Alterra Capital 10Q 2011 Q2 Quarterly report

Alterra Capital Inactive 10-Q2011 Q2 Quarterly report

Content analysis

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 June 30, 2011

¨	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.

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 July 31, 2011 was 105,794,457.

ALTERRA CAPITAL HOLDINGS LIMITED

INDEX


		PAGE

PART I—FINANCIAL INFORMATION			3

ITEM 1.	Financial Statements		3

	Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010		3

	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)		4

	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2011 and 2010 (Unaudited)		5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (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		65

ITEM 4.	Controls and Procedures		65

PART II—OTHER INFORMATION			66

ITEM 1.	Legal Proceedings		66

ITEM 1A.	Risk Factors		66

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		66

ITEM 3.	Defaults Upon Senior Securities		67

ITEM 4.	Removed and Reserved		67

ITEM 5.	Other Information		67

ITEM 6.	Exhibits		68

SIGNATURES			69

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)


	June 30, 2011		December 31, 2010
	(Unaudited)
ASSETS
Cash and cash equivalents	$	987,057	$	905,606
Fixed maturities, trading, at fair value (amortized cost: 2011 - $218,575; 2010 - $248,829)		218,481		244,872
Fixed maturities, available for sale, at fair value (amortized cost: 2011 - $5,256,460; 2010 - $5,276,326)		5,403,312		5,392,643
Fixed maturities, held to maturity, at amortized cost (fair value: 2011 - $1,049,782; 2010 - $1,015,512)		993,691		940,104
Other investments, at fair value		350,193		378,128
Accrued interest income		70,777		75,414
Premiums receivable		870,287		588,537
Losses and benefits recoverable from reinsurers		1,058,724		956,115
Deferred acquisition costs		171,517		111,901
Prepaid reinsurance premiums		215,392		149,252
Trades pending settlement		9,168		32,393
Goodwill and intangible assets		58,094		59,076
Other assets		90,671		83,247

Total assets	$	10,497,364	$	9,917,288

LIABILITIES
Property and casualty losses	$	4,230,290	$	3,906,134
Life and annuity benefits		1,317,527		1,275,580
Deposit liabilities		147,428		147,612
Funds withheld from reinsurers		122,705		121,107
Unearned property and casualty premiums		1,203,024		905,487
Reinsurance balances payable		137,910		102,942
Accounts payable and accrued expenses		104,917		99,680
Senior notes		440,482		440,476

Total liabilities		7,704,283		6,999,018

SHAREHOLDERS’ EQUITY
Common shares (par value $1.00 per share); 105,794,521 (2010 - 110,963,160) shares issued and outstanding		105,795		110,963
Additional paid-in capital		1,911,979		2,026,045
Accumulated other comprehensive income		132,218		98,946
Retained earnings		643,089		682,316

Total shareholders’ equity		2,793,081		2,918,270

Total liabilities and shareholders’ equity	$	10,497,364	$	9,917,288

See accompanying notes to unaudited interim consolidated financial statements.

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited)

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
REVENUES
Gross premiums written	$	563,907		$	398,981		$	1,191,755		$	770,120
Reinsurance premiums ceded		(136,626	)		(79,715	)		(273,983	)		(232,935	)

Net premiums written	$	427,281		$	319,266		$	917,772		$	537,185

Earned premiums	$	443,008		$	391,723		$	932,270		$	696,720
Earned premiums ceded		(94,067	)		(98,463	)		(203,442	)		(209,220	)

Net premiums earned		348,941			293,260			728,828			487,500
Net investment income		59,665			53,277			117,431			101,667
Net realized and unrealized losses on investments		(5,774	)		(14,786	)		(24,592	)		(8,364	)
Total other-than-temporary impairment losses		(187	)		(1,167	)		(1,311	)		(1,865	)
Portion of loss recognized in other comprehensive income (loss), before taxes		(166	)		867			(71	)		1,145

Net impairment losses recognized in earnings		(353	)		(300	)		(1,382	)		(720	)
Other income		591			275			1,906			619

Total revenues		403,070			331,726			822,191			580,702

LOSSES AND EXPENSES
Net losses and loss expenses		211,133			159,817			515,539			284,782
Claims and policy benefits		15,570			13,943			30,280			31,602
Acquisition costs		64,680			48,798			135,288			73,042
Interest expense		10,630			7,916			19,089			12,858
Net foreign exchange gains (losses)		3,090			(634	)		2,212			(3,086	)
Merger and acquisition expenses		—			(54,570	)		—			(49,826	)
General and administrative expenses		69,659			50,649			140,862			87,177

Total losses and expenses		374,762			225,919			843,270			436,549

INCOME (LOSS) BEFORE TAXES		28,308			105,807			(21,079	)		144,153
Income tax (benefit) expense		(4,327	)		2,360			(7,027	)		4,325

NET INCOME (LOSS)		32,635			103,447			(14,052	)		139,828

Change in net unrealized gains and losses of fixed maturities, net of tax		42,820			60,525			28,234			94,656
Foreign currency translation adjustment		165			(7,629	)		5,038			(17,369	)

COMPREHENSIVE INCOME	$	75,620		$	156,343		$	19,220		$	217,115

Net income (loss) per share	$	0.31		$	1.14		$	(0.13	)	$	1.90

Net income (loss) per diluted share	$	0.30		$	1.13		$	(0.13	)	$	1.88

Weighted average common shares outstanding—basic		105,604,786			91,042,301			106,385,007			73,779,447

Weighted average common shares outstanding—diluted		107,111,909			91,661,430			106,385,007			74,524,919

See accompanying notes to unaudited interim consolidated financial statements.

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Expressed in thousands of U.S. Dollars)


	Six Months Ended June 30,
	2011			2010
Common shares
Balance, beginning of period	$	110,963		$	55,867
Issuance of common shares, net		1,406			64,983
Repurchase of shares		(6,574	)		(2,207	)

Balance, end of period		105,795			118,643

Additional paid-in capital
Balance, beginning of period		2,026,045			752,309
Issuance of common shares, net		610			1,417,316
Stock based compensation expense		22,587			30,241
Repurchase of shares		(137,263	)		(42,166	)

Balance, end of period		1,911,979			2,157,700

Accumulated other comprehensive income
Unrealized holdings gains (losses) on investments:
Balance, beginning of period		118,197			36,791
Holding gains on available for sale fixed maturities arising in period, net of tax		31,281			99,001
Net realized gains on available for sale securities included in net income, net of tax		(3,118	)		(3,200	)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of tax		71			(1,145	)

Balance, end of period		146,431			131,447
Cumulative foreign currency translation adjustment:
Balance, beginning of period		(19,251	)		(11,360	)
Foreign currency translation adjustment		5,038			(17,369	)

Balance, end of period		(14,213	)		(28,729	)

Total accumulated other comprehensive income		132,218			102,718

Retained earnings
Balance, beginning of period		682,316			731,026
Net (loss) income		(14,052	)		139,828
Dividends		(25,175	)		(322,948	)

Balance, end of period		643,089			547,906

Total shareholders’ equity	$	2,793,081		$	2,926,967

See accompanying notes to unaudited interim consolidated financial statements.

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Expressed in thousands of U.S. Dollars)


	Six Months Ended June 30,
	2011			2010
OPERATING ACTIVITIES
Net (loss) income	$	(14,052	)	$	139,828
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Stock based compensation		22,587			30,241
Amortization of premium on fixed maturities		9,801			4,798
Accretion of deposit liabilities		3,176			2,754
Net realized and unrealized losses on investments		24,592			8,364
Net impairment losses recognized in earnings		1,382			720
Negative goodwill gain		—			(95,788	)
Changes in:
Accrued interest income		4,724			5,133
Premiums receivable		(278,695	)		150,598
Losses and benefits recoverable from reinsurers		(99,028	)		(4,706	)
Deferred acquisition costs		(58,894	)		(22,681	)
Prepaid reinsurance premiums		(65,487	)		(25,170	)
Other assets		(8,544	)		6,412
Property and casualty losses		304,109			(212,784	)
Life and annuity benefits		(31,203	)		(19,532	)
Funds withheld from reinsurers		1,598			(19,754	)
Unearned property and casualty premiums		293,029			94,146
Reinsurance balances payable		34,849			146,084
Accounts payable and accrued expenses		4,761			(14,882	)

Cash provided by operating activities		148,705			173,781

INVESTING ACTIVITIES
Purchases of available for sale securities		(1,165,503	)		(1,030,431	)
Sales of available for sale securities		709,314			264,405
Redemptions/maturities of available for sale securities		485,128			527,854
Purchases of trading securities		(28,065	)		(27,913	)
Sales of trading securities		24,563			1,153
Redemptions/maturities of trading securities		35,969			12,975
Purchases of held to maturity securities		(2,580	)		(14,682	)
Redemptions/maturities of held to maturity securities		18,251			16,570
Net sales of other investments		17,365			59,897
Acquisition of subsidiary, net of cash acquired		—			446,819

Cash provided by investing activities		94,442			256,647

FINANCING ACTIVITIES
Net proceeds from issuance of common shares		2,016			1,075
Repurchase of common shares		(143,837	)		(44,373	)
Dividends paid		(25,175	)		(321,396	)
Additions to deposit liabilities		583			2,997
Payments of deposit liabilities		(3,643	)		(9,873	)

Cash used in financing activities		(170,056	)		(371,570	)

Effect of exchange rate changes on foreign currency cash and cash equivalents		8,360			(19,452	)
Net increase in cash and cash equivalents		81,451			39,406
Cash and cash equivalents, beginning of period		905,606			702,278

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	987,057		$	741,684

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid totaled $14,382 and $9,918 for the six months ended June 30, 2011 and 2010, respectively.

Income taxes paid totaled $165 and $729 for the six months ended June 30, 2011 and 2010, respectively.

See accompanying notes to unaudited interim consolidated financial statements.

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.

Unless otherwise indicated or unless the context otherwise requires, all references in these consolidated financial statements to entity names are as set forth in the following table:


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

The Company’s Bermuda insurance and reinsurance operations are conducted through Alterra Bermuda, which is registered as both a Class 4 and 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 U.S. reinsurance operations are conducted through Alterra USA 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.

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

The Company’s Lloyd’s operations are conducted by Alterra at Lloyd’s through Lloyd’s Syndicates 1400, 2525 and 2526 (collectively, the “Syndicates”), which underwrite a diverse portfolio of specialty risks in Europe, the United States and Latin America. Alterra at Lloyd’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 22%, respectively.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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.

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, which did not have a material impact on the 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 has reflected the disclosure requirements, which did not have a material impact on the interim 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 its consolidated financial statements.

ASU 2011-04, Fair Value Measurement (820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

ASU 2011-04 was issued to provide largely identical guidance about fair value measurement and disclosure requirements with the International Accounting Standards Board’s new IFRS 13, Fair Value Measurement. The new standard does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it is already required or permitted under U.S. GAAP and requires enhanced disclosures covering all transfers between Levels 1 and 2 of the fair value hierarchy. Additional disclosures covering Level 3 assets are also required. ASU 2011-04 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is not permitted. The Company does not expect this standard to have a material impact on its consolidated financial statements.

ASU 2011-05, Comprehensive Income (220) – Presentation of Comprehensive Income

ASU 2011-05 increases the prominence of items reported in other comprehensive income and eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05 requires that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with retroactive application required. The Company does not expect this standard to have a material impact on its consolidated financial statements.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. SEGMENT INFORMATION

The Company monitors the performance of its underwriting 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 offices in Bermuda, Dublin and the United States primarily to Fortune 1000 companies. Principal lines of business include professional liability, excess liability, aviation and property.

Effective January 1, 2011, the Company redefined two of its operating and reporting segments based on changes to its internal reporting structure. Insurance business underwritten by Alterra Insurance USA, which was previously reported within the U.S. specialty segment, has been reclassified to the insurance segment. Alterra Insurance USA is a managing general underwriter for Alterra E&S and Alterra America, as well as various third party insurance companies, and is the Company’s principal insurance underwriting platform for retail distribution in the United States. Segment disclosures for comparative periods have been revised to reflect this reclassification between segments.

Reinsurance Segment

The Company’s reinsurance segment offers property and casualty quota share and excess of loss reinsurance from its offices in Bermuda, Bogota, Buenos Aires, Dublin, London and the United States to insurance companies worldwide. Principal lines of business include agriculture, auto, aviation, credit/surety, general casualty, marine & energy, 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 and 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 using Lloyd’s admitted status. This segment comprises the Company’s proportionate share of the underwriting results of the Syndicates, and the results of Alterra at Lloyd’s, the managing agent for Syndicate 1400. The Syndicates underwrite a diverse portfolio of specialty risks, including accident & health, aviation, financial institutions, international casualty, professional liability, property and surety.

Life and Annuity Reinsurance Segment

The Company’s life and annuity reinsurance segment operates out of Bermuda and offers reinsurance products focusing on 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.

Corporate

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

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

investment returns from the consolidated portfolio to the life and annuity reinsurance segment. 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 the life and annuity reinsurance segment. The balance of investment returns from this consolidated portfolio is allocated to the corporate function for the purposes of segment reporting.

Management monitors the performance of all of its segments other than life and annuity reinsurance on the basis of underwriting income, loss ratio, acquisition ratio, general and administrative expense ratio and combined ratio. Management monitors the performance of its life and annuity reinsurance business on the basis of income before taxes for the segment, which includes revenue from net premiums earned, allocated net investment income, realized and unrealized gains on investments, expenses from claims and policy benefits, acquisition costs and general and administrative expenses.

A summary of operations by segment for the three and six months ended June 30, 2011 and 2010 follows:

(Expressed in thousands of U.S. Dollars)

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three Months Ended June 30, 2011
	Property & Casualty															Life & Annuity
	Insurance			Reinsurance			U.S. Specialty			Alterra at Lloyd’s			Total			Reinsurance (a)			Corporate			Consolidated
Gross premiums written	$	141,255		$	248,754		$	99,448		$	73,520		$	562,977		$	930		$	—		$	563,907
Reinsurance premiums ceded		(56,002	)		(28,247	)		(27,358	)		(24,918	)		(136,525	)		(101	)		—			(136,626	)

Net premiums written	$	85,253		$	220,507		$	72,090		$	48,602		$	426,452		$	829		$	—		$	427,281

Earned premiums	$	97,296		$	209,212		$	73,840		$	61,730		$	442,078		$	930		$	—		$	443,008
Earned premiums ceded		(44,338	)		(12,305	)		(22,783	)		(14,540	)		(93,966	)		(101	)		—			(94,067	)

Net premiums earned		52,958			196,907			51,057			47,190			348,112			829			—			348,941
Net losses and loss expenses		(28,992	)		(125,592	)		(32,709	)		(23,840	)		(211,133	)		—			—			(211,133	)
Claims and policy benefits		—			—			—			—			—			(15,570	)		—			(15,570	)
Acquisition costs		361			(44,366	)		(9,644	)		(10,909	)		(64,558	)		(122	)		—			(64,680	)
General and administrative expenses		(8,859	)		(22,937	)		(9,289	)		(9,536	)		(50,621	)		(259	)		—			(50,880	)
Other income		139			548			—			165			852			(23	)		—			829

Underwriting income (loss)	$	15,607		$	4,560		$	(585	)	$	3,070		$	22,652			n/a			—			n/a
Net investment income																	12,545			47,120			59,665
Net realized and unrealized losses on investments																	(1,299	)		(4,475	)		(5,774	)
Net impairment losses recognized in earnings																				(353	)		(353	)
Corporate other income																				(238	)		(238	)
Interest expense																				(10,630	)		(10,630	)
Net foreign exchange losses																				(3,090	)		(3,090	)
Corporate general and administrative expenses																				(18,779	)		(18,779	)

(Loss) income before taxes																$	(3,899	)	$	9,555		$	28,308

Loss ratio (b)		54.7	%		63.8	%		64.1	%		50.5	%		60.7	%
Combined ratio (c)		70.8	%		98.0	%		101.1	%		93.8	%		93.7	%

(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.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Six Months Ended June 30, 2011
	Property & Casualty															Life & Annuity
	Insurance			Reinsurance			U.S. Specialty			Alterra at Lloyd’s			Total			Reinsurance (a)			Corporate			Consolidated
Gross premiums written	$	212,527		$	623,774		$	169,836		$	184,253		$	1,190,390		$	1,365		$	—		$	1,191,755
Reinsurance premiums ceded		(99,248	)		(65,564	)		(60,953	)		(48,097	)		(273,862	)		(121	)		—			(273,983	)

Net premiums written	$	113,279		$	558,210		$	108,883		$	136,156		$	916,528		$	1,244		$	—		$	917,772

Earned premiums	$	196,240		$	459,113		$	147,017		$	128,535		$	930,905		$	1,365		$	—		$	932,270
Earned premiums ceded		(89,068	)		(32,500	)		(46,633	)		(35,120	)		(203,321	)		(121	)		—			(203,442	)

Net premiums earned		107,172			426,613			100,384			93,415			727,584			1,244			—			728,828
Net losses and loss expenses		(63,656	)		(312,477	)		(64,084	)		(75,322	)		(515,539	)		—			—			(515,539	)
Claims and policy benefits		—			—			—			—			—			(30,280	)		—			(30,280	)
Acquisition costs		177			(93,509	)		(17,710	)		(23,965	)		(135,007	)		(281	)		—			(135,288	)
General and administrative expenses		(18,684	)		(46,195	)		(18,686	)		(19,259	)		(102,824	)		(436	)		—			(103,260	)
Other income		951			548			—			380			1,879			(23	)		—			1,856

