operating return on average shareholders’ equity decreased compared to the prior year periods primarily due to lower returns on our investments, in particular in our hedge fund portfolio. In addition, the Amalgamation resulted in a substantial increase in shareholders’ equity, which had the effect of decreasing our annualized net operating return on average shareholders’ equity.

During the quarter and nine months ended September 30, 2010, our annualized return on average shareholders’ equity decreased compared to the prior year periods principally due to the 2009 periods including non-recurring income of $41.4 million, net of expenses, related to the termination of an amalgamation agreement with IPC Holdings, Ltd.

The markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, competition can result in lower pricing and less favorable policy terms. During periods of reduced underwriting capacity, pricing and policy terms are generally more favorable for insurers and reinsurers. We are currently in a period of excess underwriting capacity. As a result, we have decreased our premium volumes in most of our lines of business (after adjusting for the Harbor Point premiums that are included in 2010’s results of operations but are not included in 2009’s results of operations). In addition, we are operating in a low interest rate environment, which has decreased our investment income. Both of these factors generally result in lower net operating income, return on average shareholders’ equity and net operating return on average shareholders’ equity.

Within our life and annuity reinsurance segment, we have not been able to identify many meaningful opportunities to write new life and annuity reinsurance contracts where we can earn an attractive investment spread. As a result, we do not expect to write any new life and annuity reinsurance contracts in the foreseeable future.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which require management to make estimates and assumptions. We have performed a current assessment of our critical accounting policies in connection with preparing our interim unaudited consolidated financial statements as of and for the nine months ended September 30, 2010. We believe that the critical accounting policies set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, continue

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to describe the significant judgments and estimates used in the preparation of our consolidated financial statements. These accounting policies pertain to revenue recognition, loss and benefit expenses and investment valuation. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material adverse effect on our results of operations and financial condition.

Consolidated Results of Operations – For the quarter and nine months ended September 30, 2010 and 2009

The following is a discussion and analysis of our consolidated results of operations for the quarter and nine months ended September 30, 2010 and 2009, which are summarized below:

	Quarter Ended September 30, 2010			Quarter Ended September 30, 2009			% change			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009			% change
		(Expressed in millions of U.S. Dollars)
Gross premiums written	$	325.2		$	265.9			22.3	%	$	1,095.3		$	1,096.7			(0.1	)%
Reinsurance premiums ceded		(60.6	)		(83.3	)		(27.3	)%		(293.5	)		(377.4	)		(22.2	)%
Net premiums written	$	264.6		$	182.6			44.9	%	$	801.8		$	719.3			11.5	%
Net premiums earned	$	342.4		$	208.0			64.6	%	$	829.9		$	627.1			32.3	%
Net investment income		59.7			42.8			39.5	%		161.4			125.1			29.0	%
Net realized and unrealized gains (losses) on investments		15.4			24.5			(37.1	)%		7.1			64.4			(89.0	)%
Net impairment losses recognized in earnings		(0.2	)		(0.1	)		100.0	%		(0.9	)		(2.2	)		(59.1	)%
Other income		1.4			0.8			75.0	%		1.9			3.1			(38.7	)%
Total revenues		418.7			276.0			51.7	%		999.4			817.5			22.3	%
Net losses and loss expenses		191.0			131.8			44.9	%		475.8			378.7			25.6	%
Claims and policy benefits		15.1			14.4			4.9	%		46.7			84.1			(44.5	)%
Acquisition costs		60.9			28.0			117.5	%		133.9			73.7			81.7	%
Interest expense		7.5			6.0			25.0	%		20.4			14.7			38.8	%
Net foreign exchange gains (losses)		3.3			0.4			n/a	%		0.3			(6.5	)		n/a	%
Merger and acquisition expenses		0.5			(41.4	)		n/a	%		(49.3	)		(31.3	)		57.5	%
General and administrative expenses		56.7			40.3			40.7	%		143.7			115.5			24.4	%
Total losses and expenses		335.0			179.5			86.6	%		771.5			628.9			22.7	%
Income before taxes		83.7			96.5			(13.3	)%		227.9			188.6			20.8	%
Income tax expense		0.9			1.2			(25.0	)%		5.2			5.0			4.0	%
Net income	$	82.8		$	95.3			(13.1	)%	$	222.7		$	183.6			21.3	%
Loss ratio (a)		56.0	%		63.4	%					57.5	%		64.7	%
Acquisition cost ratio (b)		17.8	%		13.4	%					16.1	%		12.4	%
General and administrative expense ratio (c)		12.2	%		14.1	%					12.5	%		13.4	%
Combined ratio (d)		86.0	%		90.9	%					86.1	%		90.5	%

(a) The loss ratio is calculated by dividing net losses and loss expenses by net premiums earned for the property and casualty business.

(b) The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned for the property and casualty business.

(c) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned for the property and casualty business.

(d) The combined ratio is the sum of the loss ratio, the acquisition cost ratio and the general and administrative expense ratio for the property and casualty business.

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Premiums.Gross premiums written for the quarter ended September 30, 2010 increased by 22.3% compared to the prior year period and gross premiums written for the nine months ended September 30, 2010 decreased by 0.1% compared to the prior year period. Both periods were impacted by the additional premiums written as a result of the Amalgamation. The percentage increases do not necessarily represent new business growth, since our 2009 results of operations did not include the results of operations of Harbor Point. A discussion of pro forma reinsurance segment results including Harbor Point in the 2009 comparative figures is in the section entitledReinsurance Segment on a pro forma basis. Gross premiums written in our U.S. specialty and Alterra at Lloyd’s segments increased as a result of the expansion of our product offerings and the addition of new underwriting teams. These increases were offset by decreases in the level of premiums written in our insurance and reinsurance (excluding Harbor Point) segments. The lower premium volume in these segments reflected expected reductions across several lines of business due to competitive market conditions, resulting in reduced writings because pricing did not meet our risk/return thresholds.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter and nine months ended September 30, 2010 was 18.6% and 26.8%, respectively, compared to 31.3% and 34.4%, respectively, in the prior year periods. The decrease in the percentage of reinsurance premiums ceded in the quarter ended September 30, 2010 compared to the prior year period was principally due to the inclusion of Harbor Point business from May 12, 2010 at a lower ratio of ceded to written premiums, and the cancellation of a significant property quota share treaty in our U.S. specialty segment. The cancellation of the property quota share treaty in our U.S. specialty segment resulted in the refund of reinsurance premiums ceded of $20.6 million in the second quarter of 2010.

The amount of net premiums earned is a product of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, net premiums earned generally lag quarterly increases and decreases in gross premiums written and reinsurance premiums ceded. As a result, net premiums earned tend to be less volatile than gross premiums written and reinsurance premiums ceded. The increase in net premiums earned for the quarter and nine months ended September 30, 2010 compared to the prior year periods was principally due to the incremental earnings of the Harbor Point portfolio of contracts written before the Amalgamation, which are included in the 2010 periods but have no equivalent in the comparable 2009 periods.

Net investment income.Net investment income for the quarter and nine months ended September 30, 2010 increased by 39.5% and 29.0%, respectively, compared to the prior year periods. The increase in net investment income was principally attributable to the increase in cash and invested assets as a result of the Amalgamation, and additional investment income generated by reinvesting cash into fixed maturity securities. Our average annualized investment yield was 3.23% and 3.53% for the quarters ended September 30, 2010 and 2009, respectively, and 3.44% and 3.59% for the nine months ended September 30, 2010 and 2009, respectively. The yields available in the current fixed maturity market are generally lower than the average yield on our existing portfolio. As we have invested the cash generated by operations, or the cash generated from maturing investments, into our fixed maturity portfolio, the yield on our portfolio has decreased. To date, this reduction has been partially offset by our allocation of more cash into fixed maturities, which has moderated the decrease in yield compared to prior periods. However, due to the continuing low-yield market environment, we expect continued downwards pressure on our investment yield.

Net realized and unrealized gains (losses) on investments. Net realized and unrealized gains and losses on investments have decreased for the quarter and nine months ended September 30, 2010 compared to the prior year periods. The principal components of the decrease were hedge funds and derivatives. Investment gains from hedge funds decreased by $18.3 million and $53.3 million for the quarter and nine months ended September 30, 2010, respectively, compared to the prior year periods. For the quarter and nine months ended September 30, 2010, the decrease in hedge fund income was partially offset by higher realized gains on sales of fixed maturity investments. Also contributing to the decrease for the nine months ended September 30, 2010 was a $10.4 million loss on an interest rate forward transaction in the second quarter of 2010 in contemplation of a possible long term debt issuance.

Net losses and loss expense, and claims and policy benefits. The loss ratio decreased by 7.4 and 7.2 percentage points for the quarter and nine months ended September 30, 2010, respectively, compared to the prior year periods. Significant items impacting the loss ratio were:

• Net favorable loss development of prior year reserves in the quarter and nine months ended September 30, 2010 of $36.4 million and $77.6 million, respectively, compared to $15.2 million and $47.5 million in the prior year periods;

• The net favorable loss development in the quarter ended September 30, 2010 was principally the result of net favorable development in our workers compensation, property, and general casualty lines of business, partially offset by net unfavorable development on marine & energy, compared to net favorable development on property and professional liability lines partially offset by net unfavorable development on marine & energy lines in the same quarter of 2009. Net favorable loss development in the nine months ended September 30, 2010 was principally the result of net favorable development in our workers compensation, property and general casualty lines of business, partially offset by net unfavorable development on marine & energy lines, compared to net favorable development on professional liability, property and general casualty lines offset by net unfavorable development on marine & energy lines in the same period of 2009;

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• Excluding the net favorable loss development, the loss ratio was 66.6% and 66.9% for the quarter and nine months ended September 30, 2010, respectively, compared to 70.7% and 72.8% for the prior year periods. The decrease in the loss ratio for the quarter and nine months ended September 30, 2010 compared to the prior year periods was principally due to the inclusion of net premiums earned from Harbor Point since May 12, 2010 at a significantly lower loss ratio, which reduced the average loss ratio despite the increase in property catastrophe losses discussed below. The current year loss ratio on the net premiums earned related to the Harbor Point portfolio of contracts did not include any significant property catastrophe losses other than from the New Zealand earthquake as most of the current year’s property catastrophe loss events occurred prior to the Amalgamation; and

• For the quarter and nine months ended September 30, 2010, our results included net losses of $14.1 million and $44.0 million, respectively, related to significant property catastrophe events and significant per-risk losses. For the quarter and nine months ended September 30, 2009, our results included net losses of $nil and $3.4 million, respectively, for such events.

Claims and policy benefits have decreased compared to the prior nine month period as a result of no new life and annuity reinsurance contracts being written in 2010. In the nine months ended September 30, 2009, we wrote one new contract for which we recorded claims and policy benefits of $41.1 million. In our life and annuity reinsurance segment, we have not recently seen many meaningful opportunities to write new life and annuity reinsurance contracts where we can earn an attractive investment spread. As a result, we have determined not to write any new life and annuity reinsurance contracts in the foreseeable future.

Acquisition costs.Our acquisition cost ratio for the quarter and nine months ended September 30, 2010 increased by 4.4 and 3.7 percentage points, respectively, compared to the prior year periods. The insurance and reinsurance contracts we write have a wide range of acquisition cost ratios. Changes in the mix of business written and earned changes our acquisition cost ratio from quarter to quarter. The increase in the acquisition cost ratio was principally due to changes in the mix of business written, partially influenced by the additional net premiums earned from Harbor Point. The Harbor Point portfolio of contracts contains a higher proportion of quota share contracts, which generally carry higher acquisition cost ratios than excess of loss contracts. Also contributing to the increase in the ratio for 2010 was the decrease in the level of reinsurance purchased across all of our segments, but in particular our U.S. specialty segment. As we have retained more business in our segments, we have received less ceding commission income to offset our brokerage and commission costs, which increases our acquisition cost ratio.

Interest expense.Interest expense reflects interest on funds withheld from reinsurers, and interest on our senior notes and bank loan outstanding. Interest expense for the quarter and nine months ended September 30, 2010 increased by $1.5 million and $5.7 million, respectively, compared to the prior year periods, principally due to an increase in funds withheld interest for one of our largest reinsurers and an increase in bank loans outstanding.

Merger and acquisition expenses.Merger and acquisition expenses for the nine months ended September 30, 2010 comprised advisory, legal and other professional fees, the acceleration of stock based compensation expense and other merger related expenses. These expenses were offset by the negative goodwill gain of $95.8 million recognized from the Amalgamation. Merger and acquisition expenses in 2009 comprised advisory, legal and other professional fees related to the proposed transaction with IPC Holdings Limited and IPC Limited, which was terminated in June 2009, offset by a $50.0 million termination fee received.