Underwriting income (loss)	$	25,960		$	(25,020	)	$	(96	)	$	(24,751	)	$	(23,907	)		n/a			—			n/a
Net investment income																	24,888			92,543			117,431
Net realized and unrealized losses on investments																	1,508			(26,100	)		(24,592	)
Net impairment losses recognized in earnings																				(1,382	)		(1,382	)
Corporate other income																				50			50
Interest expense																				(19,089	)		(19,089	)
Net foreign exchange losses																				(2,212	)		(2,212	)
Corporate general and administrative expenses																				(37,602	)		(37,602	)

(Loss) income before taxes																$	(3,380	)	$	6,208		$	(21,079	)

Loss ratio (b)		59.4	%		73.2	%		63.8	%		80.6	%		70.9	%
Combined ratio (c)		76.7	%		106.0	%		100.1	%		126.9	%		103.5	%

(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.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three Months Ended June 30, 2010
	Property & Casualty															Life & Annuity
	Insurance			Reinsurance			U.S. Specialty			Alterra at Lloyd’s			Total			Reinsurance (a)			Corporate			Consolidated
Gross premiums written	$	139,026		$	119,578		$	90,773		$	48,802		$	398,179		$	802		$	—		$	398,981
Reinsurance premiums ceded		(47,437	)		(13,348	)		(5,672	)		(13,233	)		(79,690	)		(25	)		—			(79,715	)

Net premiums written	$	91,589		$	106,230		$	85,101		$	35,569		$	318,489		$	777		$	—		$	319,266

Earned premiums	$	104,841		$	174,729		$	71,065		$	40,286		$	390,921		$	802		$	—		$	391,723
Earned premiums ceded		(45,211	)		(19,054	)		(27,053	)		(7,120	)		(98,438	)		(25	)		—			(98,463	)

Net premiums earned		59,630			155,675			44,012			33,166			292,483			777			—			293,260
Net losses and loss expenses		(38,296	)		(82,441	)		(26,683	)		(12,397	)		(159,817	)		—			—			(159,817	)
Claims and policy benefits		—			—			—			—			—			(13,943	)		—			(13,943	)
Acquisition costs		(821	)		(32,673	)		(9,111	)		(6,070	)		(48,675	)		(123	)		—			(48,798	)
General and administrative expenses		(8,132	)		(14,820	)		(6,355	)		(5,826	)		(35,133	)		(642	)		—			(35,775	)
Other income		97			155			—			173			425			—			—			425

Underwriting income	$	12,478		$	25,896		$	1,863		$	9,046		$	49,283			n/a			—			n/a
Net investment income																	12,420			40,857			53,277
Net realized and unrealized losses on investments																	(1,860	)		(12,926	)		(14,786	)
Net impairment losses recognized in earnings																				(300	)		(300	)
Corporate other income																				(150	)		(150	)
Interest expense																				(7,916	)		(7,916	)
Net foreign exchange gains																				634			634
Merger and acquisition expenses																				54,570			54,570
Corporate general and administrative expenses																				(14,874	)		(14,874	)

(Loss) income before taxes																$	(3,371	)	$	59,895		$	105,807

Loss ratio (b)		64.2	%		53.0	%		60.6	%		37.4	%		54.6	%
Combined ratio (c)		79.2	%		83.5	%		95.8	%		73.2	%		83.3	%

(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.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Six Months Ended June 30, 2010
	Property & Casualty															Life & Annuity
	Insurance			Reinsurance			U.S. Specialty			Alterra at Lloyd’s			Total			Reinsurance (a)			Corporate			Consolidated
Gross premiums written	$	208,432		$	274,429		$	164,675		$	120,919		$	768,455		$	1,665		$	—		$	770,120
Reinsurance premiums ceded		(87,088	)		(58,699	)		(53,824	)		(33,192	)		(232,803	)		(132	)		—			(232,935	)

Net premiums written	$	121,344		$	215,730		$	110,851		$	87,727		$	535,652		$	1,533		$	—		$	537,185

Earned premiums	$	206,587		$	270,472		$	140,250		$	77,746		$	695,055		$	1,665		$	—		$	696,720
Earned premiums ceded		(94,041	)		(35,012	)		(65,446	)		(14,589	)		(209,088	)		(132	)		—			(209,220	)

Net premiums earned		112,546			235,460			74,804			63,157			485,967			1,533			—			487,500
Net losses and loss expenses		(77,742	)		(132,506	)		(45,879	)		(28,655	)		(284,782	)		—			—			(284,782	)
Claims and policy benefits		—			—			—			—			—			(31,602	)		—			(31,602	)
Acquisition costs		(504	)		(47,639	)		(12,793	)		(11,837	)		(72,773	)		(269	)		—			(73,042	)
General and administrative expenses		(14,979	)		(23,779	)		(13,877	)		(8,539	)		(61,174	)		(1,299	)		—			(62,473	)
Other income		91			155			—			351			597			(28	)		—			569

Underwriting income	$	19,412		$	31,691		$	2,255		$	14,477		$	67,835			n/a			—			n/a
Net investment income																	25,519			76,148			101,667
Net realized and unrealized gains (losses) on investments																	4,056			(12,420	)		(8,364	)
Net impairment losses recognized in earnings																				(720	)		(720	)
Corporate other income																				50			50
Interest expense																				(12,858	)		(12,858	)
Net foreign exchange gains																				3,086			3,086
Merger and acquisition expenses																				49,826			49,826
Corporate general and administrative expenses																				(24,704	)		(24,704	)

(Loss) income before taxes																$	(2,090	)	$	78,408		$	144,153

Loss ratio (b)		69.1	%		56.3	%		61.3	%		45.4	%		58.6	%
Combined ratio (c)		82.8	%		86.6	%		97.0	%		77.6	%		86.2	%

(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.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 six months ended June 30, 2011 were:


(Expressed in thousands of U.S dollars)	North America			Europe			Rest of the world			Total
Gross premiums written	$	845,222		$	221,795		$	123,373		$	1,190,390
Reinsurance ceded		(198,267	)		(61,297	)		(14,298	)		(273,862	)

	$	646,955		$	160,498		$	109,075		$	916,528

Property and casualty gross premiums written and reinsurance premiums ceded by geographic region for the six months ended June 30, 2010 were:


(Expressed in thousands of U.S dollars)	North America			Europe			Rest of the world			Total
Gross premiums written	$	591,763		$	115,605		$	61,087		$	768,455
Reinsurance ceded		(172,106	)		(53,201	)		(7,496	)		(232,803	)

	$	419,657		$	62,404		$	53,591		$	535,652

The largest client in each of the six months ended June 30, 2011 and 2010 accounted for 5.5% and 3.5% 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 six months ended June 30, 2011 and 2010 were from North America.

There were no new life and annuity transactions written in the six months ended June 30, 2011 and 2010.

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, formerly known as Max Capital Group Ltd. Upon consummation of the Amalgamation, Max Capital Group Ltd. was renamed Alterra Capital Holdings Limited. The principal purpose of the Amalgamation was to create a larger, more diversified entity with greater market access and more underwriting opportunities than either company individually 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.

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 operations and comprehensive income over a weighted average period of 4.0 years, based on the estimated settlement of underlying losses. For the three and six months ended June 30, 2011, $6.2 million and $12.3 million, respectively, have been amortized. For the three and six months ended June 30, 2010, $2.1 million was amortized. As of June 30, 2011, the unamortized balance of this fair value adjustment was $64.3 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 operations 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. For the three and six months ended June 30, 2011, $13.1 million and $28.1 million, respectively, have been amortized. For the three and six months ended June 30, 2010, $14.9 million was amortized. As of June 30, 2011, the unamortized balance of this fair value adjustment was $31.8 million.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 operations and comprehensive income, and are composed of the following:


(Expressed in thousands of U.S. Dollars)	Three Months Ended June 30, 2010			Six Months Ended June 30, 2010
Negative goodwill gain	$	(95,788	)	$	(95,788	)
Transaction expenses		22,337			27,081
Acceleration of stock-based compensation		18,881			18,881

Merger and acquisition expenses	$	(54,570	)	$	(49,826	)

5. INVESTMENTS

Fixed Maturities—Available for Sale

The fair values and amortized cost of available for sale fixed maturities as of June 30, 2011 and December 31, 2010 were:


			Included in Accumulated Other Comprehensive Income
					Gross Unrealized Losses
June 30, 2011 (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	$	708,696	$	13,695	$	(3,452	)	$	—		$	718,939
Non-U.S. governments		118,752		3,210		(4,584	)		—			117,378
Corporate securities		2,537,018		85,743		(7,547	)		—			2,615,214
Municipal securities		212,271		7,048		(949	)		—			218,370
Asset-backed securities		206,436		1,210		(7,859	)		(862	)		198,925
Residential mortgage-backed securities (1)		1,124,395		36,854		(4,216	)		—			1,157,033
Commercial mortgage-backed securities		348,892		29,820		(1,259	)		—			377,453

	$	5,256,460	$	177,580	$	(29,866	)	$	(862	)	$	5,403,312


			Included in Accumulated Other Comprehensive Income
					Gross Unrealized Losses
December 31, 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	$	903,197	$	14,550	$	(6,648	)	$	—		$	911,099
Non-U.S. governments		76,178		3,756		(823	)		—			79,111
Corporate securities		2,525,651		74,459		(9,572	)		—			2,590,538
Municipal securities		237,772		3,319		(3,077	)		—			238,014
Asset-backed securities		92,713		528		(8,914	)		(23	)		84,304
Residential mortgage-backed securities (1)		1,137,934		31,451		(5,784	)		(2,140	)		1,161,461
Commercial mortgage-backed securities		302,881		27,667		(2,432	)		—			328,116

	$	5,276,326	$	155,730	$	(37,250	)	$	(2,163	)	$	5,392,643

⁽¹⁾	Included within residential mortgage-backed securities are securities issued by U.S. agencies with a fair value of $1,074,235 (December 31, 2010—$1,064,570).

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 June 30, 2011 and December 31, 2010.


	June 30, 2011				December 31, 2010
(Expressed in thousands of U.S. Dollars)	Fair Value		%		Fair Value		%
U.S. government and agencies (1)	$	1,793,174		33.2	$	1,975,669		36.6
AAA		1,146,157		21.2		1,010,313		18.7
AA		615,396		11.4		615,518		11.4
A		1,355,550		25.1		1,303,425		24.2
BBB		266,150		4.9		226,232		4.2
BB		24,165		0.4		32,021		0.6
B		106,444		2.0		138,703		2.6
CCC or lower		46,565		0.9		44,897		0.8
Not rated		49,711		0.9		45,865		0.9

	$	5,403,312		100.0	$	5,392,643		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 $1,074,235 (December 31, 2010—$1,064,570).

The maturity distribution for available for sale fixed maturities held as of June 30, 2011 was:


(Expressed in thousands of U.S. Dollars)	Amortized Cost		Fair Value
Within one year	$	570,539	$	575,601
After one year through five years		1,894,171		1,945,235
After five years through ten years		673,434		698,045
More than ten years		438,593		451,020

		3,576,737		3,669,901
Asset-backed securities		206,436		198,925
Mortgage-backed securities		1,473,287		1,534,486

	$	5,256,460	$	5,403,312

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 June 30, 2011 and December 31, 2010 were:


June 30, 2011 (Expressed in thousands of U.S. Dollars)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
U.S. government and agencies	$	29,694	$	722	$	—	$	30,416
Non-U.S. governments		584,039		32,364		—		616,403
Corporate securities		378,958		23,001		—		401,959
Asset-backed securities		1,000		4		—		1,004

	$	993,691	$	56,091	$	—	$	1,049,782


December 31, 2010 (Expressed in thousands of U.S. Dollars)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
U.S. government and agencies	$	29,687	$	513	$	—		$	30,200
Non-U.S. governments		538,274		48,779		—			587,053
Corporate securities		371,143		26,118		—			397,261
Asset-backed securities		1,000		—		(2	)		998

	$	940,104	$	75,410	$	(2	)	$	1,015,512

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 June 30, 2011 and December 31, 2010.


June 30, 2011 (Expressed in thousands of U.S. Dollars)	Amortized Cost		%		Fair Value		%
U.S. government and agencies	$	29,694		3.0	$	30,416		2.9
AAA		696,439		70.1		737,096		70.2
AA		117,851		11.9		121,423		11.6
A		135,249		13.6		143,984		13.7
BBB		14,458		1.4		16,863		1.6

	$	993,691		100.0	$	1,049,782		100.0


December 31, 2010 (Expressed in thousands of U.S. Dollars)	Amortized Cost		%		Fair Value		%
U.S. government and agencies	$	29,687		3.2	$	30,200		3.0
AAA		641,437		68.2		699,598		68.9
AA		113,140		12.0		118,276		11.6
A		141,683		15.1		151,127		14.9
BBB		12,744		1.4		14,764		1.5
Not rated		1,413		0.1		1,547		0.1

	$	940,104		100.0	$	1,015,512		100.0

The maturity distribution for held to maturity fixed maturities held as of June 30, 2011 was:


(Expressed in thousands of U.S. Dollars)	Amortized Cost		Fair Value
Within one year	$	50,133	$	50,659
After one year through five years		124,563		127,901
After five years through ten years		153,806		163,121
More than ten years		664,189		707,097

		992,691		1,048,778
Asset-backed securities		1,000		1,004

	$	993,691	$	1,049,782

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 six months ended June 30, 2011 and 2010 was:


	Six Months Ended
	June 30,
(Expressed in thousands of U.S. Dollars)	2011			2010
Interest earned on investments and cash and cash equivalents	$	131,241		$	105,546
Interest earned on funds withheld		131			3,726
Amortization of premium on fixed maturities		(9,801	)		(4,798	)
Investment expenses		(4,140	)		(2,807	)

	$	117,431		$	101,667

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Net Realized and Unrealized Gains and Losses

The net realized and unrealized gains and losses on investments for the six months ended June 30, 2011 and 2010 were:


	Six Months Ended
	June 30,
(Expressed in thousands of U.S. Dollars)	2011			2010
Gross realized gains on available for sale securities	$	8,306		$	7,073
Gross realized losses on available for sale securities		(4,883	)		(3,812	)
Net realized and unrealized losses on trading securities		(395	)		(1,466	)
Change in fair value of other investments		(27,620	)		(10,159	)

Net realized and unrealized losses on investments	$	(24,592	)	$	(8,364	)

Net other-than-temporary impairment losses recognized in earnings	$	(1,382	)	$	(720	)

Increase in net unrealized gains on available for sale fixed maturities, before tax	$	30,535		$	97,284

Included in net realized and unrealized gains (losses) on trading securities were $0.7 million of net realized losses recognized on trading securities sold during the six months ended June 30, 2011 ($0.3 million in the six months ended June 30, 2010).

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.

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 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 $0.4 million of OTTI in earnings for the three months ended June 30, 2011, all of which related to estimated credit losses ($0.3 million in the three months ended June 30, 2010, all of which related to estimated credit losses).

The Company recorded $1.4 million of OTTI in earnings for the six months ended June 30, 2011, all of which related to estimated credit losses ($0.7 million in the six months ended June 30, 2010, all of which related to estimated credit losses).

The following methodology and significant inputs were used to determine the estimated credit losses on residential mortgage-backed securities ($0.4 million and $1.4 million credit loss recognized for the three and six months ended June 30, 2011) during the three and six months ended June 30, 2011:

•

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.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Available for sale fixed maturities with unrealized losses, and the duration of such conditions as of June 30, 2011 and as of December 31, 2010, were:


June 30, 2011 (Expressed in thousands of U.S. Dollars)	Less Than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. government and agencies	$	126,916	$	3,452	$	—	$	—	$	126,916	$	3,452
Non-U.S. governments		38,057		4,584		—		—		38,057		4,584
Corporate securities		353,011		7,547		—		—		353,011		7,547
Municipal securities		38,730		949		—		—		38,730		949
Asset-backed securities		81,266		8,324		3,875		397		85,141		8,721
Residential mortgage-backed securities		181,954		4,216		—		—		181,954		4,216
Commercial mortgage-backed securities		67,211		1,259		—		—		67,211		1,259

	$	887,145	$	30,331	$	3,875	$	397	$	891,020	$	30,728


December 31, 2010 (Expressed in thousands of U.S. Dollars)	Less Than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
U.S. government and agencies	$	303,324	$	6,648	$	—	$	—	$	303,324	$	6,648
Non-U.S. governments		15,687		823		—		—		15,687		823
Corporate securities		373,511		9,572		—		—		373,511		9,572
Municipal securities		83,134		3,077		—		—		83,134		3,077
Asset-backed securities		42,082		8,433		547		504		42,629		8,937
Residential mortgage-backed securities		298,301		7,924		1,333		—		299,634		7,924
Commercial mortgage-backed securities		48,861		2,432		418		—		49,279		2,432

	$	1,164,900	$	38,909	$	2,298	$	504	$	1,167,198	$	39,413

Of the total holding of 3,113 (as of December 31, 2010 – 2,881) available for sale securities, 483 (as of December 31, 2010 – 497) had unrealized losses as of June 30, 2011.

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 six months ended June 30, 2011 and 2010:


(Expressed in thousands of U.S. Dollars)	2011			2010
Beginning balance at April 1	$	4,320		$	1,950
Addition for credit loss impairment recognized in the current period on securities previously impaired		353			300

Ending balance at June 30	$	4,673		$	2,250


(Expressed in thousands of U.S. Dollars)	2011			2010
Beginning balance at January 1	$	3,767		$	1,530
Addition for credit loss impairment recognized in the current period on securities not previously impaired		424			173
Addition for credit loss impairment recognized in the current period on securities previously impaired		958			547
Reduction for securities sold during the period		(476	)		—

Ending balance at June 30	$	4,673		$	2,250

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Other Investments

The following is a summary of other investments as of June 30, 2011 and December 31, 2010:


	June 30, 2011				December 31, 2010
(Expressed in thousands of U.S. Dollars)	Fair Value		Allocation %		Fair Value		Allocation %
Hedge funds, at fair value	$	317,786		90.7	$	294,257		77.8
Catastrophe bonds, at fair value		—		—		47,248		12.5
Structured deposits, at fair value		26,859		7.7		26,809		7.1
Equity method investments		5,092		1.5		5,458		1.4
Derivatives, at fair value		456		0.1		4,356		1.2

	$	350,193		100.0	$	378,128		100.0

Hedge Funds

The Company has investments in hedge funds across various investment strategies, together, the “hedge fund portfolio.” The distribution of the hedge fund portfolio by investment strategy as of June 30, 2011 and December 31, 2010 was:


	June 30, 2011				December 31, 2010
(Expressed in thousands of U.S. Dollars)	Fair Value		Allocation %		Fair Value		Allocation %
Distressed securities	$	34,496		10.8	$	35,815		12.2
Diversified arbitrage		22,532		7.1		27,892		9.5
Emerging markets		4,961		1.6		13,044		4.4
Event-driven arbitrage		26,696		8.4		30,175		10.2
Fund of funds		44,154		13.9		42,849		14.6
Global macro		49,213		15.5		49,700		16.9
Long/short credit		9,821		3.1		10,037		3.4
Long/short equity		124,214		39.1		82,065		27.9
Opportunistic		1,699		0.5		2,680		0.9

Total hedge fund portfolio	$	317,786		100.0	$	294,257		100.0

Redemptions receivable of $21.1 million and $38.1 million related to the hedge fund portfolio are excluded from the above table and are presented within trades pending settlement on the consolidated balance sheets as of June 30, 2011, and December 31, 2010, respectively.

As of June 30, 2011, the hedge fund portfolio was invested in nine strategies in 32 underlying funds. 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.

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 June 30, 2011 outstanding redemptions receivable of $21.1 million, none of which is gated, $19.6 million was received in cash prior to August 1, 2011. The fair value of the Company’s holdings in funds with gates imposed as of June 30, 2011 was $26.9 million (December 31, 2010—$30.2 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 June 30, 2011, the fair value of hedge funds held in side-pockets was $41.4 million (December 31, 2010—$61.6 million).

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Details regarding the redemption of the hedge fund portfolio as of June 30, 2011 was 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	$	34,496	$	16,398	$	18,098	Annually (3)	90 days
Diversified arbitrage		22,532		22,532		—	—	—
Emerging markets		4,961		4,961		—	—	—
Event-driven arbitrage		26,696		16,524		10,172	Quarterly	60 days
Fund of funds		44,154		—		44,154	(4)	45-370 days
Global macro		49,213		2,272		46,941	Monthly - Quarterly	3-90 days
Long/short credit		9,821		—		9,821	Quarterly	56 days
Long/short equity		124,214		3,873		120,341	Monthly - Annually (5)	30-90 days
Opportunistic		1,699		1,699		—	—	—

Total hedge funds	$	317,786	$	68,259	$	249,527

(1)	For those investments that are restricted by gates or that are invested in side pockets, the Company cannot reasonably estimate as of June 30, 2011 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 $7.4 million is September 30, 2011, and for the remaining $10.7 million is December 31, 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 was $32.3 million as of June 30, 2011.

(5)	The next available redemption date for investments totaling $13.6 million is December 31, 2011, and for investments totaling $24.4 million is June 30, 2012. The remaining balance is redeemable monthly.

Details regarding the redemption of the hedge fund portfolio as of December 31, 2010 was 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	$	35,815	$	18,663	$	17,152	Biannually (3)	180 days
Diversified arbitrage		27,892		27,892		—	—	—
Emerging markets		13,044		13,044		—	—	—
Event-driven arbitrage		30,175		20,122		10,053	Quarterly	60 days
Fund of funds		42,849		—		42,849	(4)	45-370 days
Global macro		49,700		2,344		47,356	Monthly - Quarterly	3-90 days
Long/short credit		10,037		—		10,037	Quarterly	56 days
Long/short equity		82,065		7,044		75,021	Monthly - Annually	30-90 days
Opportunistic		2,680		2,680		—	—	—

Total hedge funds	$	294,257	$	91,789	$	202,468

(1)	For those investments that are restricted by gates or that are invested in side pockets, the Company cannot reasonably estimate as of December 31, 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 $7.2 million is September 30, 2011, and for the remaining $10.0 million is December 31, 2011.

(4)

As of June 30, 2011, the Company had one unfunded commitment of $9.5 million related to its hedge fund portfolio (December 31, 2010 - $nil).

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 June 30, 2011, the estimated fair value of the Company’s investment in catastrophe bonds was $nil (December 31, 2010—$47.2 million). During the three months ended June 30, 2011, the Company disposed of all of its holdings in catastrophe bonds. For the three months ended June 30, 2011 and 2010, the Company recorded $0.8 million and $0.5 million, respectively, of net investment income from catastrophe bonds. For the six months ended June 30, 2011 and 2010, the Company recorded $1.7 million and $0.5 million, respectively, of net investment income from catastrophe bonds.

For the three months ended June 30, 2011 and 2010, the Company recorded a $0.3 million decrease and a $0.3 million increase, respectively, in the estimated fair value of the catastrophe bonds. For the six months ended June 30, 2011, the Company recorded a $25.6 million decrease in the estimated fair value of the catastrophe bonds, including a $25.0 million loss on one catastrophe bond with exposure to the earthquake and tsunami in Japan, whose estimated redemption value was $nil. For the six months ended June 30, 2010, the Company recorded a $0.3 million increase in the estimated fair value of the catastrophe bonds. The changes in estimated fair value are included in net realized and unrealized gains (losses) on investments in the consolidated statement of operations 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 of June 30, 2011, the estimated fair value of the deposit was $26.9 million (December 31, 2010 - $26.8 million). For the three months ended June 30, 2011 and 2010, $1.3 million and $nil of losses, respectively, was recorded in net realized and unrealized gains (losses) on investments in the consolidated statement of operations and comprehensive income. For the six months ended June 30, 2011 and 2010, $0.1 million and $nil million of gains, respectively, was recorded in net realized and unrealized gains (losses) on investments.

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, currency forwards, 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

The total restricted assets as of June 30, 2011 and December 31, 2010 are as follows:


(Expressed in thousands of U.S. Dollars)	June 30, 2011		December 31, 2010
Restricted assets included in cash and cash equivalents	$	344,423	$	343,912
Restricted assets included in fixed maturities, at fair value		3,649,718		3,901,362
Restricted assets included in other investments		164,276		164,008

Total	$	4,158,417	$	4,409,282

As of June 30, 2011 and December 31, 2010, $2,959.5 million and $3,155.5 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 June 30, 2011 and December 31, 2010, $1,198.9 million and $1,253.8 million, respectively, of cash and cash equivalents and investments were pledged as security in favor of letters of credit issued.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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. As a result, 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.

At June 30, 2011, 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, residential and commercial mortgage-backed securities, derivative instruments, catastrophe bonds and structured deposits.

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, each of which 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.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

•

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, volatility 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.

•

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 provided 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 cannot reasonably estimate at June 30, 2011 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. As of June 30, 2011, the remaining hedge fund portfolio investments are classified as Level 2 in the fair value hierarchy. 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 in which it invests 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. These 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 $2.5 million was made to the net asset value reported by the fund manager as of June 30, 2011 (December 31, 2010—$3.2 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.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 June 30, 2011 and December 31, 2010. The Company has no assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2011.


June 30, 2011 (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	$	314,757	$	429,708	$	—	$	744,465
Non-U.S. governments		—		168,290		—		168,290
Corporate securities		—		2,743,228		—		2,743,228
Municipal securities		—		218,370		—		218,370
Asset-backed securities		—		203,598		—		203,598
Residential mortgage-backed securities		—		1,159,922		—		1,159,922
Commercial mortgage-backed securities		—		383,920		—		383,920

Total fixed maturities		314,757		5,307,036		—		5,621,793
Hedge funds		—		217,205		100,581		317,786
Structured deposit		—		26,859		—		26,859
Derivative assets		—		456		—		456

Other investments		—		244,520		100,581		345,101

	$	314,757	$	5,551,556	$	100,581	$	5,966,894


December 31, 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	$	389,766	$	605,780	$	—	$	995,546
Non-U.S. governments		—		79,111		—		79,111
Corporate securities		—		2,735,366		—		2,735,366
Municipal securities		—		238,014		—		238,014
Asset-backed securities		—		86,937		—		86,937
Residential mortgage-backed securities		—		1,168,389		—		1,168,389
Commercial mortgage-backed securities		—		334,152		—		334,152

Total fixed maturities		389,766		5,247,749		—		5,637,515
Hedge funds		—		171,017		123,240		294,257
Structured deposits		—		26,809		—		26,809
Catastrophe bonds		—		47,248		—		47,248
Derivative assets		—		4,356		—		4,356

Other investments		—		249,430		123,240		372,670

	$	389,766	$	5,497,179	$	123,240	$	6,010,185

The other investments above do not include investments accounted for using the equity method of $5.1 million and $5.5 million as of June 30, 2011 and December 31, 2010, respectively, in which the Company is deemed to have significant influence.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables provide a summary of the changes in fair value of the Company’s Level 3 financial assets (and liabilities) for the three and six months ended June 30, 2011 and 2010.


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Other Investments
(Expressed in thousands of U.S. Dollars)	2011			2010
Beginning balance at April 1	$	114,166		$	135,683
Total gains or losses (realized/unrealized)
Included in net income		161			(3,388	)
Included in other comprehensive income		—			—
Purchases		3,244			31,519
Issuances		—			—
Settlements		(16,109	)		(13,862	)
Transfers in and/or out of Level 3		(881	)		—

Ending balance at June 30	$	100,581		$	149,952

The amount of total gains (losses) for the three months ended June 30, included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30	$	186		$	(3,388	)


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Other Investments
(Expressed in thousands of U.S. Dollars)	2011			2010
Beginning balance at January 1	$	123,240		$	176,929
Total gains or losses (realized/unrealized)
Included in net income		556			(696	)
Included in other comprehensive income		—			—
Purchases		4,154			34,354
Issuances		—			—
Settlements		(26,488	)		(31,623	)
Transfers in and/or out of Level 3		(881	)		(29,012	)

Ending balance at June 30	$	100,581		$	149,952

The amount of total gains (losses) for the six months ended June 30, included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30	$	399		$	(696	)

Transfers out of Level 3 for the six months ended June 30, 2011 and 2010 are hedge funds for which the Company can reasonably estimate when it will be able to redeem its investment at the net asset value, and the redemption period is considered to be in the near term.

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 June 30, 2011, the Company held $87.6 million (December 31, 2010—$74.1 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 six months ended June 30, 2011. 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. The Company has also entered into various foreign exchange derivatives as part of an opportunistic investment mandate granted to one of the Company’s investment managers.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The fair values of derivative instruments as of June 30, 2011 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	$	3,038	$	—
Interest rate-linked derivatives		—		(2,584	)
Foreign exchange forward contracts		2		—

Total derivatives	$	3,040	$	(2,584	)

The fair values of derivative instruments as of December 31, 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	$	5,273	$	—
Interest rate-linked derivatives		—		(1,383	)
Foreign exchange forward contracts		466		—

Total derivatives	$	5,739	$	(1,383	)

The derivative assets and liabilities are included within other investments in the consolidated balance sheets as of June 30, 2011 and December 31, 2010.

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


Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	2011 Amount of Gain or (Loss) Recognized in Income on Derivative			2010 Amount of Gain or (Loss) Recognized in Income on Derivative
Convertible bond equity call options	$	(3,110	)	$	(1,649	)
Interest rate-linked derivatives		(327	)		(10,873	)
Foreign exchange forward contracts		(397	)		155

Total derivatives	$	(3,834	)	$	(12,367	)

The impact of derivative instruments on the consolidated statement of operations and comprehensive income for the six months ended June 30, was:


Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	2011 Amount of Gain or (Loss) Recognized in Income on Derivative			2010 Amount of Gain or (Loss) Recognized in Income on Derivative
Convertible bond equity call options	$	(2,206	)	$	(3,170	)
Interest rate-linked derivatives		(464	)		(10,873	)
Foreign exchange forward contracts		(490	)		155

Total derivatives	$	(3,160	)	$	(13,888	)

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

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 June 30, 2011 was $90.6 million.

The fair value of the 6.25% senior notes and 7.20% senior notes was $359.8 million and $94.1 million, respectively, as of June 30, 2011, measured based on an independent pricing service using a matrix pricing methodology. Interest expense in connection with the senior notes was $7.1 million and $1.6 million for the three months ended June 30, 2011 and 2010, respectively, and $14.2 million and $3.3 million for the six months ended June 30, 2011 and 2010, 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 the year ending December 31, 2011 and the year ended December 31, 2010. Interest and penalties related to uncertain tax positions, of which there have been none, would be recognized in income tax expense.

10. EQUITY CAPITAL

The Board of Directors of the Company declared the following dividends during 2011 and 2010:


			Dividend to be paid
	Dividend		to shareholders of
Date Declared	per share		record on	Payable On
August 2, 2011	$	0.14	August 16, 2011	August 30, 2011
May 3, 2011	$	0.12	May 17, 2011	May 31, 2011
February 8, 2011	$	0.12	February 22, 2011	March 8, 2011
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

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

During the six months ended June 30, 2011, the Company repurchased 6,574,175 common shares at an average price of $21.88 per common share for a total amount of $143.8 million, including the costs incurred to effect the repurchases. Of the amount repurchased during the six months ended June 30, 2011, 6,497,150 common shares were repurchased under the Board-approved share repurchase authorization, including 2,273,050 common shares acquired pursuant to a privately negotiated stock purchase agreement. As of June 30, 2011, the remaining authorization under the Company’s previously authorized share repurchase program was $185.5 million.

The Company’s total authorized share capital is $220.0 million. Authorized but unissued shares may be issued as common or preferred shares as the Board may from time to time determine.

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. Unvested share-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating awards and are included in the computation of basic earnings per share. Non-participating unvested share-based compensation awards are excluded from the computation of basic earnings per share. Diluted earnings per share assumes the conversion of dilutive convertible securities and the exercise of dilutive stock warrants and options.

The following tables set forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2011 and 2010:


	Three Months Ended
	June 30,
(Expressed in thousands U.S. Dollars, except share and per share amounts)	2011			2010
Basic earnings per share:
Net income	$	32,635		$	103,447
Weighted average common shares outstanding—basic		105,604,786			91,042,301

Basic earnings per share	$	0.31		$	1.14

Diluted earnings per share:
Net income	$	32,635		$	103,447

Weighted average common shares outstanding—basic		105,604,786			91,042,301
Conversion of warrants		1,247,975			420,613
Conversion of options		148,366			193,827
Conversion of employee stock purchase plan		2,506			4,689
Non participating restricted shares		108,276			—

Weighted average common shares outstanding—diluted		107,111,909			91,661,430

Diluted earnings per share	$	0.30		$	1.13


	Six Months Ended
	June 30,
(Expressed in thousands U.S. Dollars, except share and per share amounts)	2011			2010
Basic earnings per share:
Net (loss) income	$	(14,052	)	$	139,828
Weighted average common shares outstanding—basic		106,385,007			73,779,447

Basic earnings (loss) per share	$	(0.13	)	$	1.90

Diluted earnings per share:
Net (loss) income	$	(14,052	)	$	139,828

Weighted average common shares outstanding—basic		106,385,007			73,779,447
Conversion of warrants		—			526,539
Conversion of options		—			214,258
Conversion of employee stock purchase plan		—			4,675

Weighted average common shares outstanding—diluted		106,385,007			74,524,919

Diluted earnings (loss) per share	$	(0.13	)	$	1.88

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

For the three months ended June 30, 2011, the impact of the conversion of warrants and options of 2,910,788, was excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive. Due to the net loss incurred in the six months ended June 30, 2011, all warrants and options were anti-dilutive. For the three and six months ended June 30, 2010, the impact of the conversion of warrants and options of 3,538,067 and 2,326,712, respectively, was excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive.

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.

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.