General and administrative expenses. General and administrative expenses for the quarter and nine months ended September 30, 2010 increased by $16.4 million and $28.2 million, respectively, compared to the prior year periods. The increase was principally related to increased expenses as a result of the Amalgamation. However, the corresponding increase in net earned premiums as a result of the Amalgamation resulted in a relative decrease in our general and administrative expense ratios for the quarter and nine months ended September 30, 2010 compared to the prior year periods.

Segmental Results of Operations – For the quarter and nine months ended September 30, 2010 and 2009

We monitor the performance of our underwriting operations in five segments:

• Insurance—This segment offers property and casualty excess of loss capacity from our Bermuda and Dublin offices primarily to Fortune 1000 companies. Principal lines of business include professional lines, excess liability, aviation and property.

• Reinsurance—This segment offers property and casualty quota share and excess of loss capacity from our Bermuda, Bogota, Dublin, London and United States offices to insurance companies worldwide. The underwriting activities of the former Harbor Point companies, specifically Alterra Re, Alterra Re USA and Alterra Re UK, are included within the reinsurance segment for the period from May 12, 2010. Principal lines of business include agriculture, auto, aviation, credit/surety, general casualty, medical malpractice, professional liability, property, whole account and workers’ compensation.

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• U.S. specialty—This segment offers property and casualty insurance coverage from offices in the United States primarily to small- to medium sized companies. Principal lines of business include general liability, inland marine, ocean marine, professional liability and property.

• Alterra at Lloyd’s—This segment offers property and casualty quota share and excess of loss insurance and reinsurance from our London and Copenhagen offices, primarily to medium- to large sized international clients. It also provides reinsurance to clients in Latin America, operating locally in Rio de Janeiro, Brazil, using Lloyd’s admitted status. This segment comprises our proportionate share of the underwriting results of the Syndicates, and the results of our managing agent, Alterra at Lloyd’s. The Syndicates underwrite a diverse portfolio of specialty risks, including accident & health, aviation, financial institutions, international casualty, professional liability and property.

• Life and annuity reinsurance—This segment operates from our Bermuda office and offers reinsurance products focusing on existing blocks of life and annuity business, which take the form of co-insurance transactions whereby the risks are reinsured on the same basis as the original policies. We have determined not to write any new life and annuity contracts in the foreseeable future.

We also have a corporate function that includes our investment and financing activities.

Invested assets relating to the insurance, reinsurance (other than those invested assets of the U.S. companies within the reinsurance segment) and life and annuity reinsurance segments are managed on an aggregated basis. Consequently, investment income on this consolidated portfolio and gains on other investments are not directly reflected in any one of these segments. However, because of the longer duration of liabilities on casualty insurance and reinsurance business (as compared to property), and life and annuity reinsurance business, investment returns are important in evaluating the profitability of these segments. Accordingly, we allocate investment returns from the consolidated portfolio to each of these three segments. The allocation is based on a notional allocation of invested assets from the consolidated portfolio using durations that are determined based on estimated cash flows for each segment. The balance of investment returns from this consolidated portfolio is allocated to the corporate function for the purposes of segment reporting.

The U.S. specialty segment, Alterra at Lloyd’s segment and the U.S. companies within the reinsurance segment have their own portfolio of fixed maturities investments. As a result, the investment income earned by each of these portfolios is reported in its respective segment. These portfolios, however, are managed on a consolidated basis together with the invested assets of the insurance, reinsurance and life and annuity segments.

Net investment income and net realized and unrealized gains on investments are discussed within the investing activities section of this report and not within the segment sections of this report. See “Investing Activities.”

Insurance Segment

	Quarter Ended September 30, 2010			Quarter Ended September 30, 2009			% change			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009			% change
		(Expressed in millions of U.S. Dollars)
Gross premiums written	$	70.3		$	81.1			(13.3	)%	$	269.0		$	302.7			(11.1	)%
Reinsurance premiums ceded		(34.1	)		(41.9	)		(18.6	)%		(118.9	)		(146.1	)		(18.6	)%
Net premiums written	$	36.2		$	39.2			(7.7	)%	$	150.1		$	156.6			(4.2	)%
Net premiums earned	$	55.7		$	49.1			13.4	%	$	161.7		$	150.0			7.8	%
Net losses and loss expenses		23.8			31.7			(24.9	)%		97.0			106.0			(8.5	)%
Acquisition costs		1.3			0.4			225.0	%		1.8			(1.5	)		n/a	%
General and administrative expenses		6.4			7.3			(12.3	)%		18.8			17.8			5.6	%
Loss ratio (a)		42.7	%		64.6	%					60.0	%		70.7	%
Acquisition cost ratio (b)		2.3	%		0.8	%					1.1	%		(1.0	)%
General and administrative (c) expense ratio		11.5	%		14.8	%					11.6	%		11.9	%
Combined ratio (d)		56.5	%		80.2	%					72.7	%		81.6	%

(a) The loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(b) The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned.

(c) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned.

(d) The combined ratio is the sum of the loss ratio, the acquisition cost ratio, and the general and administrative expense ratio.

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	Quarter Ended September 30, 2010		% of Premium Written			Quarter Ended September 30, 2009		% of Premium Written			Nine Months Ended September 30, 2010		% of Premium Written			Nine Months Ended September 30, 2009		% of Premium Written
	(Expressed in millions of U.S. Dollars)
Gross Premiums Written by Type of Risk:
Aviation	$	8.2		11.7	%	$	13.5		16.6	%	$	17.2		6.4	%	$	30.3		10.0	%
Excess liability		14.4		20.5	%		19.1		23.6	%		71.2		26.5	%		87.1		28.8	%
Professional liability		36.7		52.2	%		39.1		48.2	%		129.5		48.1	%		134.8		44.5	%
Property		11.0		15.6	%		9.4		11.6	%		51.1		19.0	%		50.5		16.7	%
	$	70.3		100.0	%	$	81.1		100.0	%	$	269.0		100.0	%	$	302.7		100.0	%

Premiums.Gross premiums written for the quarter and nine months ended September 30, 2010 decreased by 13.3% and 11.1%, respectively, compared to the prior year periods. Significant factors affecting gross premiums written were:

• A decrease in gross premiums written in the aviation line for the quarter and nine months ended September 30, 2010. This decrease was offset by a similar increase in aviation business written in our Alterra at Lloyd’s segment as many of the policies previously written in our insurance segment were renewed by Alterra at Lloyd’s;

• A decrease in gross premiums written in our excess liability line for the quarter and nine months ended September 30, 2010 due to fewer attractive opportunities. We continue to see a competitive pricing environment across the segment. Our objective is to continue to be selective in our renewals and new business writings, focusing on business that meets our rate of return requirements.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter and nine months ended September 30, 2010 was 48.5% and 44.2%, respectively, as compared to 51.7% and 48.3%, respectively, in the prior year periods. The amount of reinsurance that we purchase can vary significantly by line of business. The decrease in the percentage of reinsurance premiums ceded for the quarter and nine months ended September 30, 2010 was principally due to changes in the mix of business.

The amount of net premiums earned is a product of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, net premiums earned generally lag quarterly increases and decreases in gross premiums written and reinsurance premiums ceded. As a result, net premiums earned tend to be less volatile than gross premiums written and reinsurance premiums ceded.

Net losses and loss expenses.The loss ratio for the quarter and nine months ended September 30, 2010 decreased by 21.9 and 10.7 percentage points, respectively, compared to the prior year periods. Significant items impacting the loss ratio were:

• Net favorable loss development of prior year reserves in the quarter and nine months ended September 30, 2010 of $17.9 million and $32.8 million, respectively, compared to $11.0 million and $26.4 million in the prior year periods;

• Net favorable loss development in the quarter ended September 30, 2010 was principally in the following lines of business and accident years: professional liability (2005) and excess liability (2004). Net favorable loss development in the nine months ended September 30, 2010 was principally in the following lines of business and accident years: professional liability (2005-2006), property (2008), and aviation (2009). We recognized net favorable development in the prior year periods principally in the following lines of business and accident years: professional liability (2004-2005), aviation (2008), and excess liability (2003-2004);

• Excluding the net favorable loss development, the loss ratio was 74.9% and 80.3% for the quarter and nine months ended September 30, 2010, respectively, compared to 87.0% and 88.3% for the prior year periods. The decrease in the loss ratio for the quarter and nine months ended September 30, 2010 compared to the prior year periods was principally due to better current year loss experience in our aviation line of business; and

• For the nine months ended September 30, 2010, our results included net losses of $1.6 million, related to significant property catastrophe events and significant per-risk losses, with no significant such losses occurring in the third quarter. Net losses for the nine months ended September 30, 2010 included losses related to the Chile earthquake. During the quarter and nine months ended September 30, 2009, we incurred no significant property catastrophe losses.

Acquisition costs.Acquisition costs are presented net of ceding commission income associated with reinsurance premiums ceded. These ceding commissions are designed to compensate us for the costs of producing the portfolio of risks ceded to our reinsurers. Acquisition costs fluctuate moderately based on shifts in business mix quarter over quarter.

General and administrative expenses. The decrease in general and administrative expenses for the quarter ended September 30, 2010 compared to the prior year period was principally due to reduced incentive based compensation. The recognition of accelerated stock-based compensation expense triggered by the Amalgamation in the second quarter of 2010 reduced the amount of stock-based compensation in the quarter ended September 30, 2010. The expenses for the nine

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months ended September 30, 2010 included an increase in costs related to information technology compared to the prior year periods; however, overall the increase in our net premiums earned resulted in relatively little change in our general and administrative expense ratio.

Reinsurance Segment

The underwriting results of Harbor Point have been included within the reinsurance segment for the period from May 12, 2010, as shown below. As a result, a comparison of current and prior year periods is not meaningful. For this reason, we have included certain financial information for the reinsurance segment on a combined pro forma basis for informational purposes only as if the Amalgamation had occurred on January 1, 2009. See the section entitledReinsurance Segment on a pro forma basisfor a presentation of the combined pro forma information.

	Quarter Ended September 30, 2010			Quarter Ended September 30, 2009			% change			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	124.0		$	94.1			31.8	%	$	398.4		$	422.3			(5.7	)%
Reinsurance premiums ceded		(2.5	)		(11.1	)		(77.5	)%		(61.2	)		(80.6	)		(24.1	)%
Net premiums written	$	121.5		$	83.0			46.4	%	$	337.2		$	341.7			(1.3	)%
Net premiums earned	$	198.0		$	103.1			92.0	%	$	433.4		$	290.3			49.3	%
Net losses and loss expenses		117.7			68.7			71.3	%		250.2			192.8			29.8	%
Acquisition costs		45.1			20.3			122.2	%		92.7			53.5			73.3	%
General and administrative expenses		17.6			8.9			97.8	%		41.3			23.6			75.0	%
Loss ratio (a)		59.4	%		66.7	%					57.7	%		66.4	%
Acquisition cost ratio (b)		22.8	%		19.7	%					21.4	%		18.4	%
General and administrative expense ratio (c)		8.9	%		8.5	%					9.6	%		8.2	%
Combined ratio (d)		91.1	%		94.9	%					88.7	%		93.0	%

(a) The loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(b) The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned.

(c) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned.

(d) The combined ratio is the sum of the loss ratio, the acquisition cost ratio, and the general and administrative expense ratio.

	Quarter Ended September 30, 2010			% of Premium written			Quarter Ended September 30, 2009			% of Premium written			Nine Months Ended September 30, 2010		% of Premium written			Nine Months Ended September 30, 2009		% of Premium written
	(Expressed in millions of U.S. Dollars)
Gross Premiums Written by Type of Risk:
Agriculture	$	(2.7	)		(2.2	)%	$	(0.1	)		(0.1	)%	$	30.6		7.7	%	$	87.4		20.7	%
Auto		10.2			8.3	%		—			—	%		10.3		2.6	%		—		—	%
Aviation		15.3			12.3	%		10.5			11.2	%		28.7		7.2	%		25.3		6.0	%
Credit/surety		2.6			2.1	%		—			—	%		1.1		0.3	%		—		—	%
General casualty		18.5			14.9	%		7.3			7.8	%		30.7		7.7	%		23.4		5.5	%
Marine & energy		8.8			7.1	%		6.0			6.4	%		17.9		4.5	%		14.7		3.5	%
Medical malpractice		(3.1	)		(2.5	)%		2.6			2.8	%		31.8		8.0	%		56.4		13.4	%
Other		1.2			1.0	%		—			—	%		2.3		0.5	%		2.3		0.5	%
Professional liability		38.0			30.6	%		21.0			22.3	%		81.9		20.6	%		45.9		10.9	%
Property		34.9			28.1	%		13.5			14.3	%		141.9		35.6	%		89.4		21.2	%
Whole account		(0.2	)		(0.2	)%		2.5			2.6	%		4.7		1.2	%		8.5		2.0	%
Workers’ compensation		0.5			0.5	%		30.8			32.7	%		16.5		4.1	%		69.0		16.3	%
	$	124.0			100.0	%	$	94.1			100.0	%	$	398.4		100.0	%	$	422.3		100.0	%

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Premiums.Gross premiums written for the quarter ended September 30, 2010 increased by 31.8% compared to the prior year period and gross premiums written for the nine months ended September 30, 2010 decreased by 5.7% compared to the prior year period. Significant factors affecting gross premiums written were:

For the quarter ended September 30, 2010:

• Gross premiums written increased in the auto, aviation, general casualty, professional liability and property lines of business principally due to the inclusion of premiums written by the former Harbor Point companies;

• Gross premiums written from our new Latin American operations were $18.7 million, with $12.6 million included within our property line of business and the remainder spread among our credit/surety, marine & energy and other lines of business; and

• Workers’ compensation premiums decreased principally due to a downwards net premium adjustment of $9.5 million on a prior year contract triggered by a similar downwards revision to losses on the contract, as well as the non-renewal of a contract written in the prior year period, resulting in a decrease of $21.5 million.