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 operations and comprehensive income related to these agreements:


	As of		As of
(Expressed in thousands of U.S. Dollars)	June 30, 2011		December 31, 2010
Balance Sheet
Unearned property and casualty premiums	$	14,010	$	20,377
Premiums receivable		2,643		10,086
Losses and benefits recoverable from reinsurers		12,053		11,326
Property and casualty losses		266,575		299,610
Funds withheld from reinsurers		1,883		1,908


	Three Months Ended						Six Months Ended
(Expressed in thousands of U.S. Dollars)	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Statement of Operations
Gross premiums written	$	2,523		$	(3,673	)	$	3,764		$	(3,673	)
Earned premiums		2,964			405			7,872			405
Net losses and loss expenses		(2,031	)		(6,609	)		(555	)		(6,609	)
Acquisition costs		1,071			617			2,343			617

Grand Central Re Limited

The Company owns 7.5% of the ordinary shares of Grand Central Re Limited (“Grand Central Re”), a Bermuda domiciled reinsurance company managed by Alterra Managers. In conjunction with this investment, Alterra Bermuda entered into a quota share retrocession agreement with Grand Central Re that 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. Alterra Bermuda has not ceded any new business to Grand Central Re since 2003.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	As of		As of
(Expressed in thousands of U.S. Dollars)	June 30, 2011		December 31, 2010
Balance Sheet
Losses and benefits recoverable from reinsurers	$	47,229	$	48,922
Deposit liabilities		13,105		12,877
Funds withheld from reinsurers		85,369		85,991
Reinsurance balance payable		108		(236	)


	Three Months Ended						Six Months Ended
(Expressed in thousands of U.S. Dollars)	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Statement of Operations
Reinsurance premiums ceded	$	101		$	421		$	121		$	914
Earned premiums ceded		101			421			121			914
Other income		25			(150	)		50			50
Net losses and loss expenses		—			(342	)		—			(342	)
Claims and policy benefits		(551	)		436			(906	)		968
Interest expense		1,691			3,806			1,980			5,297

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.

Bay Point Holdings Limited

The Company owns 13.8% of the common shares of Bay Point Holdings Limited (“Bay Point”), a Bermuda domiciled company. 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 Bermuda-domiciled, wholly-owned reinsurance subsidiary of Bay Point that is managed by Alterra Agency. This quota share reinsurance agreement expired on December 31, 2007. As of June 30, 2011, $1.5 million (December 31, 2010—$0.9 million) was included in premiums receivable and $4.6 million (December 31, 2010—$6.5 million) in losses and benefits recoverable from reinsurers related to this agreement.

Hedge Fund Managers

Moore Capital Management, LLC (“Moore Capital”), an affiliate of one of Alterra’s significant shareholders, received aggregate management and incentive fees of $0.1 million and $0.1 million, respectively, in respect of Alterra Diversified’s assets invested in an underlying fund managed by Moore Capital for the three months ended June 30, 2011 and 2010. Management and incentive fees for the six months ended June 30, 2011 and 2010 were $0.2 million and $0.1 million, 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 operations 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 to request the issuance of secured letters of credit and unsecured letters of credit up to $600.0 million and $250.0 million, respectively. Alterra Holdings, Alterra Bermuda, Alterra Re USA and Alterra USA may also request unsecured loans from the $250.0 million tranche 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 secured sublimit of 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 $600.0 million five-year senior credit facility (the “$600.0 million Credit Facility”) with Bank of America and various other financial institutions. The $600.0 million Credit Facility allows Alterra Bermuda and certain of its insurance subsidiaries to request the issuance of secured letters of credit and unsecured letters of credit up to $450.0

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

million and $150.0 million, respectively. Alterra Bermuda or Alterra may also request unsecured loans from the $150.0 million tranche for general corporate purposes. Subject to certain conditions and at the request of Alterra Bermuda, the aggregate commitments of the lenders under the $600.0 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 $600.0 million Credit Facility.

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 60.0 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 at Lloyd’s operations. The facility may be terminated by ING at any time prior to December 31, 2011, subject to a four year notice requirement for any outstanding letters of credit.

In July 2009, Harbor Point entered into a letter of credit facility with Citibank N.A. This credit facility provides up to GBP 30.0 million for the issuance of secured letters of credit in support of the operations of Alterra Re UK.

In December 2010, Alterra Bermuda renewed a $75.0 million letter of credit facility with The Bank of Nova Scotia, which expires on December 12, 2011.

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 June 30, 2011 and December 31, 2010:


	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:
June 30, 2011	$	1,525,000	GBP	90,000

December 31, 2010	$	1,525,000	GBP	90,000

Letters of credit issued and outstanding as of:
June 30, 2011	$	906,042	GBP	70,107

December 31, 2010	$	908,025	GBP	70,107

Cash and fixed maturities at fair value pledged as collateral as of:
June 30, 2011	$	1,041,586	GBP	98,212

December 31, 2010	$	1,103,742	GBP	96,112

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 June 30, 2011.

14. SHARE BASED EQUITY AWARDS

At Alterra’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, as subsequently amended (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 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 (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.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

Prior to the Amalgamation, the Company issued warrants to purchase the Company’s common shares to certain investors and employees of Max. The remaining outstanding warrants may be exercised at any time up to their expiration dates, the last of which is August 17, 2011. Warrants were issued with exercise prices approximating the fair value of the Company’s common shares on the date of issuance.

In conjunction with the Amalgamation, certain terms of the warrant agreements held by non-employees were modified. These modifications 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 warrant 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.

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 its formation. The warrants held by non-employees are subject to anti-dilution provisions consistent with those described above. The warrants held by employees are entitled to receive accumulated cash dividends upon exercise of the warrants. 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	%

Warrant related activity is as follows:


							Weighted		Weighted		Range of
	Warrants			Warrants			Average		Average		Exercise
	Outstanding			Exercisable			Exercise Price		Fair Value		Prices
Balance, December 31, 2010		10,477,468			10,477,468		$	19.66	$	7.00	$13.88 - $26.48
Warrants exercised		(217,660	)		(217,660	)	$	14.16	$	5.68	$13.80 - $18.00
Additional warrants issued as a result of dividends declared		110,771			110,771		$	19.38	$	7.08	$13.80 - $19.53

Balance, June 30, 2011		10,370,579			10,370,579		$	19.56	$	7.03	$16.00 - $26.48

On each of February 8, 2011 and May 3, 2011, Alterra declared dividends of $0.12 per share. These dividends resulted in a reduction in the weighted average exercise price of $0.21 and an increase in the number of warrants outstanding by 110,771. A deferred dividend liability of $2.9 million is included in accounts payable and accrued expenses in the consolidated balance sheets for those warrant holders who receive cash for dividends declared rather than the anti-dilution adjustment.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 six months ended June 30, 2011 were exercised pursuant to the cashless exercise provision, which resulted in 83,946 shares being issued for the exercise of 217,660 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. The Company issued 21,655 options during the three and six months ended June 30, 2011. The fair value of these awards was estimated using the Black-Scholes option pricing model with the weighted average assumptions detailed below.

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 six months ended June 30, 2010.


Option valuation assumptions:	2011			2010
Expected remaining option life		0.5 years			3.9 years
Expected dividend yield		2.21	%		2.27	%
Expected volatility		20.95	%		37.7	%
Risk-free interest rate		0.19	%		1.84	%

The Company recognized $0.1 million and $4.6 million of stock-based compensation expense related to stock option awards for the three months ended June 30, 2011 and 2010, respectively. The Company recognized $0.3 million and $4.8 million of stock-based compensation expense related to stock option awards for the six months ended June 30, 2011 and 2010, respectively. Of the 2010 amounts, $4.5 million for the three and six months ended June 30, 2010 was recorded in merger and acquisition expenses. The remainder of the expense for the three and six months ended June 30, 2010 was recorded in general and administrative expenses. The Company did not capitalize any cost of stock-based option award compensation. As of June 30, 2011, the total compensation cost related to non-vested stock option awards not yet recognized was $0.1 million, which is expected to be recognized over a weighted average period of 1.1 years.

The total intrinsic value of stock options exercised during the six months ended June 30, 2011 was $0.9 million.

A summary of the 2000 Plan related activity follows:


						Weighted
						Average				Range of
	Options			Options		Exercise		Fair Value		Exercise
	Outstanding			Exercisable		Price		of Options		Prices
Balance, December 31, 2010		1,343,659			1,343,659	$	21.49	$	6.27	$	8.45-33.76
Options granted		21,655				$	21.75	$	1.22	$	21.63-22.12
Options exercised		(122,174	)			$	15.10	$	5.34	$	8.45-21.91
Options forfeited		(41,494	)			$	24.04	$	2.29	$	21.70-30.40

Balance, June 30, 2011		1,201,646			1,201,646	$	22.05	$	6.47	$	8.85-33.76

A summary of the 2008 Plan related activity follows:


								Weighted
	Awards							Average				Range of
	Available			Options		Options		Exercise		Fair Value		Exercise
	for Grant			Outstanding		Exercisable		Price		of Options		Prices
Balance, December 31, 2010		1,999,819			108,333		54,167	$	15.75	$	6.01	$	15.75
Restricted stock granted		(700,299	)
Restricted stock forfeited		4,908
Restricted stock units granted		(79,208	)

Balance, June 30, 2011		1,225,220			108,333		108,333	$	15.75	$	6.01	$	15.75

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A summary of the 2006 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, 2010		1,437,493			2,168,857			1,736,950	$	26.64	$	5.20	$26.48-30.82
Restricted stock granted		(491,682	)
Restricted stock forfeited		755
Options forfeited		30,593			(30,593	)			$	26.48	$	5.19	$26.48

Balance, June 30, 2011		977,159			2,138,264			2,094,071	$	26.64	$	5.20	$26.48 -30.82

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 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. The fair value of the shares and RSUs is charged to income over the vesting period. Generally, restricted stock and RSU awards vest between three and five years after the date of grant. The Company has also issued restricted shares and restricted share units with vesting terms that include a performance condition related to growth in tangible book value per share over a five year period.

Total compensation cost recognized for restricted stock and RSU awards recorded in general and administrative expenses was $11.5 million and $20.5 million for the three months ended June 30, 2011 and 2010, respectively, and was $22.2 million and $25.4 million for the six months ended June 30, 2011 and 2010, respectively.

A summary of the Company’s unvested restricted stock awards as of December 31, 2010 and changes during the six months ended June 30, 2011 follow:


	Non-vested Restricted Stock			Weighted - Average Grant - Date Fair Value		Non-vested RSUs		Weighted - Average Grant - Date Fair Value
Balance, December 31, 2010		3,357,982		$	22.52		197,988	$	22.81
Awards granted		1,191,981		$	21.57		79,208	$	21.45
Awards vested		(617,770	)	$	24.00		—	$	—
Awards forfeited		(5,663	)	$	23.72		—	$	—

Balance, June 30, 2011		3,926,530		$	21.98		277,196	$	22.42

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 subscription periods (the “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 for each of the three months ended June 30, 2011 and 2010, and $0.1 million for each of the six months ended June 30, 2011 and 2010.

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

15. SUBSEQUENT EVENTS

On July 1, 2011, Alterra Holdings, a wholly-owned subsidiary of the Company, private equity funds sponsored by Stone Point Capital, LLC, including Trident V L.P., and several unrelated third party investors executed a subscription agreement with New Point IV Limited to purchase common shares of New Point IV Limited. Following execution of the subscription agreement and a subsequent issuance of common shares, Alterra Holdings held approximately 34.8% of the issued and outstanding common shares of New Point IV Limited. Alterra Holdings’ remaining commitment under the subscription agreement with New Point IV Limited is $73.1 million.

On July 10, 2011, Alterra E&S executed a renewal rights and asset purchase agreement with Selective Insurance Company of America, a member of the Selective Insurance Group, Inc., for the sale of the commercial excess and specialty lines business written under contract binding authority by Alterra E&S’s contracted general agents. Alterra E&S’s specialty personal lines business was not included as part of this transaction. The transaction was consummated on August 1, 2011.

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 quarter and six months ended June 30, 2011 compared to the quarter and six months ended June 30, 2010 and our financial condition as of June 30, 2011. 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 for the year ended December 31, 2010.

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 and benefit reserves and the need to adjust such reserves as claims develop over time;

•

the failure of any of the loss limitation methods employed;

•

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

•

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

•

any lowering or loss of financial ratings;

•

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

•

actions by competitors, including consolidation;

•

the effects of emerging claims and coverage issues;

•

the loss of business provided to Alterra by its major brokers;

•

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

•

tax and regulatory changes and conditions;

•

retention of key personnel; and

•

the integration of new business ventures Alterra may enter into, as well as management’s 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 Annual Report on Form 10-K 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.

We have $ 2,793.1 million in consolidated shareholders’ equity as of June 30, 2011. In Bermuda, we conduct our insurance and reinsurance operations through Alterra Bermuda, which is registered as a Class 4 and 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.

In Europe, we conduct our non-Lloyd’s operations from Dublin through Alterra Insurance Europe and Alterra Re Europe. In addition, until December 31, 2010, Alterra Bermuda operated a branch in the United Kingdom. Effective January 1, 2011, we commenced underwriting this business through Alterra Re UK, a branch of Alterra Re Europe. Our Lloyd’s operations are conducted through Lloyd’s Syndicates 1400, 2525 and 2526 (collectively, the “Syndicates”), which underwrite a diverse portfolio of specialty risks in Europe, the United States and Latin America. Alterra at Lloyd’s operations are based primarily in London, England. As of June 30, 2011, our proportionate share of Syndicates 1400, 2525 and 2526 was 100%, approximately 2% and approximately 22%, respectively.

In the United States, our insurance operations are conducted through Alterra E&S, a Delaware-domiciled excess and surplus insurance company, and Alterra America, a Delaware-domiciled admitted insurance company. Through Alterra E&S and Alterra America, we write both admitted and non-admitted business throughout the United States and Puerto Rico. We conduct our U.S.-based reinsurance operations through Alterra Re USA, a Connecticut-domiciled reinsurance company.

In Latin America, we provide reinsurance to clients through Alterra at Lloyd’s, operating locally in Rio de Janeiro using Lloyd’s admitted status, through Alterra Re Europe using a representative office in Bogota, and in Buenos Aires using a local subsidiary. In May 2011, we announced our intention to apply for a license to incorporate a local reinsurance company in Brazil. We believe that this will complement our existing presence in Brazil, and will provide us with greater access to additional reinsurance opportunities.

We employ personnel and hold assets within our global service companies incorporated in Ireland, Bermuda, the United Kingdom and the United States, which we believe improves the efficiency of providing corporate services across the Company.

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. 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 portfolios are 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 June 30, 2011, the allocation of invested assets was 95.6% in cash and fixed maturities and 4.4% in other investments, principally hedge funds.

Key Performance Indicators

Our objective as a global specialty insurance and reinsurance company is to meet our 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 objective 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.

As a diversified insurer and reinsurer, which includes underwriting property catastrophe risks, we have substantial exposure to losses resulting from natural and man-made catastrophes. The incidence and severity of catastrophes are inherently unpredictable, but the loss experience of property catastrophe insurers and reinsurers has been generally characterized as low frequency and high severity in nature. Potential claims from catastrophic events may cause substantial volatility in our financial results for any fiscal quarter. As a result, the financial measures that we use to analyze our performance will reflect this volatility in the short term; however, we believe these measures should demonstrate less volatility over the long term.

The table below shows the key performance indicators as of June 30, 2011, March 31, 2011 and December 31, 2010 and for the quarters and six months ended June 30, 2011 and 2010:


	As of June 30, 2011		As of March 31, 2011		As of December 31, 2010
Book value per share⁽¹⁾	$	26.40	$	25.76	$	26.30
Diluted book value per share⁽¹⁾	$	25.98	$	25.34	$	25.99


	Quarter Ended June 30, 2011			Quarter Ended June 30, 2010			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010
	(in millions of U.S. Dollars)
Net operating income⁽²⁾	$	39.6		$	58.8		$	14.8		$	99.5
Combined ratio⁽³⁾		93.7	%		83.3	%		103.5	%		86.2	%
Annualized return on average shareholders’ equity⁽⁴⁾		4.7	%		17.8	%		(1.0	)%		14.3	%
Annualized net operating return on average shareholders’ equity⁽²⁾⁽⁴⁾		5.7	%		10.1	%		1.1	%		10.2	%

(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 (computed as the average of the quarterly average shareholders’ equity balances).

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 June 30, 2011, our book value per share on a basic and diluted basis increased by 2.5% and 2.5%, respectively. The increase in book value per share was driven by a combination of positive operating results and an increase in unrealized gains on our investment portfolio, together with share repurchases at a discount to book value per share.

Property catastrophe losses resulting from natural disasters in the United States in the second quarter, and those in Japan, New Zealand and Australia in the first quarter, had a significant effect on our results of operations for the quarter and six months ended June 30, 2011. We incurred losses from these events of $50.5 million, net of reinsurance, or $49.6 million, net of reinsurance and reinstatement premiums, for the quarter ended June 30, 2011, and $165.9 million, net of reinsurance, or $155.8 million, net of reinsurance and reinstatement premiums, for the six months ended June 30, 2011. These events are currently estimated to have caused industry losses in the tens of billions of dollars; however, our strategy of diversifying and limiting our property catastrophe risk exposures resulted in a manageable level of underwriting losses and limited the capital impact to less than 5.5% of our shareholders’ equity as of December 31, 2010. Together with our net operating income and an increase of $28.2 million in unrealized investment gains in shareholders’ equity for the six months ended June 30, 2011, our book value per diluted share remained virtually unchanged from December 31, 2010.

Despite the incurred losses from the quarter’s catastrophe events, our net operating income was $39.6 million for the quarter ended June 30, 2011, with a combined ratio of 93.7%, and $14.8 million for the six months ended June 30, 2011, with a combined ratio of 103.5%. The catastrophe losses principally affected our reinsurance and Alterra at Lloyd’s segments; however, both segments continued to have positive underwriting income for the quarter ended June 30, 2011. Net favorable development on prior year loss reserves was $48.5 million for the quarter ended June 30, 2011, reducing the combined ratio by 14.0 percentage points, and was distributed across our insurance, reinsurance and Alterra at Lloyd’s segments.

We decreased our share repurchase activity during the quarter ended June 30, 2011, while still taking advantage of select opportunities to purchase our common shares in the market. We spent $6.7 million repurchasing 311,000 shares in the market during the quarter at an average price of $21.51, a 15.1% discount to our March 31, 2011 diluted book value per share. For the six months ended June 30, 2011, we spent $142.2 million under our share repurchase authorization, repurchasing 6,497,150 shares at an average price of $21.89, a 15.8% discount to our December 31, 2010 diluted book value per share. As of June 30, 2011, our remaining share repurchase authorization was $185.5 million.

We target a long-term annualized net operating return on average shareholders’ equity (“annualized net operating ROE”) of the risk free rate plus 10% over the cycle. For the quarter and six months ended June 30, 2011, our annualized net operating ROE and annualized return on average shareholders’ equity fell short of our target primarily due to the significant property catastrophe event losses in the quarter and six month period.

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 believe the industry is currently in a period of excess underwriting capacity,

and while the current year’s property catastrophe events have likely eroded some of that capacity, there remains uncertainty regarding the timing, location and scale of a favorable turn in the market. In addition, the industry is operating in a low interest rate environment, which has decreased our ability to generate meaningful 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. We seek to manage and monitor our aggregate exposure so that the estimated maximum impact of a catastrophic event or series of catastrophic events on our short tail catastrophe exposed business is less than 20% of our beginning of year shareholders’ equity on an annual basis for a modeled 1 in 250 year event. This limitation is a self-imposed target that can be adjusted if and when we believe that the proper pricing environment exists. Although we are currently approaching this target, we continue to monitor the pricing environment and believe that we have the capital and operational flexibility to take advantage of a hardening market.

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 quarter and six months ended June 30, 2011. We believe that the critical accounting policies set forth in our Annual Report on Form 10-K for the year ended December 31, 2010 continue 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 six months ended June 30, 2011 and 2010

The following is a discussion and analysis of our consolidated results of operations for the quarter and six months ended June 30, 2011 and 2010, which are summarized below:


	Quarter Ended June 30, 2011			Quarter Ended June 30, 2010			% change			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	563.9		$	399.0			41.3	%	$	1,191.8		$	770.1			54.8	%
Reinsurance premiums ceded		(136.6	)		(79.7	)		71.4	%		(274.0	)		(232.9	)		17.6	%

Net premiums written	$	427.3		$	319.3			33.8	%	$	917.8		$	537.2			70.8	%

Net premiums earned	$	348.9		$	293.3			19.0	%	$	728.8		$	487.5			49.5	%
Net investment income		59.7			53.3			12.0	%		117.4			101.7			15.4	%
Net realized and unrealized losses on investments		(5.8	)		(14.8	)		(60.8	)%		(24.6	)		(8.4	)		192.9	%
Net impairment losses recognized in earnings		(0.4	)		(0.3	)		(33.3	)%		(1.4	)		(0.7	)		100.0	%
Other income		0.7			0.2			250.0	%		2.0			0.6			233.3	%

Total revenues		403.1			331.7			21.5	%		822.2			580.7			41.6	%

Net losses and loss expenses		211.1			159.8			32.1	%		515.5			284.8			81.0	%
Claims and policy benefits		15.6			13.9			12.2	%		30.3			31.6			(4.1	)%
Acquisition costs		64.7			48.8			32.6	%		135.3			73.0			85.3	%
Interest expense		10.6			7.9			34.2	%		19.1			12.9			48.1	%
Net foreign exchange gains		3.1			(0.6	)		n/a			2.2			(3.1	)		n/a
Merger and acquisition expenses		—			(54.6	)		(100.0	)%		—			(49.8	)		(100.0	)%
General and administrative expenses		69.7			50.7			37.5	%		140.9			87.2			61.6	%

Total losses and expenses		374.8			225.9			65.9	%		843.3			436.6			93.2	%

Income (loss) before taxes		28.3			105.8			(73.3	)%		(21.1	)		144.1			(114.6	)%

Income tax (benefit) expense		(4.3	)		2.4			(279.2	)%		(7.0	)		4.3			(262.8	)%

Net income (loss)	$	32.6		$	103.4			(68.5	)%	$	(14.1	)	$	139.8			(110.1	)%

Loss ratio^(a)		60.7	%		54.6	%					70.9	%		58.6	%
Acquisition cost ratio^(b)		18.5	%		16.6	%					18.6	%		15.0	%
General and administrative expense ratio^(c)		14.5	%		12.0	%					14.1	%		12.6	%
Combined ratio^(d)		93.7	%		83.3	%					103.5	%		86.2	%

(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 calculated by dividing the sum of net losses and loss expenses, acquisition costs and general and administrative expenses by net premium earned for the property and casualty business.

Premiums.Gross premiums written for the quarter ended June 30, 2011 increased by 41.3% compared to the prior year period and gross premiums written for the six months ended June 30, 2011 increased by 54.8% compared to the prior year period. The principal reason for this increase was the additional premiums written as a result of the Amalgamation, and strategic growth in the form of added underwriting teams in the insurance, reinsurance and Alterra at Lloyd’s segments.

A discussion of pro forma reinsurance segment results including Harbor Point in the 2010 comparative figures is in the section entitledReinsurance Segment on a pro forma basis. On a pro forma basis, gross premiums written and net premiums earned for the quarter and six months ended June 30, 2011 and 2010 would have been as follows:


	Quarter Ended June 30, 2011		% change			Quarter Ended June 30, 2010		Six Months Ended June 30, 2011		% change			Six Months Ended June 30, 2010
	(In millions of U.S. Dollars)							(In millions of U.S. Dollars)
Gross premiums written (1)	$	563.9		18.3	%	$	476.6	$	1,191.8		3.3	%	$	1,153.5
Net premiums earned (1)	$	348.9		(5.2	)%	$	368.1	$	728.8		3.2	%	$	706.4

(1)

The above pro forma financial information for the quarter and six months ended June 30, 2010 is provided, for informational purposes only, to present a summary of the combined gross premiums written and net premiums earned of the Company and the former Harbor Point companies assuming the Amalgamation occurred on January 1, 2010.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter and six months ended June 30, 2011 was 24.2% and 23.0%, respectively, compared to 20.0% and 30.2%, respectively, in the prior year periods. The ratio for the quarter ended June 30, 2011 increased compared to the prior year period due to the prior year quarter including a non-recurring $20.6 million reduction in ceded premiums written in our U.S. specialty segment. Excluding this item, the ratio in the prior year quarter was 25.1%. The decrease in the percentage of reinsurance premiums ceded in the six months ended June 30, 2011 compared to the prior year period was principally due to the Amalgamation, the reduction in the amount of business ceded by our reinsurance segment and the decision to retain more risk in general. We continually monitor our need for reinsurance based on aggregate risk exposures.

Net premiums earned is a function of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, changes in 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 six months ended June 30, 2011 compared to the prior year period was principally due to the incremental earnings as a result of the Amalgamation. In addition, increased retentions in our U.S. specialty segment and organic growth in our Alterra at Lloyd’s segment contributed to the increase in net premiums earned.

Net investment income.Net investment income for the quarter and six months ended June 30, 2011 increased by 12.0% and 15.4%, 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 3.11% and 3.12%, respectively for the quarter and six months ended June 30, 2011, and 3.35% and 3.58% for the quarter and six months ended ended June 30, 2010. 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. Due to the anticipated 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 may vary significantly from period to period. The principal component of the net loss for the quarter ended June 30, 2011 was a $3.1 million decrease in the fair value of embedded call options within our convertible bonds, and a decrease in fair value of our hedge funds of $1.9 million. The principal component of the net loss for the six months ended June 30, 2011 was a $25.0 million loss on one catastrophe bond with exposure to the Japan earthquake and tsunami. Investment losses from hedge funds decreased by $1.4 million and gains from hedge funds decreased by $2.8 million, for the quarter and six months ended June 30, 2011, respectively, compared to the prior year periods.

Net losses and loss expenses, and claims. The loss ratio increased by 6.1 and 12.3 percentage points, for the quarter and six months ended June 30, 2011, 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 six months ended June 30, 2011 of $48.5 million and $78.7 million, respectively, compared to $24.1 million and $41.2 million in the prior year periods;

•

The net favorable development for the quarter ended June 30, 2011 from our segments was as follows: insurance - $14.7 million (2010 - $9.4 million); reinsurance - $23.9 million (2010 - $11.6 million); and Alterra at Lloyd’s - $9.9 million (2010 - $3.1 million). The net favorable development for the six months ended June 30, 2011 from our segments was as follows: insurance - $22.1 million (2010 - $14.9 million); reinsurance - $46.7 million (2010 - $20.8 million); U.S. specialty - $nil (2010 - $0.8 million); and Alterra at Lloyd’s - $9.9 million (2010 - $4.7 million);

•

Excluding the net favorable loss development, the loss ratio was 74.6% and 81.7% for the quarter and six months ended June 30, 2011 compared to 62.9% and 67.1% for the prior year periods. The increase in the loss ratios compared to the prior year periods was principally due to the increase in significant property and catastrophe losses in 2011. This was partially offset by changes in the mix of business towards short tail lines of business. The quarter and six months ended June 30, 2011 also benefitted from $6.2 million and $12.3 million, respectively, of amortization of the fair value adjustment made to the acquired Harbor Point net loss reserves at the date of the Amalgamation; and

•

For the quarter and six months ended June 30, 2011, our results included incurred losses net of reinsurance of $50.5 million and $165.9 million, respectively, related to significant property catastrophe events and significant per-risk losses. The significant property catastrophe event net losses for the quarter ended June 30, 2011 included $44.8 million related to natural disasters in the U.S., which include the series of tornadoes, other severe weather and flooding along the Mississippi River during the second quarter of 2011, with the remainder related to increased loss estimates on property catastrophe events from the first quarter of 2011. The significant property catastrophe event net losses for the six months ended June 30, 2011 included losses related to the Japan earthquake and tsunami, the U.S. tornadoes and floods, the New Zealand earthquake, the Australia floods and Cyclone Yasi. For the quarter and six months ended June 30, 2010, our results included net losses of $20.3 million and $29.9 million, respectively, for property catastrophe events, including losses resulting from the Chile earthquake, European windstorm Xynthia and Australia hailstorms.

Our loss estimates for the property catastrophe losses are based on proprietary modeling analyses, industry assessments of exposure, claims information obtained from our clients and brokers to date, and a review of in-force contracts. Our actual losses from these events may vary materially from the estimates due to the inherent uncertainties in making such determinations resulting from several factors, including the preliminary nature of available information, the potential inaccuracies and inadequacies in the data provided by clients and brokers, the modeling techniques employed and the application of such techniques, the contingent nature of business interruption exposures, the effects of any resultant demand surge on claims activity, and the attendant coverage issues.

Claims and policy benefits. We did not write any new life and annuity reinsurance contracts in the quarter or six months ended June 30, 2011 and 2010, respectively. We do not intend to write any new life and annuity reinsurance contracts in our life and annuity reinsurance segment in the foreseeable future.

Acquisition costs.Our acquisition cost ratio for the quarter and six months ended June 30, 2011 increased by 1.9 and 3.6 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. A decrease in the level of reinsurance purchased across our segments also contributed to the increase in the ratio for 2011. As we retain more business in our segments, we receive 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 six months ended June 30, 2011 increased by $2.7 million and $6.2 million, respectively, compared to the prior year periods, principally due to an increase in senior notes outstanding.

Merger and acquisition expenses.Merger and acquisition expenses for the quarter and six months ended June 30, 2010 comprised advisory, legal and other professional fees, and other expenses related to the Amalgamation, offset by the negative goodwill gain of $95.8 million recorded in the quarter ended June 30, 2010.

General and administrative expenses. General and administrative expenses for the quarter and six months ended June 30, 2011 increased by $19.0 million and $53.7 million, respectively, compared to the prior year periods. The increase was principally related to the addition of general and administrative expenses related to the Amalgamation, which are not included in the prior year periods, and which increased the reinsurance segment and corporate general and administrative expenses. However, the corresponding increase in net premiums earned related to the Amalgamation partially mitigated the effect on our general and administrative expense ratio for the quarter and six months ended June 30, 2011. The increase in corporate general and administrative expenses of $3.9 million and $12.9 million for the quarter and six months ended June 30, 2011, respectively, compared to the prior year periods, was principally due to the prior year periods containing only Max’s expenses for most of the periods, together with the immediate expensing in the quarter and six months ended June 30, 2011 of some stock-based compensation awards for retirement eligible employees.

Segmental Results of Operations – For the quarter and six months ended June 30, 2011 and 2010

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

•

Insurance—This segment offers property and casualty excess of loss capacity from our offices in Bermuda, Dublin and the Unites States 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, Buenos Aires, 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, marine & energy, medical malpractice, professional liability, property, whole account and workers’ compensation.

•

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 and 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, 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, property and surety.

•

Life and annuity reinsurance—This segment operates from our Bermuda office and offers reinsurance products focusing on 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 are managed on an aggregated basis, and investment income and realized and unrealized gains on investments are not allocated to the property and casualty segments. However, because of the longer duration of liabilities on life and annuity reinsurance business, investment returns are important in evaluating the profitability of this segment and, therefore, we allocate investment returns from the consolidated portfolio to this segment. 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 the life segment. The balance of investment returns from this consolidated portfolio is allocated to the corporate function for the purposes of segment reporting.

We monitor the performance of all of our segments other than life and annuity reinsurance on the basis of underwriting income, loss ratio, acquisition ratio, general and administrative expense ratio and combined ratio. We monitor the performance of our life and annuity reinsurance business on the basis of income before taxes for the segment, which includes revenue from net premiums earned, allocated net investment income and realized and unrealized gains on investments, and expenses from claims and policy benefits, acquisition costs and general and administrative expenses.

Effective January 1, 2011, we redefined two of our operating and reporting segments based on changes to the internal reporting structure. Insurance business written by Alterra Insurance USA, which was previously reported within the U.S specialty segment, has been reclassified to the insurance segment. Alterra Insurance USA is a managing general underwriter for Alterra E&S and Alterra America, as well as various third party insurance companies, and is our principal insurance underwriting platform for retail distribution in the United States. Segment disclosures for comparative periods have been revised to reflect this reclassification.

Insurance Segment


	Quarter Ended June 30, 2011			Quarter Ended June 30, 2010			% change			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	141.3		$	139.0			1.7	%	$	212.5		$	208.4			2.0	%
Reinsurance premiums ceded		(56.0	)		(47.4	)		18.1	%		(99.2	)		(87.1	)		13.9	%

Net premiums written	$	85.3		$	91.6			(6.9	)%	$	113.3		$	121.3			(6.6	)%

Net premiums earned	$	53.0		$	59.6			(11.1	)%	$	107.2		$	112.5			(4.7	)%
Net losses and loss expenses		(29.0	)		(38.3	)		(24.3	)%		(63.7	)		(77.7	)		(18.0	)%
Acquisition costs		0.4			(0.8	)		(150.0	)%		0.2			(0.5	)		(140.0	)%
General and administrative expenses		(8.9	)		(8.1	)		9.9	%		(18.7	)		(15.0	)		24.7	%
Other income		0.1			0.1			—	%		1.0			0.1			n/a

Underwriting income	$	15.6		$	12.5			24.8	%	$	26.0		$	19.4			34.0	%

Loss ratio^(a)		54.7	%		64.2	%					59.4	%		69.1	%
Acquisition cost ratio^(b)		(0.7	)%		1.4	%					(0.2	)%		0.4	%
General and administrative^(c) expense ratio		16.7	%		13.6	%					17.4	%		13.3	%
Combined ratio^(d)		70.8	%		79.2	%					76.7	%		82.8	%

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


	Quarter Ended June 30, 2011		% of Premium Written			% Ceded			Quarter Ended June 30, 2010		% of Premium Written			% Ceded
	(Expressed in millions of U.S. Dollars)
Gross Premiums Written by Type of Risk:
Aviation	$	3.8		2.7	%		24.2	%	$	6.6		4.8	%		38.5	%
Excess liability		41.4		29.3	%		47.9	%		38.0		27.3	%		40.1	%
Professional liability		66.0		46.7	%		31.5	%		67.1		48.3	%		29.7	%
Property		30.1		21.3	%		48.1	%		27.3		19.6	%		35.7	%

	$	141.3		100.0	%		39.6	%	$	139.0		100.0	%		34.1	%


	Six Months Ended June 30, 2011		% of Premium Written			% Ceded			Six Months Ended June 30, 2010		% of Premium Written			% Ceded
	(Expressed in millions of U.S. Dollars)
Gross Premiums Written by Type of Risk:
Aviation	$	5.2		2.4	%		35.6	%	$	9.0		4.3	%		40.3	%
Excess liability		68.8		32.4	%		48.6	%		64.6		31.0	%		44.1	%
Professional liability		92.8		43.7	%		42.1	%		94.7		45.5	%		39.7	%
Property		45.7		21.5	%		54.4	%		40.1		19.2	%		43.3	%

	$	212.5		100.0	%		46.7	%	$	208.4		100.0	%		41.8	%

Premiums.Gross premiums written for the quarter and six months ended June 30, 2011 increased by 1.7% and 2.0%, respectively, compared to the prior year periods. Significant factors affecting gross premiums written were:

•

An increase in excess liability and property gross premiums written, principally due to improved pricing conditions in these lines of business; and

•

Continuing competitive pricing conditions in aviation and professional liability have resulted in slight decreases in the level of business written. 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 six months ended June 30, 2011 was 39.6% and 46.7%, respectively, compared to 34.1% and 41.8%, respectively, in the prior year periods. The amount of reinsurance that we purchase can vary significantly by line of business. The increase in the percentage of reinsurance premiums ceded for the quarter and six months ended June 30, 2011 was principally due to changes in the mix of business.