For the nine months ended September 30, 2010:

• Gross premiums written increased in the auto, aviation, general casualty, professional liability and property lines of business principally due to the inclusion of premiums written by the former Harbor Point companies from May 12, 2010;

• Gross premiums written decreased in our agriculture line of business principally due to the non-renewal of a contract as a result of a client merger in 2010;

• Medical malpractice premiums decreased principally due to reduction in line sizes, increase in client retentions and reduced estimates of assumed premiums on some quota share contracts;

• Gross premiums written from our new Latin American operations were $20.7 million, with $14.0 million included within our property line of business and the remainder spread among our credit/surety, marine & energy and other lines of business;

• Workers’ compensation premiums decreased principally due to a downwards net premium adjustment of $9.5 million on a prior year contract triggered by a similar downwards revision to losses on the contract, as well as the non-renewal of a significant contract written in the prior year, resulting in a decrease of $45.7 million; and

• Across our lines of business, we continued to experience a competitive price environment. As a result, we have been selective in our renewals, focusing on business that meets our rate of return requirements.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter and nine months ended September 30, 2010 was 2.0% and 15.4%, respectively, compared to 11.8% and 19.1%, respectively, in the prior year periods. The decrease in the percentage of reinsurance premiums ceded in the quarter and nine months ended September 30, 2010 compared to the prior year period was principally due to the inclusion of Harbor Point business from May 12, 2010 at a lower ratio of reinsurance premiums ceded to gross premiums written.

The amount of net premiums earned is a product of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, net premiums earned generally lag quarterly increases and decreases in gross premiums written and reinsurance premiums ceded. As a result, net premiums earned tend to be less volatile than gross premiums written and reinsurance premiums ceded. The increase in net premiums earned for the quarter and nine months ended September 30, 2010 compared to the prior year periods was principally due to the incremental earnings of the Harbor Point portfolio of contracts written before the Amalgamation, which are included in the 2010 periods but have no equivalent in the comparable 2009 periods.

Net losses and loss expenses.The loss ratio decreased by 7.3 and 8.7 percentage points for the quarter and nine months ended September 30, 2010, respectively, compared to the prior year periods. Significant items impacting the loss ratio were:

• Net favorable loss development of prior year reserves in the quarter and nine months ended September 30, 2010 was $14.1 million and $34.9 million, respectively, compared to $3.3 million and $20.1 million in the prior year periods. Included in the net favorable development for the quarter and nine months ended September 30, 2010 was an $8.9 million reduction to net loss reserves on a significant prior year workers’ compensation contract for which there was an offsetting reduction to net premiums earned of $9.5 million. As a result, the net favorable loss development on this workers’ compensation contract had a modest negative impact on net income;

• Net favorable loss development in the quarter ended September 30, 2010 was principally in the following lines of business and accident years: workers compensation (2001-2005), general casualty (2004-2006), and property (2009), partially offset by net unfavorable development on our professional liability (2008) and marine & energy (2005-2008) lines of business. Net favorable loss development in the nine months ended September 30, 2010 was principally in the following lines of business and accident years: workers compensation (2001-2005), property (2008-2009), and general casualty (2005-2006), partially offset by net unfavorable development on our professional liability (2008-2009), aviation (2007) and marine & energy (2008-2009) lines of business. We recognized net favorable development in the prior year periods principally in the following lines of business and accident years: property (2007-2008), professional liability (2005-2006), and general casualty (2003-2004), partially offset by net unfavorable development recognized on our marine & energy (2007-2008) line of business;

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• Excluding the net favorable loss development (and after adding back the $9.5 million reduction to net premiums earned for the workers’ compensation contract discussed above), the loss ratio was 63.5% and 64.4% for the quarter and nine months ended September 30, 2010, respectively, and 69.8% and 73.3% for the prior year periods. The decrease in the loss ratio for the quarter and nine months ended September 30, 2010 compared to the prior year periods was principally due to the inclusion of net premiums earned from Harbor Point since May 12, 2010 at a significantly lower loss ratio, which reduced the average loss ratio despite the increase in property catastrophe losses discussed below. The current year loss ratio on the net premiums earned related to the Harbor Point portfolio of contracts did not include any significant property catastrophe losses other than from the New Zealand earthquake as most of the current year’s property catastrophe loss events occurred prior to the Amalgamation; and

• The quarter ended September 30, 2010 included $11.6 million in significant property catastrophe-related and significant per-risk losses, including losses for the New Zealand earthquake. The nine months ended September 30, 2010 included $26.6 million in significant property catastrophe-related and significant per-risk losses, principally as a result of the Deepwater Horizon oil spill, European windstorm Xynthia, Australian hail storms and the New Zealand earthquake. For the quarter ended September 30, 2009, we incurred no significant property catastrophe losses. For the nine months ended September 30, 2009, we incurred significant property catastrophe losses of $2.0 million.

Acquisition costs.The ratio of acquisition costs to net premiums earned for the quarter and nine months ended September 30, 2010 increased 3.1 percentage points and 3.0 percentage points, respectively, compared to the prior year periods. The reinsurance contracts that we write have a wide range of acquisition cost ratios. The increase in the acquisition cost ratio was principally due to changes in the mix of business written, partially influenced by the additional net premiums earned from Harbor Point. The Harbor Point business contains a higher proportion of quota share contracts, which generally carry higher acquisition cost ratios than excess of loss contracts.

General and administrative expenses.General and administrative expenses for the quarter and nine months ended September 30, 2010 increased $8.7 million and $17.7 million, respectively, compared to the prior year periods. The increases were principally due to the inclusion of Harbor Point’s expenses for the period from May 12, 2010. The increase in the level of total expenses did not result in a significant change to our general and administrative expense ratio due to the corresponding increase in net premiums earned.

Reinsurance Segment—on a pro forma basis

The following table presents certain financial information for the reinsurance segment on a combined pro forma basis (after the elimination of intercompany transactions and the amortization of certain acquisition accounting adjustments) for the quarter and nine months ended September 30, 2010 and 2009, for informational purposes only, as if the Amalgamation had occurred on January 1, 2009 and January 1, 2010, respectively. The pro forma data does not necessarily represent results that would have occurred if the Amalgamation had taken place at the beginning of each period presented, nor is it indicative of future results.

		Quarter Ended September 30, 2010			Quarter Ended September 30, 2009			% change			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009			% change
		(Expressed in millions of U.S. Dollars)
Gross premiums written		$	124.0			210.9			(41.2	)%	$	781.8		$	935.0			(16.4	)%
Net premiums earned			198.0			239.0			(17.2	)%		639.3			680.2			(6.0	)%
Net losses and loss expenses			117.7			113.6			3.6	%		383.6			347.9			10.3	%
Acquisition costs	��		45.1			50.2			(10.2	)%		134.9			136.0			(0.8	)%
General and administrative expenses			17.6			19.7			(10.7	)%		50.9			57.4			(11.3	)%
Loss ratio (a)			59.4	%		47.6	%					60.0	%		51.2	%
Acquisition cost ratio (b)			22.8	%		21.0	%					21.1	%		20.0	%
General and administrative expense ratio (c)			8.9	%		8.2	%					8.0	%		8.4	%
Combined ratio (d)			91.1	%		76.8	%					89.1	%		79.6	%

(a) The loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(b) The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned.

(c) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned.

(d) The combined ratio is the sum of the loss ratio, the acquisition cost ratio, and the general and administrative expense ratio.

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	Quarter Ended September 30, 2010			% of Premium Written			Quarter Ended September 30, 2009			% of Premium Written			Nine Months Ended September 30, 2010		% of Premium Written			Nine Months Ended September 30, 2009		% of Premium Written
	(Expressed in millions of U.S. Dollars)
Gross Premiums Written by Type of Risk:
Agriculture	$	(2.7	)		(2.2	)%	$	(0.1	)		—	%	$	48.6		6.2	%	$	90.9		9.7	%
Auto		10.2			8.3	%		12.8			6.1	%		42.7		5.5	%		39.3		4.2	%
Aviation		15.3			12.3	%		18.2			8.6	%		30.1		3.9	%		33.4		3.6	%
Credit/surety		2.6			2.1	%		0.4			0.2	%		27.7		3.5	%		11.6		1.2	%
General casualty		18.5			14.9	%		31.2			14.8	%		67.6		8.7	%		78.3		8.4	%
Marine & energy		8.8			7.1	%		8.6			4.1	%		35.2		4.5	%		42.6		4.6	%
Medical malpractice		(3.1	)		(2.5	)%		7.1			3.3	%		37.1		4.7	%		65.3		7.0	%
Other		1.2			1.0	%		(0.1	)		—	%		7.1		0.9	%		3.4		0.4	%
Professional liability		38.0			30.6	%		60.4			28.6	%		145.4		18.6	%		164.7		17.6	%
Property		34.9			28.1	%		34.2			16.2	%		270.6		34.6	%		294.9		31.5	%
Whole account		(0.2	)		(0.2	)%		4.5			2.1	%		50.0		6.4	%		28.5		3.0	%
Workers’ compensation		0.5			0.5	%		33.7			16.0	%		19.7		2.5	%		82.1		8.8	%
	$	124.0			100.0	%	$	210.9			100.0	%	$	781.8		100.0	%	$	935.0		100.0	%

Premiums.Gross premiums written for the quarter ended September 30, 2010 would have been 41.2% lower than the prior year period and gross premiums written for the nine months ended September 30, 2010 would have been 16.4% lower than the prior year period. Significant factors affecting gross premiums written:

For the quarter ended September 30, 2010:

• The decrease in the general casualty line of business would have been principally due to the non-renewal or reduced premiums written on certain contracts due to unfavorable pricing and other terms and conditions, and ceding companies retaining more risk for their own account;

• The decrease in professional liability premiums would have been principally due to the non-renewal of a number of contracts in 2010, together with some shifting of renewal dates to a different quarter;

• Gross premiums written from our new Latin America operations were $18.7 million, with $12.6 million included within our property line of business and the remainder spread among our credit/surety, marine & energy and other lines of business; and

• Workers’ compensation premiums would have decreased principally due to a downwards net premium adjustment of $9.5 million on a prior year contract triggered by a similar downwards revision to losses on the contract, as well as the non-renewal of a contract written in the prior year quarter, resulting in a decrease of $21.5 million.

For the nine months ended September 30, 2010:

• Gross premiums written would have decreased in our agriculture line of business principally due to the non-renewal of a contract as a result of a client merger in 2010;

• The increase in our credit/surety and whole account lines of business would have been principally due to new business written;

• Marine & energy, medical malpractice and professional liability premiums would have decreased principally due to reductions in line sizes, increase in client retentions and reduced estimates of assumed premiums on certain quota share policies;

• Gross premiums written from our new Latin America operations were $20.7 million, with $14.0 million included within our property line of business and the remainder spread among our credit/surety, marine & energy and other lines of business;

• The decrease in property premiums would have been principally due to increased selectivity in our renewals, focusing on business that meets our rate of return requirements; and

• Workers’ compensation premiums would have decreased principally due to a downwards net premium adjustment of $9.5 million on a prior year contract triggered by a similar downwards revision to losses on the contract, as well as the non-renewal of a contract written in the prior year period, resulting in a decrease of $45.7 million.

The amount of net premiums earned is a product of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, net premiums earned generally lag quarterly increases and decreases in gross premiums written

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and reinsurance premiums ceded. As a result, net premiums earned tend to be less volatile than gross premiums written and reinsurance premiums ceded.