Net losses and loss expenses.The loss ratio for the quarter and six months ended June 30, 2011 decreased by 9.5 and 9.7 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 six months ended June 30, 2011 of $14.7 million and $22.1 million, respectively, compared to $9.4 million and $14.9 million in the prior year periods;

•

Net favorable loss development in the quarter and six months ended June 30, 2011 was principally in the following lines of business and accident years: property (2009), excess liability (2005) and aviation (2009-2010). We recognized net favorable development in the quarter and six months ended June 30, 2010 principally in the following lines of business and accident years: aviation (2008) and property (2008-2009);

•

Excluding the net favorable loss development, the loss ratio was 82.5% and 80.0% for the quarter and six months ended June 30, 2011, respectively, compared to 80.6% and 83.1% for the quarter and six months ended June 30, 2010, respectively. The increase in the loss ratio for the quarter and six month period was principally due to increased property catastrophe losses in the quarter and six months ended June 30, 2011 partially offset by better current year loss experience in our aviation line of business; and

•

For the quarter ended June 30, 2011, our results included an increase of $3.7 million in our estimate of net losses related to the Japan earthquake and tsunami and the flooding in Australia. For the six months ended June 30, 2011, we recorded net losses of $6.5 million related to property catastrophe events in Japan and Australia. The quarter and six months ended June 30, 2010 included net losses of $1.6 million related to the earthquake in Chile.

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 generally fluctuate based on shifts in business mix quarter over quarter.

General and administrative expenses. The increase in general and administrative expenses for the quarter and six months ended June 30, 2011 compared to the prior year periods was principally due to adjustments to incentive-based compensation and expenses associated with expanding our underwriting infrastructure within Alterra Insurance USA.

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, 2010. See the section entitledReinsurance Segment on a pro forma basisfor a presentation of the combined pro forma information.


	Quarter Ended June 30, 2011			Quarter Ended June 30, 2010			% change			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	248.8		$	119.6			108.0	%	$	623.8		$	274.4			127.3	%
Reinsurance premiums ceded		(28.3	)		(13.3	)		112.8	%		(65.6	)		(58.7	)		11.8	%

Net premiums written	$	220.5		$	106.3			107.4	%	$	558.2		$	215.7			158.8	%

Net premiums earned	$	196.9		$	155.7			26.5	%	$	426.6		$	235.5			81.1	%
Net losses and loss expenses		(125.6	)		(82.4	)		52.4	%		(312.5	)		(132.5	)		135.8	%
Acquisition costs		(44.4	)		(32.7	)		35.8	%		(93.5	)		(47.6	)		96.4	%
General and administrative expenses		(22.9	)		(14.8	)		54.7	%		(46.2	)		(23.8	)		94.1	%
Other income		0.6			0.1			500.0	%		0.6			0.1			500.0	%

Underwriting income (loss)		4.6			25.9			(82.2	)%		(25.0	)		31.7			(178.9	)%
Loss ratio(a)		63.8	%		53.0	%					73.2	%		56.3	%
Acquisition cost ratio (b)		22.5	%		21.0	%					21.9	%		20.2	%
General and administrative expense ratio (c)		11.6	%		9.5	%					10.8	%		10.1	%
Combined ratio (d)		98.0	%		83.5	%					106.0	%		86.6	%

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


	Quarter Ended June 30, 2011			% of Premium written			% Ceded			Quarter Ended June 30, 2010			% of Premium written			% Ceded
	(Expressed in millions of U.S Dollars)
Gross Premiums Written by Type of Risk:
Agriculture	$	8.7			3.5	%		—	%	$	(2.5	)		(2.1	)%		(2.5	)%
Auto		55.1			22.2	%		—	%		—			—	%		—	%
Aviation		0.1			—	%		124.4	%		8.6			7.2	%		19.7	%
Credit/surety		1.6			0.6	%		—	%		(1.5	)		(1.3	)%		—	%
General casualty		22.0			8.8	%		—	%		(0.9	)		(0.8	)%		—	%
Marine & energy		(0.6	)		(0.2	)%		1.9	%		5.0			4.2	%		1.3	%
Medical malpractice		11.2			4.5	%		0.5	%		7.8			6.5	%		(0.2	)%
Other		0.4			0.2	%		—	%		0.1			0.1	%		—	%
Professional liability		39.5			15.9	%		—	%		32.0			26.8	%		—	%
Property		106.2			42.7	%		26.3	%		61.1			51.1	%		17.5	%
Whole account		0.3			0.1	%		—	%		2.4			2.0	%		—	%
Workers’ compensation		4.3			1.7	%		4.6	%		7.5			6.3	%		6.2	%

	$	248.8			100.0	%		11.4	%	$	119.6			100.0	%		11.2	%


	Six Months Ended June 30, 2011		% of Premium written			% Ceded			Six Months Ended June 30, 2010			% of Premium written			% Ceded
	(Expressed in millions of U.S Dollars)
Gross Premiums Written by Type of Risk:
Agriculture	$	29.5		4.7	%		0.3	%	$	33.3			12.1	%		2.1	%
Auto		70.3		11.3	%		—	%		—			—	%		—	%
Aviation		1.0		0.2	%		26.0	%		13.4			4.9	%		16.3	%
Credit/surety		26.0		4.2	%		—	%		(1.5	)		(0.5	)%		—	%
General casualty		38.3		6.1	%		—	%		12.2			4.4	%		3.0	%
Marine & energy		16.5		2.6	%		—	%		9.1			3.3	%		2.8	%
Medical malpractice		28.8		4.6	%		1.3	%		35.0			12.8	%		5.2	%
Other		2.2		0.4	%		0.4	%		1.1			0.4	%		72.3	%
Professional liability		99.2		15.9	%		—	%		43.9			16.0	%		—	%
Property		256.0		41.0	%		25.2	%		107.0			39.0	%		50.6	%
Whole account		35.3		5.7	%		0.1	%		4.9			1.8	%		—	%
Workers’ compensation		20.7		3.3	%		1.0	%		16.0			5.8	%		(9.5	)%

	$	623.8		100.0	%		10.5	%	$	274.4			100.0	%		21.4	%

Premiums.Gross premiums written for the quarter and six months ended June 30, 2011 increased by 108.0% and 127.3%, respectively, compared to the prior year periods. Due to the material impact on gross written premium volume between the 2010 and 2011 periods resulting from the Amalgamation, a discussion of the variances in gross written premium is not meaningful. A comparative discussion of changes in gross premiums written, which we believe is more meaningful, is provided in the section entitledReinsurance Segment on a pro forma basis.

Reinsurance premiums ceded increased by 112.8% and 11.8% for the quarter and six months ended June 30, 2011, respectively, compared to the prior year periods. These increases were principally due to an increase in property quota share reinsurance ceded. The ratio of reinsurance premiums ceded to gross premiums written for the quarter and six months ended June 30, 2011 was 11.4% and 10.5%, respectively, compared to 11.2% and 21.4%, respectively, in the prior year periods. The decrease in the percentage of reinsurance premiums ceded is principally due to the Amalgamation and a planned reduction in the amount of business ceded by our reinsurance segment.

Net premiums earned is a function of the earning of gross premiums written and reinsurance premiums ceded over the last several quarters and, therefore, changes in 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 six months ended June 30, 2011 compared to the prior year periods was principally due to the incremental earnings of the Harbor Point portfolio of contracts, which are included within the entire 2011 periods but are only included for a portion of the comparable 2010 periods.

Net losses and loss expenses.The loss ratio increased by 10.8 and 16.9 percentage points for the quarter and six months ended June 30, 2011, 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 six months ended June 30, 2011 was $23.9 million and $46.7 million, respectively, compared to $11.6 million and $20.8 million in the prior year periods;

•

Net favorable development in the quarter ended June 30, 2011 was principally on the following lines of business and accident years: net favorable development on property (2007-2010), whole account (2006-2007) and agriculture (2009), partially offset by net adverse development on medical malpractice (2008-2010). Net favorable development in the six months ended June 30, 2011 was principally on the following lines of business and accident years: net favorable development on property (2007-2010), whole account (2006-2007), agriculture (2009) and aviation (2006-2009), partially offset by net adverse development on general casualty (2006-2007) and medical malpractice (2008-2010). Net favorable development in the prior year periods was principally on our property, whole account and workers’ compensation lines of business, partially offset by net adverse development on our aviation line of business;

•

Excluding net favorable loss development, the loss ratio was 75.9% and 84.2% for the quarter and six months ended June 30, 2011, respectively, compared to 60.4% and 65.1% for the prior year periods. The increase in the loss ratio for the quarter and six months ended June 30, 2011 compared to the prior year period was principally due to the increase in property catastrophe and significant per-risk losses. This was partially offset by the shift in mix of business towards more short-tail lines of business since the Amalgamation, and the benefit of $6.2 million and $12.3 million for the quarter and six months ended June 30, 2011, respectively, of amortization of the fair value adjustment made to the acquired Harbor Point net loss reserves at the date of the Amalgamation;

•

The quarter and six months ended June 30, 2011 included $33.3 million and $118.0 million, respectively, in significant property catastrophe-related and significant per-risk losses. For the quarter ended June 30, 2011, $33.1 million of these losses resulted from the natural disasters in the U.S., including the series of tornadoes and other severe weather and flooding along the Mississippi River that occurred during the second quarter. For the six months ended June 30, 2011, property catastrophe losses included losses for the Japan earthquake and tsunami, Australia floods, Cyclone Yasi, New Zealand earthquake and U.S. tornadoes and flooding. The quarter and six months ended June 30, 2010 included $10.4 million and $14.9 million, respectively, in significant property catastrophe-related and significant per-risk losses, principally as a result of the Deepwater Horizon oil spill, Europe windstorm Xynthia and Australia hail storms.

Acquisition costs.The ratio of acquisition costs to net premiums earned for the quarter and six months ended June 30, 2011 increased 1.5 and 1.7 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 an increase in the proportion of net premiums earned from our casualty lines of business, which tend to have higher acquisition cost ratios than our property line.

General and administrative expenses.General and administrative expenses for the quarter and six months ended June 30, 2011 increased $8.1 million and $22.4 million, respectively, compared to the prior year periods. The increases were principally due to the inclusion of the former Harbor Point companies’ expenses for the period from May 12, 2010. In addition, the quarter ended June 30, 2011 included a full quarter of stock-based compensation expense, whereas the prior year period only included half a quarter of stock-based compensation expense due to the Amalgamation. The increase in general and administrative expenses for the six months ended June 30, 2011 did not result in a significant change to our general and administrative expense ratio due to a similar percentage 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 six months ended June 30, 2010 for informational purposes only, as if the Amalgamation had occurred on January 1, 2010. 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 June 30, 2011			Quarter Ended June 30, 2010			% change			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	248.8		$	197.1			26.2	%	$	623.8		$	657.8			(5.2	)%
Net premiums earned		196.9			226.3			(13.0	)%		426.6			441.3			(3.3	)%
Net losses and loss expenses		(125.6	)		(136.2	)		(7.8	)%		(312.5	)		(265.9	)		17.5	%
Acquisition costs		(44.4	)		(47.2	)		(5.9	)%		(93.5	)		(89.9	)		4.0	%
General and administrative expenses		(22.9	)		(16.5	)		38.8	%		(46.2	)		(33.4	)		38.3	%
Loss ratio(a)		63.8	%		60.2	%					73.2	%		60.2	%
Acquisition cost ratio (b)		22.5	%		20.8	%					21.9	%		20.4	%
General and administrative expense ratio (c)		11.6	%		7.3	%					10.8	%		7.6	%
Combined ratio (d)		98.0	%		88.3	%					106.0	%		88.2	%

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

Gross Premiums Written by Type of Risk:


	Quarter Ended June 30, 2011			% of Premium Written			Quarter Ended June 30, 2010			% of Premium Written			Six Months Ended June 30, 2011		% of Premium Written			Six Months Ended June 30, 2010		% of Premium Written
	(Expressed in millions of U.S. Dollars)												(Expressed in millions of U.S. Dollars)
Agriculture	$	8.7			3.5	%	$	(4.6	)		(2.3	)%	$	29.5		4.7	%	$	51.3		7.8	%
Auto		55.1			22.2	%		14.4			7.3	%		70.3		11.3	%		32.4		4.9	%
Aviation		0.1			—	%		8.6			4.4	%		1.0		0.2	%		14.8		2.3	%
Credit/surety		1.6			0.6	%		1.5			0.8	%		26.0		4.2	%		25.1		3.8	%
General casualty		22.0			8.8	%		6.7			3.4	%		38.3		6.1	%		49.1		7.5	%
Marine & energy		(0.6	)		(0.2	)%		5.2			2.6	%		16.5		2.6	%		26.4		4.0	%
Medical malpractice		11.2			4.5	%		6.4			3.2	%		28.8		4.6	%		40.2		6.1	%
Other		0.4			0.2	%		0.3			0.1	%		2.2		0.4	%		6.0		0.9	%
Professional liability		39.5			15.9	%		51.6			26.2	%		99.2		15.9	%		107.4		16.4	%
Property		106.2			42.7	%		96.7			49.0	%		256.0		41.0	%		235.7		35.8	%
Whole account		0.3			0.1	%		3.1			1.6	%		35.3		5.7	%		50.2		7.6	%
Workers’ compensation		4.3			1.7	%		7.2			3.7	%		20.7		3.3	%		19.2		2.9	%

	$	248.8			100.0	%	$	197.1			100.0	%	$	623.8		100.0	%	$	657.8		100.0	%

Premiums.Gross premiums written for the quarter and six months ended June 30, 2011 would have been 26.2% higher and 5.2% lower, respectively, than the prior year periods. Significant factors affecting gross premiums written were:

For the quarter ended June 30, 2011:

•

Gross premiums written in our agriculture line of business would have increased principally due to a shift in the timing of a contract renewal from the first quarter of 2010 to the second quarter of 2011 that accounted for $15.0 million;

•

Gross premiums written in our auto line of business would have increased principally due to a shift in the timing of a contract renewal from the first quarter of 2010 to the second quarter of 2011 that accounted for $25.0 million. In addition, there would have been a significant increase in one quota share contract that renewed in the quarter due to price and volume increases at the ceding company as well as an increased participation on the contract;

•

Gross premiums written in our general casualty line of business would have increased principally due to a shift in the timing of a contract renewal from the first quarter of 2010 to the second quarter of 2011 that accounted for $11.2 million; and

•

Gross premiums written would have decreased in the professional liability line of business principally due to contracts not renewed or reductions in our participations due to a more competitive pricing environment.

For the six months ended June 30, 2011:

•

Gross premiums written in our agriculture line of business would have decreased principally due the non-renewal of a $29.9 million contract resulting from the client retaining more business;

•

Gross premiums written in our auto line of business would have increased principally due to an increase in quota share contracts that renewed in the period due to price and volume increases at the ceding companies as well as an increased participation on one contract. In addition, the six months ended June 30, 2011 would have included an increase in premium estimates of $9.5 million on 2010 quota share contracts also primarily due to price and volume increases at the ceding companies;

•

Gross premiums written in our aviation, general casualty, marine & energy and professional liability lines of business would have decreased principally due to contracts not renewed or reductions in our participation due to a more competitive pricing environment;

•

Gross premiums written in our medical malpractice line of business would have decreased principally due to the non-renewal of one contract that accounted for $15.0 million. This would have been partially offset by an increase in premium estimates of $8.2 million in the six months ended June 30, 2011 compared to a decrease in premium estimates of $5.5 million in the six months ended June 30, 2010;

•

Gross premiums written in our property line of business would have increased principally due to new business and increases in participations due to improved pricing and market conditions. In addition, the six months ended June 30, 2011 would have included gross premiums written on property of $13.8 million compared to $1.4 million for the six months ended June 30, 2010 related to our Latin America operations; and

•

Gross premiums written in our whole account line of business would have decreased due to reductions in our participation on two quota share contracts.

Net losses and loss expenses.The loss ratio for the quarter and six months ended June 30, 2011 would have increased by 3.6 and 13.0 percentage points, respectively, compared to the prior year periods. Significant items impacting the loss ratio would have included:

•

Net favorable loss development of prior year reserves in the quarter and six months ended June 30, 2011 would have been $23.9 million and $46.7 million, respectively, compared to $17.1 million and $33.9 million in the prior year periods;

•

The net favorable development in the quarter and six months ended June 30, 2011 would have been principally due to favorable development on our property, whole account, and agriculture lines of business, partially offset by adverse development on our medical malpractice line of business. The favorable development in the quarter and six months ended June 30, 2010 would have been principally on our property, whole account and workers’ compensation lines of business, partially offset by adverse development on our aviation and marine & energy lines of business;

•

Excluding the net favorable loss development, the loss ratio would have been 75.9% and 84.2% for the quarter and six months ended June 30, 2011, respectively, compared to 67.7% and 67.9% for the prior year periods. The increase in the loss ratio for the 2011 quarter would have been principally due to a shift in the mix of business. The increase in the loss ratio for the six months ended June 30, 2011 would have been principally due to the significant increase in property catastrophe events and significant per-risk losses, together with a shift in the mix of business; and

•

The quarter and six months ended June 30, 2011 would have included $33.3 million and $118.0 million, respectively, in significant property catastrophe-related and significant per-risk losses, principally as a result of the Japan earthquake and tsunami, Australia floods, Cyclone Yasi, New Zealand earthquake and U.S. tornadoes and flooding. The quarter and six months ended June 30, 2010 would have included $39.6 million and $82.6 million, respectively, in significant property catastrophe-related and significant per-risk losses, principally as a result of the Deepwater Horizon oil spill, Chile earthquake, Europe windstorm Xynthia and Australia hail storms.