Net losses and loss expenses.The loss ratio for the quarter and nine months ended September 30, 2010 would have increased by 11.8 and 8.8 percentage points, respectively, compared to the prior year periods. Significant items impacting the loss ratio:

• Net favorable loss development of prior year reserves in the quarter and nine months ended September 30, 2010 would have been $19.6 million and $53.6 million, respectively, compared to $17.1 million and $33.2 million in the prior year periods. Included in the net favorable development for the quarter and nine months ended September 30, 2010 was an $8.9 million reduction to net loss reserves on a significant prior year workers’ compensation contract for which there was an offsetting reduction to net premiums earned of $9.5 million. As a result, the net favorable loss development on this workers’ compensation contract had a modest negative impact on net income;

• The favorable development in the quarter and nine months ended September 30, 2010 would have been principally on our property, general casualty and workers compensation lines of business, partially offset by net unfavorable development on our professional liability and marine & energy lines of business. The favorable development in the prior year periods would have been principally on our property and professional liability lines of business, partially offset by net unfavorable development recognized on our marine & energy line of business;

• Excluding the net favorable loss development (and after adjusting for the $9.5 million reduction to net premiums earned for the workers’ compensation contract discussed above), the loss ratio would have been 66.2% and 67.2% for the quarter and nine months ended September 30, 2010, respectively, and 54.7% and 56.0% for the prior year periods. The increase in the loss ratio for the quarter and nine months ended September 30, 2010 compared to the prior year periods would have been principally due to the significant increase in property catastrophe events and significant per-risk losses; and

• The quarter ended September 30, 2010 would have included $11.6 million in significant property catastrophe-related and significant per-risk losses, principally as a result of the New Zealand earthquake. The nine months ended September 30, 2010 would have included $92.8 million in significant property catastrophe-related and significant per-risk losses, principally as a result of the Deepwater Horizon oil spill, European windstorm Xynthia, the Chilean earthquake, Australian hail storms and the New Zealand earthquake. The quarter ended September 30, 2009 would have included net losses of $3.2 million related to significant property catastrophe events. The nine months ended September 30, 2009 would also have included $8.9 million of significant property catastrophe-related net losses, principally related to windstorm Klaus.

Acquisition costs.The ratio of acquisition costs to net premiums earned would have increased 1.8 percentage points and 1.1 percentage points for the quarter and nine months ended September 30, 2010, respectively, compared to the prior year periods. The reinsurance contracts that we write have a wide range of acquisition cost ratios. The increase in the acquisition cost ratio would have been principally due to changes in the mix of business written.

General and administrative expenses.General and administrative expenses for the quarter and nine months ended September 30, 2010 would have decreased compared with prior year periods, principally due to the decrease in the amortization expense of renewal rights held by Harbor Point. The renewal rights were included in the assets of Chubb Re acquired by Harbor Point in 2005 and were fully amortized by the end of 2009.

U.S. Specialty Segment

	Quarter Ended September 30, 2010			Quarter Ended September 30, 2009			% change			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	71.9		$	69.4			3.6	%	$	246.2		$	219.3			12.3	%
Reinsurance premiums ceded		(21.5	)		(26.2	)		(17.9	)%		(77.6	)		(118.6	)		(34.6	)%
Net premiums written	$	50.4		$	43.2			16.7	%	$	168.6		$	100.7			67.4	%
Net premiums earned	$	51.4		$	31.1			65.3	%	$	132.8		$	73.9			79.7	%
Net investment income		1.3			1.5			(13.3	)%		4.0			4.6			(13.0	)%
Net losses and loss expenses		32.2			21.3			51.2	%		82.6			46.5			77.6	%
Acquisition costs		6.9			1.9			n/a	%		19.7			5.9			n/a	%
General and administrative expenses		10.0			7.8			28.2	%		26.4			21.2			24.5	%
Loss ratio (a)		62.6	%		68.4	%					62.2	%		62.9	%
Acquisition cost ratio (b)		13.4	%		6.2	%					14.8	%		7.9	%
General and administrative expense ratio (c)		19.4	%		25.1	%					19.9	%		28.7	%
Combined ratio (d)		95.4	%		99.7	%					96.9	%		99.5	%

(a) The loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(b) The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned.

(c) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned.

(d) The combined ratio is the sum of the loss ratio, the acquisition cost ratio, and the general and administrative expense ratio.

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	Quarter Ended September 30, 2010		% of Premium Written			Quarter Ended September 30, 2009		% of Premium Written			Nine Months Ended September 30, 2010		% of Premium Written			Nine Months Ended September 30, 2009		% of Premium Written
	(Expressed in millions of U.S. Dollars)
Gross Premiums Written by Type of Risk:
General Liability	$	25.6		35.6	%	$	27.2		39.2	%	$	76.2		30.9	%	$	69.1		31.5	%
Marine		15.6		21.7	%		16.2		23.3	%		49.7		20.2	%		45.9		20.9	%
Professional Liability		3.6		5.0	%		—		—	%		9.5		3.9	%		—		—	%
Property		27.1		37.7	%		26.0		37.5	%		110.8		45.0	%		104.3		47.6	%
	$	71.9		100.0	%	$	69.4		100.0	%	$	246.2		100.0	%	$	219.3		100.0	%

Premiums.Gross premiums written for the quarter ended September 30, 2010 were consistent with the prior year period, with growth in our new professional liability line offset by slight decreases in general casualty and marine. The increase in gross premiums written for the nine months ended September 30, 2010 was principally due to:

• The addition of professional liability to our product line in the fourth quarter of 2009; and

• Moderate growth of 6% to 11% in our general liability, marine and property product lines. Market conditions remain competitive across all lines of business. Owing to the smaller average policy size of our U.S. specialty client base, we expect premium volumes to be less sensitive to market rate changes than for similar product lines written by our insurance segment.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter and nine months ended September 30, 2010 was 29.9% and 31.5%, respectively, compared to 37.8% and 54.1%, respectively, in the prior year periods. We intend to gradually retain more risk in the lines of business that we expect will have the greatest long term potential. Consistent with this strategy, during the second quarter of 2010, reinsurance premiums ceded were reduced by $20.6 million due to our cancellation of a property quota share treaty and the resulting return of prepaid premiums. Excluding this cancellation, the ratio for the nine months ended September 30, 2010 was 39.9%. The decrease in reinsurance premiums ceded from the prior year periods was principally due to the replacement of our property quota share treaty with a surplus share treaty under which we retain more of the risk, and a decrease in the ceding percentage on our marine quota share treaty.

The amount of net premiums earned is a product of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, net premiums earned generally lag quarterly increases and decreases in gross premiums written and reinsurance premiums ceded. As a result, net premiums earned tend to be less volatile than gross premiums written and reinsurance premiums ceded.

Net losses and loss expenses.The loss ratio for the quarter and nine months ended September 30, 2010 decreased 5.8 percentage points and 0.7 percentage points, respectively, compared to the prior year periods. Significant items impacting the loss ratio were:

• Net favorable loss development of prior year reserves in the quarter and nine months ended September 30, 2010 was $nil and $0.8 million, respectively, compared to net unfavorable development $2.7 million and $1.8 million in the prior year periods. The net favorable development in the nine months ended September 30, 2010 was principally on our property line of business and the net unfavorable development in the prior year periods was principally on our marine line of business;

• Excluding the net favorable loss development, the loss ratio was 62.6% and 62.8% for the quarter and nine months ended September 30, 2010, respectively, and 59.7% and 60.5% for the prior year periods. The increase in the loss ratio was principally due to changes in the mix of business; and

• Our results for the nine months ended September 30, 2010 include net losses of $9.0 million for significant property catastrophe losses and significant per-risk losses. Large loss events in the nine months ended September 30, 2010 included flooding in

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Tennessee and storms in the Northeastern U.S. These losses were contained within our annual loss expectations for the property line of business. During the quarter ended September 30, 2010 and nine months ended September 30, 2009, we did not incur any significant property catastrophe losses or significant per-risk losses.

Acquisition expenses.The acquisition cost ratio for the quarter and nine months ended September 30, 2010 increased from the prior year periods, principally as a result of the decrease in the amount of reinsurance we purchased. As we retain more business, we receive less ceding commission income to offset our brokerage and commission costs, which has increased our acquisition cost ratio.

General and administrative expenses.General and administrative expenses principally comprise personnel and infrastructure costs, both of which increased in 2010 compared to 2009. However, our general and administrative expense ratio of 19.4% and 19.9% for the quarter and nine months ended September 30, 2010 was lower than the 25.1% and 28.7% ratios for the prior year periods. The decrease in the ratios were principally due to the increase in net premiums earned.

Alterra at Lloyd’s Segment

Our Alterra at Lloyd’s segment comprises all of our UK-based Lloyd’s operating businesses. This includes the underwriting operations of the Syndicates for which we record our proportionate share.

	Quarter Ended September 30, 2010			Quarter Ended September 30, 2009			% change			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	57.7		$	21.1			173.5	%	$	178.7		$	110.6			61.6	%
Reinsurance premiums ceded		(2.4	)		(4.0	)		(40.0	)%		(35.6	)		(31.9	)		11.6	%
Net premiums written	$	55.3		$	17.1			223.4	%	$	143.1		$	78.7			81.8	%
Net premiums earned	$	36.1		$	24.6			46.7	%	$	99.3		$	71.3			39.3	%
Net investment income		2.3			1.7			35.3	%		7.3			3.2			128.1	%
Net losses and loss expenses		17.4			10.0			74.0	%		46.0			33.4			37.7	%
Acquisition costs		7.5			5.3			41.5	%		19.3			14.8			30.4	%
General and administrative expenses		7.8			5.4			44.4	%		16.3			15.9			2.5	%
Loss ratio (a)		48.1	%		40.8	%					46.4	%		46.9	%
Acquisition cost ratio (b)		20.7	%		21.4	%					19.5	%		20.8	%
General and administrative expense ratio (c)		21.6	%		22.0	%					16.4	%		22.2	%
Combined ratio (d)		90.4	%		84.2	%					82.3	%		89.9	%

(a) The loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.

(b) The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned.

(c) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned.

(d) The combined ratio is the sum of the loss ratio, the acquisition cost ratio, and the general and administrative expense ratio.

	Quarter Ended September 30, 2010		% of Premium Written			Quarter Ended September 30, 2009		% of Premium Written			Nine Months Ended September 30, 2010		% of Premium Written			Nine Months Ended September 30, 2009		% of Premium Written
	(Expressed in millions of U.S. Dollars)
Gross Premiums Written by Type of Risk:
Accident & health	$	5.9		10.2	%	$	3.7		17.5	%	$	25.4		14.2	%	$	21.3		19.3	%
Aviation		4.0		6.9	%		—		—	%		10.9		6.1	%		—		—	%
Financial institutions		8.1		14.1	%		6.9		32.7	%		19.1		10.7	%		18.4		16.6	%
International casualty		8.5		14.7	%		—		—	%		28.3		15.8	%		—		—	%
Professional liability		4.3		7.5	%		5.3		25.1	%		15.4		8.6	%		14.6		13.2	%
Property		26.9		46.6	%		5.2		24.7	%		79.6		44.6	%		56.3		50.9	%
	$	57.7		100.0	%	$	21.1		100.0	%	$	178.7		100.0	%	$	110.6		100.0	%

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Premiums.Gross premiums written for the quarter and nine months ended September 30, 2010 increased 173.5% and 61.6%, respectively, compared to the prior year periods. The increase in gross premiums written was primarily due to:

• The addition of aviation business to our Alterra at Lloyd’s segment in the fourth quarter of 2009, which largely represents a transfer of business previously written within our insurance segment;

• The addition of international casualty product lines in the first quarter of 2010, which generated $8.5 million and $28.3 million of gross premiums written in the quarter and nine months ended September 30, 2010, respectively; and

• The commencement of underwriting in Brazil, which generated $11.5 million and $19.3 million of gross premiums written for the quarter and nine months ended September 30, 2010, respectively. Gross premiums written from Brazil included in the property line of business for the quarter and nine months ended September 30, 2010 were $7.0 million and $14.5 million, respectively. The remaining business written from Brazil comprises surety business and has been included within the international casualty line of business.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter and nine months ended September 30, 2010 was 4.2%, and 19.9%, respectively, compared to 19.0% and 28.8%, respectively, for the comparable prior year periods. The significant drop for the quarter was principally due to the level of reinsurance premiums ceded staying relatively flat (as the third quarter is not a significant renewal quarter for reinsurance premiums ceded), while our volume of gross premiums written increased by 173.5% for the quarter ended September 30, 2010 compared to the prior year period. The volume of reinsurance premiums ceded did not increase in proportion to the increase in gross premiums written because a significant proportion of our reinsurance program are excess of loss contracts rather than quota share contracts.