Acquisition costs.The ratio of acquisition costs to net premiums earned would have increased 1.7 and 1.5 percentage points for the quarter and six months ended June 30, 2011, 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 an increase in the proportion of net premiums earned from our casualty lines of business, which tend to have higher acquisition cost ratios than our property line.

General and administrative expenses.General and administrative expenses for the quarter and six months ended June 30, 2011 would have increased compared with the prior year periods principally due to the transfer of some corporate function employees and expenses to the reinsurance segment as part of the Amalgamation integration and an increase in the number of retirement eligible employees whose stock-based compensation awards are fully expensed when granted.

U.S. Specialty Segment


	Quarter Ended June 30, 2011			Quarter Ended June 30, 2010			% change			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	99.5		$	90.8			9.6	%	$	169.8		$	164.7			3.1	%
Reinsurance premiums ceded		(27.4	)		(5.7	)		380.7	%		(61.0	)		(53.8	)		13.4	%

Net premiums written	$	72.1		$	85.1			(15.3	)%	$	108.8		$	110.9			(1.9	)%

Net premiums earned	$	51.1		$	44.0			16.1	%	$	100.4		$	74.8			34.2	%
Net losses and loss expenses		(32.7	)		(26.7	)		22.5	%		(64.1	)		(45.9	)		39.7	%
Acquisition costs		(9.7	)		(9.1	)		6.6	%		(17.7	)		(12.8	)		38.3	%
General and administrative expenses		(9.3	)		(6.3	)		47.6	%		(18.7	)		(13.8	)		35.5	%

Underwriting (loss) income	$	(0.6	)	$	1.9			(131.6	)%	$	(0.1	)	$	2.3			(104.3	)%
Loss ratio (a)		64.1	%		60.6	%					63.8	%		61.3	%
Acquisition cost ratio (b)		18.9	%		20.7	%					17.6	%		17.1	%
General and administrative expense ratio (c)		18.2	%		14.4	%					18.6	%		18.6	%
Combined ratio (d)		101.1	%		95.8	%					100.1	%		97.0	%

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

Gross Premiums Written by Type of Risk:


	Quarter Ended June 30, 2011		% of Premium Written			% Ceded			Quarter Ended June 30, 2010		% of Premium Written			% Ceded
	(Expressed in millions of U.S. Dollars)
General Liability	$	18.4		18.5	%		23.9	%	$	22.8		25.1	%		22.6	%
Marine		25.4		25.5	%		40.6	%		18.0		19.8	%		55.1	%
Professional Liability		4.9		4.9	%		13.6	%		1.8		2.0	%		13.0	%
Property		50.8		51.1	%		23.6	%		48.2		53.1	%		(20.3	)%

	$	99.5		100.0	%		27.5	%	$	90.8		100.0	%		6.2	%

Gross Premiums Written by Type of Risk:


	Six Months Ended June 30, 2011		% of Premium Written			% Ceded			Six Months Ended June 30, 2010		% of Premium Written			% Ceded
	(Expressed in millions of U.S. Dollars)
General Liability	$	36.3		21.4	%		23.7	%	$	42.8		26.0	%		25.6	%
Marine		42.5		25.0	%		39.3	%		34.1		20.7	%		57.6	%
Professional Liability		9.2		5.4	%		14.1	%		4.0		2.4	%		15.4	%
Property		81.8		48.2	%		42.0	%		83.8		50.9	%		27.7	%

	$	169.8		100.0	%		35.9	%	$	164.7		100.0	%		32.7	%

Premiums.Gross premiums written for the quarter and six months ended June 30, 2011 increased 9.6% and 3.1%, respectively, compared to the prior year periods. The increase in gross premiums written was principally due to organic growth in business written in our marine and professional liability lines partially offset by a strategic decline in general liability business sourced from our contracted general agent distribution channel.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter and six months ended June 30, 2011 was 27.5% and 35.9%, respectively, compared to 6.2% and 32.7% in the prior year periods. During the quarter ended June 30, 2010, premiums ceded was reduced by $20.6 million due to our cancellation of a property quota share treaty and the resulting return of prepaid premiums as of April 1, 2010. Excluding this cancellation, the ratio was 28.9% and 45.2% for the quarter and six months ended June 30, 2010, respectively. The resulting decrease is consistent with our intention to gradually retain more risk in the lines of business that we expect will have the greatest long term potential returns. The decrease was partially offset for the six months ended June 30, 2011 by an increase in the cost of property catastrophe reinsurance purchased in the quarter ended March 31, 2011.

Net losses and loss expenses.The loss ratio for the quarter and six months ended June 30, 2011 increased 3.5 and 2.5 percentage points, respectively, compared to the prior year periods. Significant items impacting the loss ratio were:

•

There was no development of prior year loss reserves in the quarter and six months ended June 30, 2011 compared to net favorable development of $nil and $0.8 million in the quarter and six months ended June 30, 2010. The net favorable development in the quarter and six months ended June 30, 2010 was principally on our property line of business;

•

Excluding the net favorable loss development, the loss ratio was 64.1% and 63.8% for the quarter and six months ended June 30, 2011, respectively, compared to 60.6% and 62.3% for the prior year periods. The increase was principally due to changes in the mix of business, particularly an increase in the marine and professional liability lines of business, which have a higher average loss ratio than property lines, which declined as a percentage of gross premiums written; and

•

Our results for the quarter and six months ended June 30, 2011 include net losses of $4.5 million and $4.5 million, respectively, for property catastrophe losses and significant per risk losses compared to $8.6 million and $9.0 million for the quarter and six months ended June 30, 2010, respectively. These large loss events included losses for natural disasters in the U.S., including the series of tornadoes, other severe weather and flooding along the Mississippi River for the quarter and six months ended June 30, 2011, and Tennessee flooding and Northeastern U.S. storms for the quarter and six months ended June 30, 2010.

Acquisition expenses.The acquisition cost ratio for the quarter ended June 30, 2011 was lower compared to the prior year period due to a temporary increase in acquisition costs in the prior year period resulting from the cancellation of a ceded property quota share treaty and the reversal of estimated profit sharing commission. Acquisition costs increased for the six months ended June 30, 2011 compared to the prior year period as we have reduced the amount of reinsurance purchased. As we retain more business, we receive less ceding commission income to offset our brokerage and commission costs, which increases our acquisition cost ratio.

General and administrative expenses.General and administrative expenses for the quarter and six months ended June 30, 2011 increased $3.0 million and $4.9 million, respectively, compared to the prior year periods. The increase in the general and administrative expense ratio for the quarter ended June 30, 2011 compared to the prior year period was principally due to a combination of additional expenses in the quarter ended June 30, 2011, and a reduction of expenses in the prior year period. The quarter ended June 30, 2011 included additional costs associated with the negotiation of the sale of renewal rights to our contract binding distribution channel, as well as the establishment of our new excess casualty platform. In addition, the quarter ended June 30, 2011 included a full quarter of stock-based compensation expense, whereas the prior year period only included half a quarter of stock-based compensation expense due to the Amalgamation. For the six months ended June 30, 2011, the general and administrative expense ratio is consistent with the prior year period.

Alterra at Lloyd’s Segment

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


	Quarter Ended June 30, 2011			Quarter Ended June 30, 2010			% change			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010			% change
	(Expressed in millions of U.S. Dollars)
Gross premiums written	$	73.5		$	48.8			50.6	%	$	184.3		$	120.9			52.4	%
Reinsurance premiums ceded		(24.9	)		(13.2	)		88.6	%		(48.1	)		(33.2	)		44.9	%

Net premiums written	$	48.6		$	35.6			36.5	%	$	136.2		$	87.7			55.3	%

Net premiums earned	$	47.2		$	33.2			42.2	%	$	93.4		$	63.2			47.8	%
Net losses and loss expenses		(23.8	)		(12.4	)		91.9	%		(75.3	)		(28.7	)		162.4	%
Acquisition costs		(10.9	)		(6.1	)		78.7	%		(24.0	)		(11.8	)		103.4	%
General and administrative expenses		(9.5	)		(5.8	)		63.8	%		(19.3	)		(8.5	)		127.1	%
Other income		0.1			0.1			—	%		0.4			0.3			33.3	%

Underwriting income (loss)	$	3.1		$	9.0			(65.6	)%	$	(24.8	)	$	14.5			(271.0	)%
Loss ratio (a)		50.5	%		37.4	%					80.6	%		45.4	%
Acquisition cost ratio (b)		23.1	%		18.3	%					25.7	%		18.7	%
General and administrative expense ratio (c)		20.2	%		17.6	%					20.6	%		13.5	%
Combined ratio (d)		93.8	%		73.2	%					126.9	%		77.6	%

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

Gross Premiums Written by Type of Risk:


	Quarter Ended June 30, 2011		% of Premium Written			% Ceded			Quarter Ended June 30, 2010		% of Premium Written			% Ceded
	(Expressed in millions of U.S. Dollars)
Accident & health	$	8.4		11.4	%		2.7	%	$	6.0		12.3	%		13.8	%
Aviation		1.8		2.4	%		118.7	%		2.6		5.3	%		63.7	%
Financial institutions		6.4		8.7	%		10.0	%		4.8		9.9	%		(25.9	)%
International casualty		8.5		11.6	%		0.5	%		6.2		12.7	%		25.7	%
Professional liability		10.5		14.3	%		6.4	%		4.2		8.6	%		3.7	%
Property		37.9		51.6	%		55.8	%		25.0		51.2	%		41.1	%

	$	73.5		100.0	%		33.9	%	$	48.8		100.0	%		27.1	%

Gross Premiums Written by Type of Risk:


	Six Months Ended		% of Premium Written						Six Months Ended		% of Premium Written
	June 30, 2011		% of Premium Written			% Ceded			June 30, 2010		% of Premium Written			% Ceded
	(Expressed in millions of U.S. Dollars)
Accident & health	$	21.9		11.9	%		20.3	%	$	19.3		16.0	%		24.5	%
Aviation		3.6		2.0	%		92.2	%		7.0		5.8	%		47.6	%
Financial institutions		15.5		8.4	%		32.6	%		10.9		9.0	%		41.1	%
International casualty		42.3		22.9	%		4.7	%		19.9		16.4	%		8.0	%
Professional liability		18.4		10.0	%		8.6	%		11.1		9.2	%		18.6	%
Property		82.6		44.8	%		38.4	%		52.7		43.6	%		32.3	%

	$	184.3		100.0	%		26.1	%	$	120.9		100.0	%		27.4	%

Premiums.Gross premiums written for the quarter and six months ended June 30, 2011 increased 50.6% and 52.4%, respectively, compared to the prior year periods. The increase in gross premiums written was primarily due to:

•

An increase of $2.3 million and $22.4 million in our international casualty line of business for the quarter and six months ended June 30, 2011, respectively. We began underwriting this business in the quarter ended March 31, 2010 and the increase reflects the expansion of our client base as well as favorable market conditions;

•

An increase of $6.3 million and $7.3 million in our professional liability line of business for the quarter and six months ended June 30, 2011, respectively, principally due to better than expected renewals and new business added; and

•

An increase of $12.9 million and $29.9 million in our property line of business for the quarter and six months ended June 30, 2011, respectively, principally due to improving market conditions, as well as $3.2 million and $10.1 million, respectively, of gross reinstatement premiums related to property catastrophe events.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter and six months ended June 30, 2011 was 33.9% and 26.1%, respectively, compared to 27.1% and 27.4% for the prior year periods. The increase in the ratio for the quarter ended June 30, 2011 was principally due to the purchase of a property reinsurance contract in the quarter. We retain a larger proportion of premiums on our international casualty line of business than on the other lines and as a result the increase in gross premiums written on this line reduced the overall ratio of reinsurance premiums ceded to gross premiums written for the six months ended June 30, 2011.

Net losses and loss expense.The loss ratio for the quarter and six months ended June 30, 2011 increased by 13.1 and 35.2 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 six months ended June 30, 2011 was $9.9 million and $9.9 million, respectively, compared to net favorable development of $3.1 million and $4.7 million, respectively, in the prior year periods. The net favorable development in the prior year periods was principally on our professional liability and financial institutions lines of business;

•

Excluding the net favorable prior year loss development, the loss ratio was 71.5% and 91.2% for the quarter and six months ended June 30, 2011, respectively, compared to 46.6% and 52.8% for the prior year periods. The increase in the loss ratio was principally due to catastrophe-related and significant per-risk losses and also changes in the mix of business, which now includes a greater proportion of international casualty business; and

•

Net losses and loss expense for the quarter and six months ended June 30, 2011 include $9.1 million and $37.0 million, respectively, in catastrophe-related and significant per-risk losses. Property catastrophe losses for the quarter ended June 30, 2011 were principally related to natural disasters in the U.S., including the series of tornadoes, other severe weather and flooding along the Mississippi River during the second quarter of 2011, with some minor increases in loss estimates for events from the first quarter of 2011. Property catastrophe losses for the six months ended June 30, 2011 included net losses from the Japan earthquake and

tsunami, Australia floods, Cyclone Yasi, New Zealand earthquake and the U.S. tornadoes and flooding. Net losses and loss expense for the quarter and six months ended June 30, 2010 include $nil and $4.4 million, respectively, in significant property catastrophe-related and significant per risk losses, which include net losses from the Deepwater Horizon oil spill, Chile earthquake, Europe windstorm Xynthia and Australia hail storms.

Acquisition expenses.The acquisition cost ratio increased 4.8 and 7.0 percentage points for the quarter and six months ended June 30, 2011, respectively, compared to the prior year periods. During the first quarter of 2011, we re-estimated certain commission expenses based on updated information, which contributed approximately 2.6 percentage points to the increase for the six months ended June 30, 2011. This is not expected to have an ongoing effect on our acquisition cost ratio. The remaining increase is attributable to changes in the mix of business written.

General and administrative expenses.General and administrative expenses for the quarter and six months ended June 30, 2011 increased $3.7 million and $10.8 million, respectively, compared to prior year periods. The prior year periods included profit commission income earned from the Syndicates that are not wholly owned by Alterra, which partially offset the cost of managing those Syndicates. Further, profit commission income in the quarter ended March 31, 2010 benefitted from a non-recurring gain of $4.9 million resulting from the closing of a year of account on one of the third-party Syndicates. Alterra at Lloyd’s no longer manages the Syndicates that are not wholly owned by Alterra and, therefore, there is no comparable gain in the quarter and six months ended June 30, 2011. Costs associated with expanding our underwriting teams, growth in Brazil, and regulatory changes in Europe contributed to the absolute increase in general and administrative expenses; however, as a result of the growth in our net premiums earned, the general and administrative expense ratios of 20.2% and 20.7% for the quarter and six months ended June 30, 2011, respectively, were consistent with the 21.2% ratio for the year ended December 31, 2010.

Life and Annuity Reinsurance Segment


	Quarter Ended June 30, 2011			Quarter Ended June 30, 2010			% change			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010			% change
	(Expressed in millions of U.S. Dollars)
Net premiums earned	$	0.8		$	0.8			—	%	$	1.2		$	1.5			(20.0	)%
Net investment income		12.5			12.4			0.8	%		24.9			25.5			(2.4	)%
Net realized and unrealized
(loss) gains on investments		(1.3	)		(1.9	)		(31.6	)%		1.5			4.1			(63.4	)%
Claims and policy benefits		(15.6	)		(13.9	)		12.2	%		(30.3	)		(31.6	)		(4.1	)%
Acquisition costs		(0.1	)		(0.1	)		—	%		(0.3	)		(0.3	)		—	%
General and administrative expenses		(0.3	)		(0.7	)		(57.1	)%		(0.4	)		(1.3	)		(69.2	)%

(Loss) income	$	(3.9	)	$	(3.4	)		14.7	%	$	(3.4	)	$	(2.1	)		61.9	%

The nature of life and annuity reinsurance transactions that we historically had 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 claims and policy benefits can be volatile, and 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. Losses for the quarter and six month periods ended June 30, 2011 and 2010, respectively, were principally due to low rates of return on our hedge fund investments.

There were no new life and annuity contracts written during the quarter or six months ended June 30, 2011 or 2010. 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. As a result, we have determined not 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 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. 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 our other segments.

Investing Activities

The results of investing activities discussed below include net investment income, net realized and unrealized gains (losses) on investments and net impairment losses recognized in earnings for the consolidated group, including amounts which are allocated to the life and annuity segment.