The amount of net premiums earned is a product of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, net premiums earned generally lag quarterly increases and decreases in gross premiums written and reinsurance premiums ceded. As a result, net premiums earned tend to be less volatile than gross premiums written and reinsurance premiums ceded.

Net losses and loss expense.The loss ratio for the quarter ended September 30, 2010 increased by 7.3 percentage points and decreased by 0.5 percentage points for nine months ended September 30, 2010 compared to the prior year periods. Significant items impacting the loss ratio were:

• Net favorable loss development of prior year reserves in the quarter and nine months ended September 30, 2010 was $4.4 million and $9.1 million, respectively, compared to net favorable development of $3.6 million and $2.8 million, respectively, in the prior year periods. The net favorable development in the quarter and nine months ended September 30, 2010 was principally on our financial institutions and professional liability lines of business;

• Excluding the net favorable loss development, the loss ratio was 60.2% and 55.5%, respectively, for the quarter and nine months ended September 30, 2010 compared to 55.4% and 50.8%, respectively, for the prior year periods. The increase in the loss ratio for both periods was principally due to changes in the mix of business, which now includes aviation and international casualty lines of business; and

• Losses and loss expense for the quarter ended September 30, 2010 include $2.5 million in significant property catastrophe-related and significant per-risk losses, which include net losses from the New Zealand earthquake. Losses and loss expense for the nine months ended September 30, 2010 include $6.8 million in significant property catastrophe-related and significant per risk losses, which include net losses from the New Zealand earthquake, Deepwater Horizon oil spill, Chilean earthquake, European windstorm Xynthia and Australian hail storms. These losses were contained within our annual loss expectations for the property line of business. In the quarter and nine months ended September 30, 2009, there was $nil and $1.4 million, respectively, of significant catastrophe related and significant per-risk losses.

Acquisition expenses.The acquisition cost ratio decreased 0.7 and 1.3 percentage points for the quarter and nine months ended September 30, 2010, respectively, compared to the prior year periods. The decrease in acquisition costs for the nine months ended September 30, 2010 was principally attributable to the addition of international casualty business in the first quarter of 2010, which has a lower average acquisition cost ratio.

General and administrative expenses.General and administrative expenses for the quarter and nine months ended September 30, 2010 increased $2.4 million and $0.4 million, respectively, compared to prior year periods. However, the general and administrative expense ratio for the quarter ended September 30, 2010 decreased by 0.4 percentage points compared to the prior year period as net premiums earned increased at the same rate. The ratio for the nine months ended September 30, 2010 decreased 5.8 percentage points compared to the prior year period. General and administrative expenses for this segment includes profit commission income earned by Alterra at Lloyd’s from the Lloyd’s Syndicates that are not wholly owned by Alterra, which partially offsets the costs of managing the Syndicates. Profit commission income in the nine months ended September 30, 2010 benefitted from a non-recurring gain of $4.9 million resulting from the closing of a year of account on one of these third-party Syndicates. Partially offsetting the increased profit commission income was an increase in information technology expenses and expenses related to our new office in Brazil.

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Life and Annuity Reinsurance Segment

	Quarter Ended September 30, 2010		Quarter Ended September 30, 2009		% change			Nine Months Ended September 30, 2010		Nine Months Ended September 30, 2009		% change
	(Expressed in millions of U.S. Dollars)
Net premiums earned	$	1.2	$	0.1		n/a	%	$	2.8	$	41.6		(93.3	)%
Net investment income		12.2		13.1		(6.9	)%		37.7		37.6		0.3	%
Net realized and unrealized gains (losses) on investments		3.3		11.9		(72.3	)%		7.4		29.1		(74.6	)%
Claims and policy benefits		15.1		14.4		4.9	%		46.7		84.1		(44.5	)%
Acquisition costs		0.2		0.2		—	%		0.4		1.0		(60.0	)%
General and administrative expenses		0.6		0.8		(25.0	)%		1.9		2.2		(13.6	)%

The nature of life and annuity reinsurance transactions that we had historically written resulted in a limited number of transactions actually bound with potentially large variations in quarterly and annual premium volume. Consequently, components of our underwriting results, such as premiums written, premiums earned and benefits can be volatile and, accordingly, period-to-period comparisons are not necessarily representative of future trends. Our life and annuity benefit reserves are recorded on a discounted present value basis. This discount is amortized through income as a claims and policy benefits expense over the term of the underlying policies. As a result, income is driven by the spread between the actual rate of return on our investments and the interest discount on our reserves, together with differences between estimated and actual claims, premiums, expenses and persistency of the underlying policies.

There were no new life and annuity contracts written during the quarter or nine months ended September 30, 2010. One new reinsurance contract was written in the second quarter of 2009, accounting for most of the premiums written for the nine months ended September 30, 2009. Our life and annuity business was focused exclusively on acquiring policies with significant reserve balances, which allowed us to earn a profit by investing at a higher yield than the cost of funds of those reserves. We were able to execute this strategy successfully in prior years as our investment in hedge funds constituted a significant portion of our total investments and investment yields in general were more attractive. Our investment strategy is now focused primarily on holding high quality fixed maturity securities, which makes it difficult to grow our life and annuity business profitably. In addition, we have not been able to identify many meaningful opportunities to write new life and annuity reinsurance contracts where we can earn an attractive investment spread. As a result, we do not expect to write any new life and annuity contracts in the foreseeable future. This determination does not affect our existing life and annuity reinsurance contracts and we will continue to service our existing life and annuity customer base.

Gross premiums written, reinsurance premiums ceded, net premiums earned, acquisition costs and general and administrative expenses represent ongoing premium receipts or adjustments and related administration expenses on existing contracts. Interest expense relates to interest on funds withheld on the variable quota share retrocession agreement with Grand Central Re and on certain deposit liabilities. The interest expense on funds withheld from Grand Central Re is based on the average of two total return fixed maturity indices, which varies from period to period. Claims and policy benefits in each period represent reinsured policy claims payments net of the change in policy and claim liabilities.

Net investment income and net realized and unrealized gains (losses) on investments are discussed within the investing activities section as we manage investments for this segment on a consolidated basis with the insurance and reinsurance segments.

Investing Activities

The results of investing activities discussed below include the net investment income, net realized and unrealized gains (losses) on investments and net impairment losses recognized in earnings for all of our segments, including amounts which are allocated to the segments. These investment results are presented below on a consolidated basis.

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	Quarter Ended September 30, 2010			Quarter Ended September 30, 2009			% change			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009			% change
	(Expressed in millions of U.S. Dollars)
Net investment income	$	59.7		$	42.8			39.5	%	$	161.4		$	125.1			29.0	%
Net realized and unrealized gains (losses) on investments	$	15.4		$	24.5			(37.1	)%	$	7.1		$	64.4			(89.0	)%
Net impairment losses recognized in earnings	$	(0.2	)	$	(0.1	)		100.0	%	$	(0.9	)	$	(2.2	)		(59.1	)%
Average annualized yield on cash, fixed maturities		3.23	%		3.53	%					3.44	%		3.59	%

Net investment income. The increase in net investment income for the quarter and nine months ended September 30, 2010 was principally attributable to the increase in cash and invested assets as a result of the Amalgamation and additional investment income generated by shifting cash into higher yielding fixed maturity securities. Our ratio of cash to invested assets decreased from 19.5% at September 30, 2009 to 11.6% at September 30, 2010 as we redeployed cash into fixed maturity investments and paid a special dividend. The yields available in the current fixed maturity market are generally lower than the average yield on our existing portfolio. As we have invested cash generated by operations and cash generated from maturing investments into our fixed maturity portfolio, the yield on our portfolio has decreased. To date, this reduction has been partially offset by our redeployment of a larger portion of cash into fixed maturities, helping to slow the decline in yield compared to the prior periods. However, due to the continuing low-yield market environment, we expect continued downwards pressure on our investment yield.

Net realized and unrealized (losses) gains on investment include the following:

	Quarter Ended September 30, 2010		Quarter Ended September 30, 2009			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009
	(Expressed in millions of U.S. Dollars)
Increase in fair value of hedge funds (a)	$	4.9	$	23.2		$	8.9		$	62.2
Increase (decrease) in fair value of derivatives		1.5		0.5			(12.4	)		0.5
Increase in fair value of catastrophe bonds		0.7		—			0.4			—
Increase in fair value of structured deposit		0.8		—			0.8			—
Income from equity method investments		0.3		0.1			0.3			0.5
Change in fair value of other investments		8.2		23.8			(2.0	)		63.2
Net realized gains (losses) on available for sale securities		6.3		(0.7	)		9.7			(1.4	)
Net realized gains (losses) on trading securities		0.9		1.4			(0.6	)		2.6
Net realized and unrealized gains on investments	$	15.4	$	24.5		$	7.1		$	64.4

(a) An increase in fair value of derivatives of $6.3 million from a wholly-owned hedge fund are included in the increase in fair value of hedge funds for the nine months ended September 30, 2009.

Change in fair value of other investments.The majority of other investments comprise our investment in hedge funds. The increase in fair value of the hedge fund portfolio was $4.9 million, or a 1.35% rate of return, for the quarter ended September 30, 2010, compared to an increase of $23.2 million, or a 3.94% rate of return, for the quarter ended September 30, 2009. The increase in fair value of the hedge fund portfolio was $8.9 million, or a 2.65% rate of return, for the nine months ended September 30, 2010, compared to an increase of $62.2 million, or a 9.36% rate of return, for the nine months ended September 30, 2009. Over the last 24 months, we have significantly reduced our level of investment in hedge funds. As a result, the returns generated by our hedge fund portfolio represent a decreasing proportion of our total investment income compared to previous periods. The rate of return of 2.65% for the nine months ended September 30, 2010 compares to the HFRI Fund of Funds Composite Index returning 2.01% over the same period, which we believe is our most relevant benchmark.

Seven of the nine hedge fund strategies we employed experienced positive returns during the quarter ended September 30, 2010. The largest contributors by investment strategy to the increase in fair value for the quarter ended September 30, 2010 were the long/short equity and the fund of fund strategies. As of September 30, 2010, 27.5% and 12.6% of our hedge fund portfolio was allocated to the long/short equity and fund of fund strategies, respectively. The largest decrease in fair value offsetting the overall increase for the quarter was contributed by the event driven arbitrage strategy. As of September 30, 2010, 10.2% of our hedge fund portfolio was allocated to this strategy.

Eight of the ten hedge fund strategies we employed experienced positive returns during the nine months ended September 30, 2010. The largest contributors by investment strategy to the net gain for the nine months ended September 30, 2010 were the global macro and the distressed securities strategies. As of September 30, 2010, 14.4% and 17.8% of our hedge fund portfolio was allocated to the global macro and the diversified arbitrage strategies, respectively. The largest loss partially offsetting the net gains for the nine

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month period was contributed by the event-driven arbitrage strategy. As of September 30, 2010, 10.2% of our hedge fund portfolio was allocated to this strategy.

The allocation of invested assets to our hedge fund portfolio as of September 30, 2010 was 4.1%, which is consistent with our expected ongoing allocation. The objective of our hedge fund portfolio is to achieve a market neutral/absolute return strategy, with diversification by strategy and underlying fund. A market neutral strategy strives to generate consistent returns in both up and down markets by selecting long and short positions with a total net exposure of zero. Returns are derived from the long/short spread, or the amount by which long positions outperform short positions. The objective of an absolute return strategy is to provide stable performance regardless of market conditions, with minimal correlation to market benchmarks.

The fair value of derivatives increased by $1.5 million for the quarter ended September 30, 2010, and decreased $12.4 million for the nine months ended September 30, 2010. We hold various derivative instruments, including convertible bond equity call options, interest rate linked derivative instruments and foreign exchange forward contracts. During the second quarter of 2010, we considered replacing our revolving bank loan with longer term debt. In contemplation of this plan, we entered into two interest rate forward contracts indexed to the U.S. treasury rate. Due to market volatility at that time, we elected not to replace our revolving bank loan and the forward contracts were settled for a loss of $10.4 million in the second quarter.

At September 30, 2010, we had $47.4 million invested in catastrophe bonds, with a par value of $45.3 million, which are scheduled to mature at various dates between May 24, 2011 and October 19, 2012. The increase in fair value of the catastrophe bonds was $0.7 million during the quarter ended September 30, 2010 and $0.4 million during the nine months ended September 30, 2010, which is included in net realized and unrealized gains (losses) on investments in the consolidated statement of income and comprehensive income.

We also hold an index-linked structured deposit. The deposit has a guaranteed minimum redemption amount of $24.3 million and a scheduled redemption date of December 18, 2013. The increase in fair value of the structured deposit was $0.8 million during the quarter and nine months ended September 30, 2010, which is included in net realized and unrealized investment gains (losses) on investments in the consolidated statement of income and comprehensive income.

Net realized and unrealized gains and losses on fixed maturities. Our total fixed maturities portfolio is split into three portfolios:

• an available for sale portfolio;

• a held to maturity portfolio; and

• a trading portfolio.

Our available for sale portfolio is recorded at fair value with unrealized gains and losses recorded in other comprehensive income as part of total shareholders’ equity. Our available for sale fixed maturities investment strategy is not intended to generate significant realized gains and losses as more fully discussed below in the Financial Condition section. Our held to maturity portfolio includes securities for which we have the ability and intent to hold to maturity or redemption, and is recorded at amortized cost. There should be no realized gains or losses related to this portfolio unless there is an other than temporary impairment loss. Our trading portfolio is recorded at fair value with unrealized gains and losses recorded in net income, all of which are reported within our Alterra at Lloyd’s segment. Net realized and unrealized gains on our fixed maturities portfolios for the quarter and nine months ended September 30, 2010 were $7.2 million and $9.1 million, respectively, and were gains of $0.7 million and $1.2 million for the quarter and nine months ended September 30, 2009, respectively.

Net impairment losses recognized in earnings.As a result of our quarterly review of securities in an unrealized loss position, we recorded other-than-temporary impairment losses through earnings for the quarter and nine months ended September 30, 2010 of $0.2 million and $0.9 million, respectively, and $0.1 million and $2.2 million for the quarter and nine months ended September 30, 2009, respectively. These impairment losses are presented separately from all other net realized and unrealized gains and losses on investments. A discussion of our process for estimating other-than-temporary impairments is included in Note 5 of our unaudited consolidated interim financial statements included herein.

Financial Condition

Cash and invested assets. Aggregate invested assets, comprising cash and cash equivalents, fixed maturities and other investments, were $7,960.8 million as of September 30, 2010 compared to $5,262.4 million as of December 31, 2009, an increase of 51.3%. The increase in cash and invested assets resulted principally from the Amalgamation, which contributed $2,663.0 million in invested assets as of May 12, 2010. This increase during the nine months ended September 30, 2010 was partially offset by the payment of dividends of $335.6 million.

We hold an available for sale portfolio, a trading portfolio, and a held to maturity portfolio of fixed maturities securities. We record the available for sale and trading investment portfolios at fair value on our balance sheet. On our available for sale portfolio, the unrealized gain or loss (absent credit losses) of the investments is recorded in other accumulated comprehensive income in the

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shareholders’ equity section of our consolidated balance sheet. On our trading portfolio, the unrealized gain or loss is recorded in net income.

In an effort to match the expected cash flow requirements of our long-term liabilities, we invest a portion of our fixed maturity investments in long duration securities. Because we intend to hold a number of these long duration securities to maturity, we classify those securities as held to maturity in our consolidated balance sheet. This held to maturity portfolio is recorded at amortized cost. As a result, we do not record changes in the fair value of this portfolio, which should reduce the impact on shareholders’ equity of fluctuations in fair value of those investments.

Fixed maturities are subject to fluctuations in fair value due to changes in interest rates, changes in issuer specific circumstances, such as credit rating changes, and changes in industry specific circumstances, such as movements in credit spreads based on the market’s perception of industry risks. As a result of these fluctuations, it is possible to have significant unrealized gains or losses on a security. Our strategy for our fixed maturities portfolios is to tailor the maturities of the portfolios to the timing of expected loss and benefit payments. At maturity, absent any credit loss, a fixed maturity’s amortized cost will equal its fair value and no realized gain or loss will be recognized in income. If, due to an unforeseen change in loss payment patterns, we need to sell available for sale fixed maturity securities before maturity, we could realize significant gains or losses in any period, which could result in a meaningful effect on reported net income for such period.

In order to reduce the likelihood of needing to sell investments before maturity, especially given the unpredictable and potentially significant cash flow requirements of our property catastrophe business, we maintain significant cash and cash equivalent balances. We believe it is more likely than not that we will not be required to sell those fixed maturities securities in an unrealized loss position until such time as they reach maturity or the fair value increases.

We perform regular reviews of our fixed maturities portfolio and utilize a process that considers numerous indicators in order to identify investments that show signs of potential other than temporary impairments. The indicators include the issuer’s financial condition and ability to make future scheduled interest and principal payments, benchmark yield spreads, the nature of collateral or other credit support and significant economic events that have occurred that affect the industry in which the issuer participates.

Our portfolio of investment grade fixed maturities includes mortgage-backed and asset-backed securities and collateralized mortgage obligations. These types of securities have cash flows that are backed by the principal and interest payments of a group of underlying mortgages or other receivables. As a result of the increasing default rates of borrowers, there is a greater risk of defaults on mortgage-backed and asset-backed securities and collateralized mortgage obligations, especially those that are non-investment grade. These factors make the estimate of fair value more uncertain. We obtain fair value estimates from multiple independent pricing sources in an effort to mitigate some of the uncertainty surrounding the fair value estimates. If we need to liquidate these securities within a short period of time, the actual realized proceeds may be significantly different from the fair values estimated at September 30, 2010.

We performed a review of securities in an unrealized loss position as of September 30, 2010 for other-than-temporary impairments, which included the consideration of relevant factors, including prepayment rates, subordination levels, default rates, credit ratings, weighted average life and cash flow testing. Together with our investment managers, we continue to monitor our potential exposure to mortgage-backed and asset-backed securities, and we will make adjustments to the investment portfolio, if and when we deem necessary. As a result of this process, we recognized an other than temporary impairment charge through net income of $0.2 million during the quarter ended September 30, 2010.

A discussion of our process for estimating other-than-temporary impairments is included in Note 5 of our unaudited interim consolidated financial statements.

As described in Note 6 of our unaudited interim consolidated financial statements, our available for sale and trading fixed maturities investments and the majority of our other investments are carried at fair value.

Fair value prices for all securities in our fixed maturities portfolio are independently provided by our investment custodians, our investment accounting service provider, and our investment managers, which each utilize internationally recognized independent pricing services. We record the unadjusted price provided by the investment custodian, investment accounting service provider or investment manager after validating the prices. Our validation process includes: (i) comparison to the price provided by the external provider, with significant differences investigated; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to calculate fair value; and (iv) comparing the price to our knowledge of the current investment market.

The independent pricing services used by our investment custodians, investment accounting service provider and investment managers obtain actual transaction prices for securities that have quoted prices in active markets. Each pricing service has its own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of

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“matrix pricing” in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker/dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities. The ability to obtain quoted market prices is reduced in periods of decreasing liquidity, which generally increases the use of matrix pricing methods and the uncertainty surrounding the fair value estimates.

Investments in hedge funds comprise a portfolio of limited partnerships and stock investments in trading entities, or funds, which invest in a wide range of financial products. The units of account that we value are our interests in the funds and not the underlying holdings of such funds. Thus, the inputs we use to value our investments in each of the funds may differ from the inputs used to value the underlying holdings of such funds. These funds are stated at fair value, which ordinarily will be the most recently reported net asset value as advised by the fund manager or administrator, where the fund’s underlying holdings can be in various quoted and unquoted investments. We believe the reported net asset value represents the fair value market participants would apply to an interest in the fund. The fund managers value their underlying investments at fair value in accordance with policies established by each fund, as described in each of their financial statements and offering memoranda.

We have designed ongoing due diligence processes with respect to funds and their managers. These processes are designed to assist us in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is necessary. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, we may incorporate adjustments to the reported net asset value. These adjustments may involve significant judgment. We obtain the audited financial statements for every fund annually, and regularly review and discuss the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values.

We are able to redeem the hedge fund portfolio held through Alterra Diversified on the same terms that the underlying funds can be liquidated. In general, the funds in which we are invested require at least 30 days notice of redemption, and may be redeemed on a monthly, quarterly, semi-annual, annual or longer basis, depending on the fund.

Certain funds in which we are invested have a lock-up period. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem. Funds that do provide for periodic redemptions may, depending on the funds’ governing documents, have the ability to deny or delay a redemption request, called a gate. The fund may implement this restriction because the aggregate amount of redemption requests as of a particular date exceeds a specified level, generally ranging from 15% to 25% of the fund’s net assets. The gate is a method for executing an orderly redemption process, which allows for redemption requests to be executed in a timely manner to reduce the possibility of adversely affecting the remaining investors in the fund.

The majority of our hedge fund portfolio is redeemable within one year, and the imposition of gates by certain funds is not expected to significantly impact our cash flow needs. Based upon information provided by the fund managers, as of September 30, 2010, we estimate that over 69.0% of the underlying assets held by our hedge fund portfolio are traded securities or have broker quotes available. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date. Of our September 30, 2010 outstanding redemptions receivable of $28.9 million, none of which are gated, $27.2 million were received in cash prior to November 3, 2010. The fair value of our holdings in funds with gates imposed as of September 30, 2010 was $36.4 million.

Certain funds may be allowed to invest a portion of their assets in illiquid securities, such as private equity and convertible debt. In such cases, a common mechanism used is a side-pocket, whereby the illiquid security is assigned to a separate memorandum capital account or designated account. Typically, the investor loses its redemption rights to the designated account. Only when the illiquid security is sold, or otherwise deemed liquid by the fund, may investors redeem their interest. As of September 30, 2010, the fair value of our hedge funds held in side-pockets was $67.1 million.

Due to the uncertainty surrounding the timing of the redemption of the underlying assets within funds with gates and side-pockets, we have included these funds in the greater than 365 days category in the table below. If we requested full redemptions for all of our holdings in the funds, the tables below indicate our best estimate of the earliest date from September 30, 2010 on which such redemptions might be received. This estimate is based on available information from the funds and is subject to significant change.

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	As of September 30, 2010
	Fair Value		% of Hedge fund portfolio
	(in thousands of U.S. Dollars)
Liquidity:
Within 90 days	$	156,839		47.6	%
Between 91 to 180 days		21,231		6.4	%
Between 181 to 365 days		6,961		2.1	%
Greater than 365 days		144,845		43.9	%
Total hedge funds	$	329,876		100.0	%

Although we believe that our significant cash balances, fixed maturities investments and credit facilities provide sufficient liquidity to satisfy the claims of insureds and ceding clients, in the event that we were required to access assets invested in the hedge fund investment portfolio, our ability to do so may be limited by these liquidity constraints.

Additional information about the hedge fund portfolio can be found in Notes 5 and 6 to our unaudited interim consolidated financial statements included herein.

As of September 30, 2010, we had $47.4 million invested in catastrophe bonds, with a par value of $45.3 million. We receive quarterly interest payments on the catastrophe bonds based on variable interest rates ranging from 3.7% to 14.4% and are scheduled to mature at various dates between May 24, 2011 and October 19, 2012. The redemption value of the bonds will adjust based on the occurrence of covered events such as windstorms and earthquakes across a number of geographic regions, including Japan, Europe, Mexico and the United States. The maximum possible loss to us is limited to the value of our investment.

We also hold an index-linked structured deposit. The deposit has a guaranteed minimum redemption value of $24.3 million and a scheduled redemption date of December 18, 2013. The interest earned on the deposit is a function of the performance of the reference indices over the term of the deposit.

Losses and benefits recoverable from reinsurers. Losses and benefits recoverable from reinsurers totaled $976.8 million as of September 30, 2010 compared to $1,001.4 million as of December 31, 2009, a decrease of 2.5%. This decrease was principally due to the losses recoverable collected as part of the final settlement of a significant contract during the quarter, which was partially offset by additional losses ceded under our reinsurance and retrocessional agreements resulting from net earned premiums during the nine months ended September 30, 2010.

Losses recoverable from reinsurers on property and casualty business were $941.4 million and $964.8 million as of September 30, 2010 and December 31, 2009, respectively. Benefits recoverable from reinsurers on life and annuity business were $35.4 million and $36.6 million as of September 30, 2010 and December 31, 2009, respectively.

As of September 30, 2010, 87.7% of our losses and benefits recoverable were with reinsurers rated “A” or above by A.M. Best Company and 5.2% were rated “A-”. Grand Central Re, a Bermuda domiciled reinsurance company in which Alterra Bermuda has a 7.5% equity investment, is our largest “NR—not rated” retrocessionaire and accounted for 5.1% of our losses and benefits recoverable as of September 30, 2010. As security for outstanding loss obligations, we retain funds from Grand Central Re amounting to 181.4% of its loss recoverable obligations. The remaining 2.0% of losses and benefits recoverable were with reinsurers rated “B+” or lower, including those not rated.