	Quarter Ended June 30, 2011			Quarter Ended June 30, 2010			% change			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010			% change
	(Expressed in millions of U.S. Dollars)
Net investment income	$	59.7		$	53.3			12.0	%	$	117.4		$	101.7			15.4	%
Net realized and unrealized losses on investments	$	(5.8	)	$	(14.8	)		(60.8	)%	$	(24.6	)	$	(8.4	)		192.9	%
Net impairment losses recognized in earnings	$	(0.4	)	$	(0.3	)		33.3	%	$	(1.4	)	$	(0.7	)		100.0	%
Average annualized yield on cash and fixed maturities		3.11	%		3.35	%					3.12	%		3.58	%

Net investment income. The increase in net investment income for the quarter and six months ended June 30, 2011 was attributable principally to the increase in cash and invested assets as a result of the Amalgamation, with some additional benefit from shifting cash into higher yielding fixed maturity securities. Our ratio of average cash to average invested assets decreased from 12.8% and 13.1% for the quarter and six months ended June 30, 2010, respectively, to 12.5% and 12.5% for the quarter and six months ended June 30, 2011, 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 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 anticipated 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 June 30, 2011			Quarter Ended June 30, 2010			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010
	(Expressed in millions of U.S. Dollars)
(Decrease) increase in fair value of hedge funds	$	(1.9	)	$	(3.3	)	$	1.3		$	4.0
Decrease in fair value of derivatives		(3.8	)		(12.4	)		(3.2	)		(13.9	)
Decrease in fair value of catastrophe bonds		(0.3	)		(0.3	)		(25.6	)		(0.3	)
(Decrease) increase in fair value of structured deposit		(1.3	)		—			0.1			—
Gain (loss) from equity method investments		—			0.1			(0.2	)		—

Decrease in fair value of other investments		(7.3	)		(15.9	)		(27.6	)		(10.2	)
Net realized (losses) gains on available for sale securities		0.1			2.4			3.4			3.3
Net realized and unrealized gains (losses) on trading securities		1.4			(1.3	)		(0.4	)		(1.5	)

Net realized and unrealized losses on investments	$	(5.8	)	$	(14.8	)	$	(24.6	)	$	(8.4	)

Change in fair value of other investments.Our investment in hedge funds comprises the majority of other investments. The decrease in fair value of the hedge fund portfolio was $1.9 million, or a negative 0.45% rate of return, for the quarter ended June 30, 2011, compared to a decrease of $3.3 million, or a negative 0.69% rate of return, for the quarter ended June 30, 2010. The increase in fair value of the hedge fund portfolio was $1.3 million, or a 0.53% rate of return, for the six months ended June 30, 2011, compared to an increase of $4.0 million, or a 1.29% rate of return, for the six months ended June 30, 2010. The rate of return of 0.53% for the six months ended June 30, 2011 compares to the HFRI Fund of Funds Composite Index returning negative 0.31% over the same period, which we believe is our most relevant benchmark.

Six of the nine hedge fund strategies we employed experienced negative returns during the quarter ended June 30, 2011. The largest contributors by investment strategy to the decrease in fair value for the quarter ended June 30, 2011 were the diversified arbitrage and global macro strategies. As of June 30, 2011, 7.1% and 15.5% of our hedge fund portfolio was allocated to the diversified arbitrage and global macro strategies, respectively. The largest increase in fair value offsetting the overall decrease for the quarter was contributed by the distressed securities strategy. As of June 30, 2011, 10.9% of our hedge fund portfolio was allocated to this strategy.

Four of the nine hedge fund strategies we employed experienced positive returns during the six months ended June 30, 2011. The largest contributors by investment strategy to the increase in fair value for the six months ended June 30, 2011 were the long/short equity and the fund of fund strategies. As of June 30, 2011, 39.1% and 13.9% 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 six month period was contributed by the event driven arbitrage strategy. As of June 30, 2011, 8.4% of our hedge fund portfolio was allocated to this strategy.

The allocation of invested assets to our hedge fund portfolio as of June 30, 2011 was 4.0%, 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 decreased by $3.8 million and $3.2 million for the quarter and six months ended June 30, 2011, respectively, compared to a decrease in fair value of $12.4 million and $13.9 million for the quarter and six months ended June 30, 2010, respectively. We hold various derivative instruments, including convertible bond equity call options, interest rate linked derivative instruments and foreign exchange forward contracts.

The decrease in fair value of the catastrophe bonds was $0.3 million and $25.6 million during the quarter and six months ended June 30, 2011, respectively, which is included in net realized and unrealized (losses) gains on investments in the consolidated statement of operations and comprehensive income. During the second quarter of 2011, we disposed of all catastrophe bond holdings. The decrease in fair value for the six months ended June 30, 2011 was principally due to a $25.0 million loss on one catastrophe bond with exposure to the earthquake and tsunami in Japan.

As of June 30, 2011, we held 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 fair value of the structured deposit decreased by $1.3 million and increased by $0.1 million during the quarter and six months ended June 30, 2011, respectively, which is included in net realized and unrealized (losses) gains on investments in the consolidated statement of operations and comprehensive income.

Net realized and unrealized gains and losses on available for sale and trading securities. 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. Net realized and unrealized gains on our fixed maturities portfolios for the quarter and six months ended June 30, 2011 were $1.5 million and $3.0 million, respectively, and were $1.1 million and $1.8 million for the quarter and six months ended June 30, 2010, 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 six months ended June 30, 2011 of $0.4 million and $1.4 million, respectively, and $0.3 million and $0.7 million for the quarter and six months ended June 30, 2010, 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 $ 7,952.7 million as of June 30, 2011 compared to $ 7,861.4 million as of December 31, 2010, an increase of 1.2%. The modest increase in cash and invested assets resulted principally from the combination of the timing of the settlement of premiums and losses, the increase in our held to maturity portfolio resulting from foreign currency gains on euro-denominated securities, partially offset by payments for share repurchases and dividends.

We hold an available for sale portfolio, a trading portfolio and a held to maturity portfolio of fixed maturities securities. 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 these 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 fixed maturity portfolio comprises high quality, liquid securities. As of June 30, 2011, our fixed maturities investments had a dollar-weighted average credit rating of Aa2/AA. Under our fixed maturities investment guidelines, a minimum weighted average credit rating of Aa2/AA, or its equivalent, must be maintained for our fixed maturities investment portfolio as a whole. Our fixed maturities investment guidelines also provide that we cannot leverage our fixed maturities investments. Further details of the credit ratings on our fixed maturities investments is included in Note 5 of our unaudited consolidated interim financial statements included herein.

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 estimating the fair value of these securities 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 as of June 30, 2011.

We performed a review of securities in an unrealized loss position as of June 30, 2011 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 $0.4 million during the quarter ended June 30, 2011.

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, with each utilizing 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 “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. As a result, 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 in which we invest 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 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 invest 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 June 30, 2011, we estimate that over 73.0% 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 June 30, 2011 outstanding redemptions receivable of $21.1 million, none of which are gated, $19.6 million was received in cash prior to August 1, 2011. The fair value of our holdings in funds with gates imposed as of June 30, 2011 was $26.9 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 June 30, 2011, the fair value of our hedge funds held in side-pockets was $41.4 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 June 30, 2011 on which such redemptions might be received. This estimate is based on available information from the funds and is subject to significant change.


	As of June 30, 2011
	Fair Value		% of Hedge fund portfolio
	(in thousands of U.S. Dollars)
Liquidity:
Within 90 days	$	144,787		45.6	%
Between 91 to 180 days		48,023		15.1	%
Between 181 to 365 days		24,395		7.7	%
Greater than 365 days		100,581		31.6	%

Total hedge funds	$	317,786		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.

Losses and benefits recoverable from reinsurers. Losses and benefits recoverable from reinsurers totaled $1,058.7 million as of June 30, 2011 compared to $956.1 million as of December 31, 2010, an increase of 10.7%. This increase resulted principally from recoveries on losses for the significant catastrophes during the quarter and additional losses ceded under our reinsurance and retrocessional agreements resulting from net earned premiums during the six months ended June 30, 2011.

Losses recoverable from reinsurers on property and casualty business were $1,024.7 million and $921.0 million as of June 30, 2011 and December 31, 2010, respectively. Benefits recoverable from reinsurers on life and annuity business were $34.0 million and $35.1 million as of June 30, 2011 and December 31, 2010, respectively.

As of June 30, 2011, 84.4% of our losses and benefits recoverable were with reinsurers rated “A” or above by A.M. Best Company and 9.0% 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 4.5% of our losses and benefits recoverable as of June 30, 2011. As security for outstanding loss obligations, we retain funds from Grand Central Re amounting to 180.8% of its loss recoverable obligations. The remaining 2.1% 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 $4,230.3 million as of June 30, 2011 compared to $3,906.1 million as of December 31, 2010, an increase of 8.3%. During the six months ended June 30, 2011, we incurred gross losses of $666.9 million, we paid $393.0 million in property and casualty losses and we recorded gross favorable development on prior year reserves of $93.2 million, excluding reserve movements related to changes in premium estimates. Net of reinsurance, we paid $322.1 million in property and casualty losses during the six months ended June 30, 2011.

Liabilities for life and annuity benefits.Life and annuity benefits totaled $1,317.5 million at June 30, 2011 compared to $1,275.6 million as of December 31, 2010. The increase 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 $65.0 million of benefit payments during the six months ended June 30, 2011.

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 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.

Shareholders’ equity. Our shareholders’ equity decreased to $2,793.1 million as of June 30, 2011 from $2,918.3 million as of December 31, 2010, a decrease of 4.3%, principally due to the repurchase of $143.8 million of common shares, the net loss of $14.1 million, and the declaration of dividends of $25.2 million in the six months ended June 30, 2011. In addition, we recorded an increase in accumulated other comprehensive income of $33.3 million, principally from an increase in net unrealized gains on investments.

Liquidity. We generated $148.7 million of cash from operations during the six months ended June 30, 2011 compared to $173.8 million for the six months ended June 30, 2010. The two principal factors that impact our operating cash flow are premium collections and timing of loss and benefit payments.

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, subject to certain conditions. Our two largest credit facilities expire in June and August of 2012. Our cash and cash equivalents balance was $987.1 million as of June 30, 2011. 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 June 30, 2011. 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 June 30, 2011, Alterra Bermuda met all minimum solvency and liquidity requirements. Alterra Bermuda returned $300.0 million of capital and surplus to Alterra during the six months ended June 30, 2011 through a dividend and distribution of additional paid-in 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 June 30, 2011, 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 $906.0 million in letters of credit outstanding under these facilities. We also had two sterling denominated letter of credit facilities totaling GBP 90.0 million ($144.2 million) supporting our Funds at Lloyd’s commitments and the Alterra Re UK operations, of which GBP 70.1 million ($112.3 million) was utilized as of June 30, 2011. 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 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 June 30, 2011.

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 June 30, 2011, total shareholders’ equity was $2,793.1 million compared to $2,918.3 million as of December 31, 2010, a decrease of 4.3%. On May 21, 2010, we filed a shelf registration statement on Form S-3 (File No. 333-167035) with the U.S. Securities and Exchange Commission 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 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 June 30, 2011. The senior notes are guaranteed by Alterra.

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

We repurchase our shares from time to time through the open market, privately negotiated transactions or Rule 10b5-1 stock trading plans. During the quarter ended June 30, 2011, we repurchased 311,127 common shares for $6.7 million. During the six months ended June 30, 2011, we repurchased 6,574,175 common shares for $143.8 million. As of June 30, 2011, the aggregate amount available under our Board approved share repurchase plan was $185.5 million.

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, 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 June 30, 2011, 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 (4)	A- (1)(2)
Outlook on financial strength rating	Stable (1)(2)(3)	Stable (1)	Stable (4)	Positive (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)	On August 5, 2011, A.M. Best affirmed our financial strength rating but revised the outlook to negative.

(4)	Applicable to Alterra Bermuda

During the quarter ended June 30, 2011 we paid a dividend to shareholders on May 31, 2011 of $0.12 per share for an aggregate amount of $12.6 million. On August 2, 2011, our Board of Directors declared a dividend of $0.14 per share for an estimated aggregate amount of $14.9 million payable to shareholders on August 16, 2011. 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.

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 June 30, 2011			Quarter Ended June 30, 2010			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010
	(Expressed in millions of U.S. Dollars, except share and per share amounts)
Net income (loss)	$	32.6		$	103.4		$	(14.1	)	$	139.8
Net realized and unrealized losses on non-hedge fund investments, net of tax^(a)		4.7			11.6			27.3			12.8
Net foreign exchange losses (gains), net of tax		2.2			(0.3	)		1.6			(2.0	)
Merger and acquisition expenses, net of tax		—			(55.9	)		—			(51.2	)

Net operating income	$	39.6		$	58.8		$	14.8		$	99.4

Net income (loss) per diluted share	$	0.30		$	1.13		$	(0.13	)	$	1.88
Net realized and unrealized losses on non-hedge fund investments		0.04			0.12			0.26			0.17
Net foreign exchange losses (gains)		0.02			—			0.01			(0.03	)
Merger and acquisition expenses		—			(0.61	)		—			(0.69	)

Net operating income per diluted share	$	0.37		$	0.64		$	0.14		$	1.33

Weighted average common shares outstanding - basic		105,604,786			91,042,301			106,385,007			73,779,447
Weighted average common shares outstanding - diluted		107,111,909			91,661,430			106,385,007			74,524,919
Annualized net income (loss)	$	130.5		$	413.8		$	(28.1	)	$	279.7
Annualized net operating income	$	158.2		$	235.1		$	29.7		$	198.9
Average shareholders’ equity^(b)	$	2,758.2		$	2,321.7		$	2,789.4		$	1,955.3
Annualized return on average shareholders’ equity		4.7	%		17.8	%		(1.0	)%		14.3	%
Annualized net operating return on average shareholders’ equity		5.7	%		10.1	%		1.1	%		10.2	%

(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 average shareholders’ equity balances.

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 insurance and reinsurance 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 June 30, 2011, 96.6% of the securities held in our fixed maturities portfolio, by carrying value, were rated Baa3/BBB- or above. As of June 30, 2011, 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 1.9% of our fixed maturity portfolio by carrying value as of June 30, 2011) 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 June 30, 2011, 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 4.6%, or approximately $306.9 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 5.0%, or approximately $333.6 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 well as return in the selection of each of our hedge fund portfolio investments. We 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 June 30, 2011, 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 0.2%, or approximately $0.7 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 0.2%, or approximately $0.7 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 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 June 30, 2011, our hedge fund portfolio’s VaR was estimated to be 12.0% 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 June 30, 2011, 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 our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, each of our 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 June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on our evaluation, we believe that there was no such change during the quarter ended June 30, 2011.

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.

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 on 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. The two lawsuits have been stayed for more than three years, while the court has addressed issues in related cases. Alterra Bermuda is not a party in those related cases. We intend to continue 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 June 30, 2011.

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, 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 2010 Annual Report on Form 10-K filed on February 25, 2011. There were no material changes from these risk factors during the six months ended June 30, 2011.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

We repurchase our shares from time to time through the open market, privately negotiated transactions or Rule 10b5-1 stock trading plans. During the three months ended June 30, 2011, we repurchased 311,127 common shares for $6.7 million. As of June 30, 2011, the aggregate amount available under our Board-approved repurchase plan was $185.5 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 June 30, 2011.


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
(April 1, 2011 to April 30, 2011)		—	$	0.00		—	$	192.2 million
(May 1, 2011 to May 31, 2011)		127	$	21.82		—	$	192.2 million
(June 1, 2011 to June 30, 2011)		311,000	$	21.51		311,000	$	185.5 million

Total (April 1, 2011 to June 30, 2011) (1)		311,127	$	21.51		311,000	$	185.5 million

(1)

On September 17, 2001, our Board of Directors approved a share repurchase plan providing for repurchases of our common shares. The repurchase plan has been increased from time to time at the election of our Board of Directors. The most recent increase was on February 8, 2011 when our Board of Directors authorized an additional $200.0 million in repurchases.

(2)

During the three months ended June 30, 2011, the Company purchased 127 of its common shares in connection with its employee benefit plans, including, as applicable, purchases associated with the exercise of options and the vesting of restricted stock and restricted stock unit awards. These purchases were not made pursuant to a publicly announced repurchase plan or program.

ITEM 3.

Defaults Upon Senior Securities

None.

ITEM 4.

Removed and Reserved

ITEM 5.

Other Information

None.

ITEM 6.

Exhibits


Exhibit		Description

10.1		Underwriting Services Agreement, dated May 1, 2011, by and among New Point Re IV Limited, Alterra Agency Limited and Alterra Bermuda Limited.

10.2(a)		Form of Non-Employee Director Restricted Stock Award Agreement, pursuant to the Alterra Capital Holdings Limited 2006 Long Term Incentive Plan.

10.2(b)		Form of Non-Employee Director Restricted Stock Award Agreement, pursuant to the Alterra Capital Holdings Limited 2008 Stock Incentive Plan.

10.3		Employment Agreement, dated June 1, 2011, between Alterra Capital Holdings Limited and W. Marston Becker (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 3, 2011).

10.4		Restricted Stock Award Agreement, dated June 1, 2011, between Alterra Capital Holdings Limited and W. Marston Becker (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 3, 2011).

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 six months ended June 30, 2011 formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2011 and December 31, 2010; (ii) Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2011 and 2010; (iii) Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2011 and 2010; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010; and (v) Notes to the Interim Consolidated Financial Statements.

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:		August 9, 2011



		/s/ JOSEPH W. ROBERTS
Name:		Joseph W. Roberts
Title:		Executive Vice President and Chief Financial Officer
Date:		August 9, 2011



		/s/ DAVID F. SHEAD
Name:		David F. Shead
Title:		Chief Accounting Officer
Date:		August 9, 2011

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