Liabilities for property and casualty losses. Property and casualty losses totaled $3,847.4 million as of September 30, 2010 compared to $3,178.1 million as of December 31, 2009, an increase of 21.1%. The increase in property and casualty losses was principally attributable to the Amalgamation, which resulted in a $852.0 million increase in reserves. Partially offsetting this increase was a decrease in property and casualty losses of $315.0 million resulting from the final settlement of a significant prior year contract during the second quarter of 2010. During the nine months ended September 30, 2010, we paid $756.5 million in property and casualty losses, including the $315.0 million settlement, and recorded gross favorable development on prior year reserves of $111.0 million.

Liabilities for life and annuity benefits.Life and annuity benefits totaled $1,299.2 million at September 30, 2010 compared to $1,372.5 million as of December 31, 2009. The decrease was principally attributable to movements in foreign exchange rates. We endeavor to match these liabilities with assets of similar currency and duration in order to limit the net impact to shareholders’ equity of movements in foreign exchange rates. In addition, we paid $73.5 million of benefit payments during the nine months ended September 30, 2010.

Senior notes. On September 27, 2010, Alterra Finance, a wholly-owned indirect subsidiary of Alterra, issued $350.0 million principal amount of 6.25% senior notes due September 30, 2020 with interest payable on March 30 and September 30 of each year. The 6.25% senior notes are Alterra Finance’s senior unsecured obligations and rank equally in right of payment with all of Alterra Finance’s future unsecured and unsubordinated indebtedness and rank senior to all of Alterra Finance’s future subordinated indebtedness. The 6.25% senior notes are fully and unconditionally guaranteed by Alterra on a senior unsecured basis. The guarantee

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ranks equally with all of Alterra’s existing and future unsecured and unsubordinated indebtedness and ranks senior to all of Alterra’s future subordinated indebtedness. The effective interest rate related to the 6.25% senior notes, based on the net proceeds received, was 6.37%. The proceeds, net of all issuance costs, from the sale of the 6.25% senior notes were $346.9 million and were used to repay a $200.0 million revolving bank loan outstanding under the $850.0 million Credit Facility, with the remainder to be used for general corporate purposes.

On April 16, 2007, Alterra USA privately issued $100.0 million principal amount of 7.20% senior notes due April 14, 2017 with interest payable on April 16 and October 16 of each year. The senior notes are Alterra USA’s senior unsecured obligations and rank equally in right of payment with all existing and future senior unsecured indebtedness of Alterra USA. The senior notes are fully and unconditionally guaranteed by Alterra. Following repurchases of $8.5 million and $0.9 million principal amount in December 2008 and December 2009, respectively, the principal amount of the senior notes outstanding as of September 30, 2010 was $90.6 million.

Shareholders’ equity. Our shareholders’ equity increased to $3,036.5 million as of September 30, 2010 from $1,564.6 million as of December 31, 2009, an increase of 94.1%, principally due to the Amalgamation, which increased shareholders’ equity by $1,481.8 million. In addition, we generated net income of $ 222.7 million and a $164.9 million increase in accumulated other comprehensive income for the nine months ended September 30, 2010. These increases were offset by the declaration of dividends of $337.1 million and repurchase of common shares of $98.4 million during the nine months ended September 30, 2010.

Liquidity. We generated $169.0 million of cash from operations during the nine months ended September 30, 2010 compared to $249.9 million for the nine months ended September 30, 2009. The two principal factors that impact our operating cash flow are premium collections and timing of loss and benefit payments. In addition, during the three months ended September 30, 2010 we settled $147.1 million of reinsurance balances payable as part of the final settlement of a significant contract.

Our casualty business generally has a long claim-tail. As a result, we expect that we will generate significant operating cash flow as we accumulate property and casualty loss reserves on our balance sheet. Our property business generally has a short claim-tail. Consequently, we expect volatility in our operating cash flow levels as losses are incurred. We believe that our property and casualty loss reserves and life and annuity benefit reserves currently have an average duration of approximately 5.0 years. We expect increases in the amount of expected loss payments in future periods with a resulting decrease in operating cash flow; however, we do not expect loss payments to exceed the premiums generated. Actual premiums written and collected and losses and loss expenses paid in any period could vary materially from our expectations and could have a significant and adverse effect on operating cash flow.

While we tailor our fixed maturities portfolios in an effort to match the duration of expected loss and benefit payments, increased loss amounts or settlement of losses and benefits earlier than anticipated can result in greater cash needs. We maintain a significant working cash balance and have generated positive cash flow from operations in each of our last eight years of operating history. We also have the ability to borrow an additional $400.0 million using our current credit facilities. Our two largest credit facilities expire in June and August of 2012. Our cash and cash equivalents balance was $925.8 million as of September 30, 2010. We believe that we currently maintain sufficient liquidity to cover existing requirements and provide for contingent liquidity. Nonetheless, it is possible that significant deviations in expected loss and benefit payments can occur, potentially requiring us to liquidate a portion of our fixed maturities portfolios. If we need to liquidate our fixed maturities securities within a short period of time, the actual realized proceeds may be significantly different from the fair values estimated as of September 30, 2010. We believe that our portfolio has sufficient liquidity to mitigate this risk, and we believe that we can continue to hold any potentially illiquid position until we can initiate an appropriately priced transaction.

As a holding company, Alterra’s principal asset is its investment in the common shares of its principal operating subsidiary, Alterra Bermuda. Alterra’s principal source of funds is from interest income on cash balances and cash dividends from our subsidiaries, including Alterra Bermuda. The payment of dividends by Alterra Bermuda is limited under Bermuda insurance laws. In particular, Alterra Bermuda may not declare or pay any dividends if it is in breach of its minimum solvency or liquidity levels under Bermuda law or if the declaration or payment of the dividends would cause it to fail to meet the minimum solvency or liquidity levels under Bermuda law. As of September 30, 2010, Alterra Bermuda met all minimum solvency and liquidity requirements. Alterra Bermuda returned $475.0 million of capital and surplus during the nine months ended September 30, 2010 through dividends and distributions of capital. Alterra Re USA may not pay dividends without the consent of the Connecticut Insurance Commissioner until May 12, 2012.

In the ordinary course of business, we are required to provide letters of credit or other regulatory approved security to certain of our clients to meet contractual and regulatory requirements. As of September 30, 2010, we had three U.S dollar denominated letter of credit facilities totaling $1,525.0 million with an additional $400.0 million available subject to certain conditions. On that date, we had $900.5 million in letters of credit outstanding under these facilities. We also had two sterling denominated letter of credit facilities totaling GBP 110.0 million ($172.9 million) supporting our Funds at Lloyd’s commitments and the Alterra Re UK operations, of which GBP 80.1 million ($125.9 million) was utilized as of September 30, 2010. Each of our credit facilities requires that we comply with certain financial covenants, which may include a minimum consolidated tangible net worth covenant, a minimum insurer financial strength

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rating and restrictions on the payment of dividends. We were in compliance with all of the financial covenants of each of our credit facilities as of November 5, 2010.

The amount which Alterra provides as Funds at Lloyd’s is not available for distribution for the payment of dividends. Our corporate members may also be required to maintain funds under the control of Lloyd’s in excess of their capital requirements and such funds also may not be available for distribution or the payment of dividends.

Capital resources. As of September 30, 2010, total shareholders’ equity was $3,036.5 million compared to $1,564.6 million as of December 31, 2009, an increase of 94.1%. On May 21, 2010, we filed a shelf registration statement on Form S-3 (File No. 333-167035) with the SEC that permits us to periodically issue debt securities, common shares, preferred shares, depository shares, warrants, share-purchase contracts and share purchase units. The shelf registration statement also covers debt securities of Alterra Finance LLC and trust preferred securities of Alterra Capital Trust I. In September, 2010, Alterra Finance issued $350.0 million principal amount of 6.25% senior notes due September 30, 2020 with interest payable on March 30 and September 30 of each year pursuant to the shelf registration statement. The senior notes are guaranteed by Alterra. The net proceeds of the offering were used to repay a $200.0 million revolving bank loan outstanding under the $850.0 million Credit Facility, with the remainder to be used for general corporate purposes.

In April 2007, Alterra USA sold $100.0 million aggregate principal amount of 7.20% senior notes due April 14, 2017, of which $90.6 million principal amount was outstanding as of September 30, 2010. The senior notes are guaranteed by Alterra.

We believe that we have sufficient capital to meet our foreseeable financial obligations.

Ratings are an important factor in establishing the competitive position of reinsurance and insurance companies and are important to our ability to market our products. We have a financial strength rating for our non-Lloyd’s reinsurance and insurance subsidiaries, as set forth in the table below, from each of A.M. Best Company, or A.M. Best, Fitch Inc., or Fitch, Moody’s Investor Services, Inc., or Moody’s, and Standard and Poor’s Ratings Services, or S&P. These ratings reflect each rating agency’s opinion of our financial strength, operating performance and ability to meet obligations. They are not evaluations directed toward the protection of investors in securities issued by Alterra. The Syndicates share the Lloyd’s market ratings.

As of September 30, 2010, we were rated as follows:

	A.M. Best	Fitch	Moody’s	S&P
Financial strength rating for non-Lloyd’s reinsurance and insurance subsidiaries	A(excellent)(1)(2)	A (strong)(1)	A3(3)	A- (1)(2)
Outlook on financial strength rating	Stable(1)(2)	Stable (1)	Stable (3)	Stable (1)(2)
Lloyd’s financial strength rating applicable to the Syndicates	A (excellent)	A+ (strong)	Not applicable	A+ (strong)

(1) Applicable to Alterra Bermuda, Alterra Re Europe, Alterra Insurance Europe, Alterra America and Alterra E&S

(2) Applicable to Alterra Re USA

(3) Applicable to Alterra Bermuda

During the quarter ended September 30, 2010 we paid a dividend to shareholders on August 31, 2010 of $0.12 per share for an aggregate amount of $14.1 million. On November 2, 2010, our Board of Directors declared a dividend of $0.12 per share for an estimated aggregate amount of $14.0 million payable to shareholders on November 30, 2010. Continuation of cash dividends in the future will be at the discretion of the Board of Directors and will be dependent upon our results of operations, cash flows, financial position and capital requirements and upon general business conditions, legal, tax, regulatory and contractual restrictions on the payment of dividends and other factors the Board of Directors deems relevant.

Off-balance sheet arrangements

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or variable interest entities, that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Contractual Obligations

	Payment due by period (in thousands of U.S. Dollars)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(Expressed in millions of U.S. Dollars)
Senior notes	$	703,425	$	28,400	$	56,800	$	56,800	$	561,425
Operating lease obligations		25,445		6,276		9,553		5,313		4,303
Property and casualty losses		3,847,366		685,507		1,280,932		827,415		1,053,512
Life and annuity benefits		2,376,844		113,528		215,367		199,966		1,847,983
Deposit liabilities		173,540		41,337		69,088		10,132		52,983
Total	$	7,126,620	$	875,048	$	1,631,740	$	1,099,626	$	3,520,206

The reserves for losses and benefits together with deposit liabilities represent management’s estimate of the ultimate cost of settling losses, benefits and deposit liabilities. As more fully discussed in our “Critical Accounting Policies—Property and casualty losses” and “Critical Accounting Policies—Life and annuity reinsurance benefit reserve process” in our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, the estimation of losses and benefits is based on various complex and subjective judgments. Actual losses and benefits paid may differ, perhaps significantly, from the reserve estimates reflected in our financial statements. Similarly, the timing of payment of our estimated losses and benefits is not fixed and there may be significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different from the amounts disclosed above.

The amounts in the above table represent our gross estimates of known liabilities as of September 30, 2010 and do not include any allowance for claims for future events within the time period specified. Accordingly, it is highly likely that the total amounts paid out in the time periods shown will be greater than those indicated in the table. Furthermore, life and annuity benefits and deposit liabilities recorded in the unaudited interim consolidated financial statements as of September 30, 2010 are computed on a net present value basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect a discount of the amount payable

Non-GAAP Financial Measures

In this Quarterly Report on Form 10-Q, we have presented net operating income and annualized net operating return on average shareholders’ equity, which are “non-GAAP financial measures” as defined in Regulation G. We believe that these non-GAAP financial measures, which may be defined differently by other companies, allow for a more complete understanding of the performance of our business. These measures, however, should not be viewed as a substitute for those determined in accordance with U.S. GAAP. A reconciliation of the non-GAAP financial measures to their respective most directly comparable U.S. GAAP financial measures is as follows:

	Quarter Ended September 30,  2010			Quarter Ended September 30,  2009			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009
	(Expressed in millions of U.S. Dollars, except share and per share amounts)
Net income	$	82.8		$	95.3		$	222.7		$	183.6
Net realized and unrealized (gains) losses on non-hedge fund investments(a)		(10.1	)		(0.7	)		2.6			1.2
Net foreign exchange gains		2.8			0.4			0.8			(5.1	)
Merger and acquisition expenses		0.5			(41.3	)		(50.6	)		(31.3	)
Net operating income	$	76.0		$	53.7		$	175.5		$	148.4
Earnings per diluted share	$	0.70		$	1.64		$	2.50		$	3.18
Net realized and unrealized (gains) losses on non-hedge fund investments		(0.08	)		(0.01	)		0.03			0.02
Net foreign exchange gains		0.02			0.01			0.01			(0.09	)
Merger and acquisition expenses		—			(0.72	)		(0.57	)		(0.54	)
Net operating income per diluted share	$	0.64		$	0.92		$	1.97		$	2.57
Weighted average common shares outstanding—basic		117,200,505			57,233,115			88,253,609			56,978,901
Weighted average common shares outstanding—diluted		117,957,942			58,210,501			89,001,515			57,677,996
Annualized net income	$	331.3		$	381.3		$	296.9		$	244.8
Annualized net operating income	$	304.2		$	214.6		$	234.0		$	197.9
Average shareholders’ equity(b)	$	2,981.8			1,455.1			2,297.4			1,346.6
Annualized return on average shareholders’ equity		11.1	%		26.2	%		12.9	%		18.2	%
Annualized net operating return on average shareholders’ equity		10.2	%		14.8	%		10.2	%		14.7	%

(a) Net realized and unrealized losses (gains) on non-hedge fund investments includes realized and unrealized (gains) losses on trading securities, realized (gains) losses on available for sale securities, net impairment losses recognized in earnings, income from equity method investments and change in fair value of investment derivatives, catastrophe bonds and structured deposits.

(b) Average shareholders’ equity is computed as the average of the quarterly shareholders’ equity balances. The average for the nine months ended September 30, 2010 has been weighted to include Harbor Point from May 12, 2010, the date of the consummation of the Amalgamation.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We engage in an investment strategy that combines a fixed maturities investment portfolio and a hedge fund portfolio that employs various strategies to manage investment risk. We attempt to maintain adequate liquidity in our cash and fixed maturities investment portfolio to fund operations, pay reinsurance and insurance liabilities and claims and provide funding for unexpected events. We seek to manage our credit risk through industry and issuer diversification, and interest rate risk by monitoring the duration and structure of our investment portfolio relative to the duration and structure of our liability portfolio. We are exposed to potential loss from various market risks, primarily changes in interest rates, credit spreads and equity prices. Accordingly, our earnings would be affected by these changes. We manage our market risk based on board-approved investment policies. With respect to our fixed maturities investment portfolio, our risk management strategy and investment policy is to invest in debt instruments of investment grade issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. We select investments with characteristics such as duration, yield, currency and liquidity that are tailored to the cash flow characteristics of our property and casualty and life and annuity liabilities.

As of September 30, 2010, 96.6% of the securities held in our fixed maturities portfolio, by carrying value, were rated Baa3/BBB- or above. As of September 30, 2010, the weighted average credit rating of our fixed maturities portfolio was Aa2/AA. Under our current fixed maturities investment guidelines, securities in our fixed maturities portfolio, when purchased, must have a minimum rating of Baa3/BBB-, or its equivalent, from at least one internationally recognized statistical rating organization. We allow two of our investment managers (managing approximately 3.4% of our fixed maturity portfolio by carrying value as of September 30, 2010) to follow an opportunistic strategy, allowing them to purchase securities below investment-grade; however, no more than 10.0% of their holdings may be rated below B3/B-. In addition, a minimum weighted average credit quality rating of Aa3/AA-, or its equivalent, must be maintained for our fixed maturities investment portfolio as a whole. As of September 30, 2010, the impact on the fixed maturities investment portfolio from an immediate 100 basis point increase in market interest rates would have resulted in an estimated decrease in fair value of 4.5%, or approximately $302.2 million, and the impact on the fixed maturities investment portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in fair value of 5.1%, or approximately $342.1 million.

With respect to our hedge fund portfolio, we consistently and systematically monitor the strategies and funds in which we are invested. We focus on risk, as opposed to return, in the selection of each of our hedge fund portfolio investments. This causes us to select individual hedge funds that have exhibited attractive risk/reward characteristics and low correlation to other investments in the portfolio, as opposed to individual investments that have shown the highest return, but also higher volatility of return. We then combine the selected individual hedge funds into a portfolio of hedge funds. By combining investments that we believe have moderate volatility and low correlations, we aim to achieve a hedge fund portfolio that has overall lower volatility relative to investing in a common stock portfolio or a typical fund of hedge funds portfolio.

As of September 30, 2010, the estimated impact on the hedge fund portfolio from an immediate 100 basis point increase in market interest rates would have resulted in an estimated decrease in fair value of 0.7%, or approximately $2.2 million, and the impact on the hedge fund portfolio from an immediate 100 basis point decrease in market interest rates would have resulted in an estimated increase in fair value of 0.7%, or approximately $2.2 million. Another method that attempts to measure portfolio risk is Value-at-Risk, or VaR. VaR is a statistical risk measure, calculating the level of potential losses that could be expected to be

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exceeded, over a specified holding period and at a given level of confidence, in normal market conditions, and is expressed as a percentage of the portfolio’s initial value. Since the VaR approach is based on historical positions and market data, VaR results should not be viewed as an absolute and predictive gauge of future financial performance or as a way for us to predict risk. As of September 30, 2010, our hedge fund portfolio’s VaR was estimated to be 12.6% at the 99.0% level of confidence and with a three-month time horizon.

ITEM 4. Controls and Procedures

Part A—Evaluation of Disclosure Controls and Procedures.

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act, which we refer to as disclosure controls), are controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

As of September 30, 2010, an evaluation of the effectiveness of the design and operation of our disclosure controls was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls were effective to ensure that material information relating to our company is made known to management, including the Chief Executive Officer and Chief Financial Officer, particularly during the periods when our periodic reports are being prepared.

Part B—Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

Management evaluated whether there was a change in our internal control over financial reporting during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. On May 12, 2010, we completed an amalgamation with Harbor Point, whose assets, revenues and net income constitute approximately 31.0% of total assets, approximately 36.9% of revenues and 45.4% of net income of our consolidated financial statement amounts as of and for the quarter ended September 30, 2010. We are currently in the process of integrating the internal controls and procedures of Harbor Point and its subsidiaries into our internal control over financial reporting. There have been no other changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

We are, from time to time, a party to litigation and/or arbitration that arises in the normal course of our business operations. We are also subject to other potential litigation, disputes and regulatory or governmental inquiry.

Antitrust . Two lawsuits filed in the United States District Court for The Northern District of Georgia name Alterra Bermuda, along with approximately 100 other insurance companies and brokers, as a defendant. The claims in each case are that the defendants conspired to manipulate bidding practices for insurance policies in certain insurance lines and failed to disclose certain commission arrangements. The first of these cases was filed on April 4, 2006 by New Cingular Wireless Headquarter LLC and 16 other corporations. The complaint asserts statutory claims under the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organization Act, the antitrust laws of several states, as well as common law claims alleging breach of fiduciary duty and fraud. On October 16, 2006, the Judicial Panel on Multidistrict Litigation transferred the case to the U.S. District Court for the District of New Jersey for pretrial proceedings on a consolidated basis with other lawsuits raising smaller claims. The second action was filed

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October 12, 2007 by Sears, Roebuck & Co. and two affiliated corporations. The complaint in this suit charges Alterra Bermuda and certain other insurance company defendants with violations of the antitrust and consumer fraud laws of Georgia and other states and common law claims of inducement of breach of fiduciary duties, tortuous interference with contract, unjust enrichment and aiding and abetting fraud. The Judicial Panel on Multidistrict Litigation transferred this case to the U.S. District Court for the District of New Jersey for consolidated pretrial proceedings in November 2007. We intend to defend ourselves vigorously in these suits but cannot at this time predict the outcome of the matters described above or estimate the potential costs related to defending the action. No liability has been established in our unaudited interim consolidated financial statements as of September 30, 2010.

While any proceeding contains an element of uncertainty, we currently do not believe that the ultimate outcome of all outstanding litigation, arbitrations and inquiries will have a material adverse effect on our consolidated financial condition, future operating results and/or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular fiscal quarter or year.

ITEM 1A. Risk Factors

Reference is made to the Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 16, 2010, and amended on March 12, 2010, and updated in Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed on May 4, 2010 and in Part II of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 6, 2010.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

We repurchase our shares from time to time through the market, privately negotiated transactions or Rule 10b5-1 stock trading plans. During the three months ended September 30, 2010, $54.1 million had been expended to repurchase 2,845,356 shares. Of the amount repurchased during the period, 539,900 common shares were acquired pursuant to a privately negotiated stock purchase agreement. As of November 2, 2010, the aggregate amount available for share repurchases was $222.7 million.

The table below sets forth the information with respect to purchases made by or on behalf of Alterra or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common shares during the three months ended September 30, 2010.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(July 1, 2010 to July 31, 2010)		745,000	$	19.40		745,000	$	76.7 million
(August 1, 2010 to August 31, 2010)		835,456	$	18.26		835,456	$	61.4 million
(September 1, 2010 to September 30, 2010)		1,264,900	$	19.26		1,264,900	$	37.1 million
Total (July 1, 2010 to September 30, 2010) (1)		2,845,356	$	19.00		2,845,356	$	37.1 million

(1) On September 17, 2001, our Board of Directors approved a share repurchase program providing for repurchases of our common shares. The repurchase program has been increased from time to time at the election of our Board of Directors. In February 2010 and November 2010, our Board of Directors authorized increases to the repurchase program permitting for additional repurchases of $100.0 million and $200.0 million, respectively.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Removed and Reserved

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ITEM 5. Other Information

None.

ITEM 6. Exhibits

Exhibit	Description
4.1	Indenture, dated as of September 1, 2010, among Alterra Finance LLC, Alterra Capital Holdings Limited and The Bank of New York Mellon, as trustee, paying agent and registrar (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 27, 2010).
4.2	First Supplemental Indenture, dated as of September 27, 2010 (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 27, 2010).
4.3	Form of 6.25% Senior Notes due 2020 (incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 27, 2010).
10.1	Second Amendment to the Amended and Restated Credit Agreement, dated as of August 5, 2010, by and among certain subsidiaries of Alterra Capital Holdings Limited, the Lender parties thereto, and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 23, 2010).
10.2	Fourth Amendment to the Credit Agreement, dated as of August 5, 2010, by and among Alterra Capital Holdings Limited, Alterra Insurance Limited, the Lender parties thereto, and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 23, 2010).
10.3	Amendment No. 5 to Credit Agreement with The Bank of Nova Scotia (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 1, 2010).
10.4	Guaranty Agreement, dated as of September 27, 2010, by Alterra Finance LLC, in favor of the Lender parties to the Amended and Restated Credit Agreement, dated as of June 12, 2007, by and among Alterra Holdings Limited, Alterra Bermuda Limited (f/k/a Harbor Point Re Limited), Alterra Reinsurance USA Inc. (f/k/a Harbor Point Reinsurance U.S., Inc.), Alterra Holdings USA Inc. (f/k/a Harbor Point U.S. Holdings, Inc.), certain lenders party thereto, and Bank of America, N.A., as fronting bank, letter of credit administrator and administrative agent (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 27, 2010).
10.5	Guaranty Agreement, dated as of September 27, 2010, by Alterra Finance LLC, in favor of the Lender parties to the Credit Agreement, dated as of August 7, 2007, by and among Alterra Bermuda Limited (f/k/a Alterra Insurance Limited), Alterra Capital Holdings Limited, certain lenders party thereto, and Bank of America, N.A., as fronting bank, letter of credit administrator and administrative agent (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on September 27, 2010).
10.6	Forms of Director Restricted Stock Award Agreement
10.7	Form of Employee Restricted Stock Award Agreement
12.1	Computation of Ratio of Earnings to Fixed Charges.
21.1	Schedule of Group Companies.
31.1	Certification of the Chief Executive Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from Alterra Capital Holdings Limited’s Quarterly Report on Form 10-Q for the three months ended September 30, 2010 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2010 and December 31, 2009; (ii) Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2010 and 2009; (iii) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2010 and 2009; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009; and (v) Notes to the Interim Consolidated Financial Statements, tagged as blocks of text.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Alterra Capital Holdings Limited
	/s/    W. MARSTON BECKER
Name:	W. Marston Becker
Title:	Chief Executive Officer
Date:	November 5, 2010
	/s/    JOSEPH W. ROBERTS
Name:	Joseph W. Roberts
Title:	Executive Vice President and Chief Financial Officer
Date:	November 5, 2010

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