UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________________________________________________________________________

FORM 10-Q

________________________________________________________________________________

(Mark One)

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

For the quarterly period ended March 31, 2013

OR

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

For the transition period from              to             

Commission file number 000-33047

________________________________________________________________________________

ALTERRA CAPITAL HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

________________________________________________________________________________

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

Alterra House

2 Front Street

Hamilton, HM 11

Bermuda

(Address of principal executive offices) (Zip Code)

(441) 295-8800

(Registrant’s telephone number, including area code)

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

________________________________________________________________________________

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

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

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

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

The number of the registrant’s common shares (par value $1.00 per share) outstanding as of April 23, 2013 was 96,133,957.

ALTERRA CAPITAL HOLDINGS LIMITED

INDEX

		PAGE
PART I — FINANCIAL INFORMATION		3
ITEM 1.	Financial Statements	3
	Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012	3
	Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	4
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (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	32
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	55
ITEM 4.	Controls and Procedures	56
PART II — OTHER INFORMATION		57
ITEM 1.	Legal Proceedings	57
ITEM 1A.	Risk Factors	57
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
ITEM 3.	Defaults Upon Senior Securities	57
ITEM 4.	Mine Safety Disclosures	58
ITEM 5.	Other Information	58
ITEM 6.	Exhibits	59
SIGNATURES		60

2

PART I —FINANCIAL INFORMATION

ITEM 1. Financial Statements

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

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

	March 31, 2013		December 31, 2012
	(Unaudited)
ASSETS
Cash and cash equivalents	$	958,108	$	440,298
Fixed maturities, trading, at fair value (amortized cost: 2013—$399,708; 2012—$421,827)	406,378		429,246
Fixed maturities, available for sale, at fair value (amortized cost: 2013—$4,819,126; 2012—$5,349,407)	5,068,520		5,647,303
Fixed maturities, held to maturity, at amortized cost (fair value: 2013—$1,013,628; 2012—$1,070,308)	818,656		852,266
Equity method investments	116,294		92,050
Other investments, at fair value	314,519		316,955
Restricted cash and cash equivalents	340,329		254,458
Accrued interest income	56,701		65,361
Premiums receivable	853,446		748,705
Losses and benefits recoverable from reinsurers	1,304,103		1,289,577
Deferred acquisition costs	169,239		146,328
Prepaid reinsurance premiums	301,437		247,740
Trades pending settlement	2,824		27,768
Goodwill and intangible assets	54,524		54,751
Other assets	69,094		64,272
Total assets	$	10,834,172	$	10,677,078
LIABILITIES
Property and casualty losses	$	4,686,705	$	4,690,344
Life and annuity benefits	1,124,600		1,159,545
Deposit liabilities	132,617		132,910
Funds withheld from reinsurers	91,796		92,733
Unearned property and casualty premiums	1,187,030		1,031,633
Reinsurance balances payable	197,637		176,027
Accounts payable and accrued expenses	83,102		107,742
Trades pending settlement	14,790		5,890
Senior notes	440,538		440,532
Total liabilities	7,958,815		7,837,356
SHAREHOLDERS’ EQUITY
Common shares (par value $1.00 per share); 96,192,368 (2012—96,059,645) shares issued and outstanding	96,192		96,060
Additional paid-in capital	1,724,261		1,721,241
Accumulated other comprehensive income	192,753		244,172
Retained earnings	862,151		778,249
Total shareholders’ equity	2,875,357		2,839,722
Total liabilities and shareholders’ equity	$	10,834,172	$	10,677,078

See accompanying notes to unaudited interim consolidated financial statements.

3

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 March 31,
	2013			2012
REVENUES
Gross premiums written	$	649,993		$	661,330
Reinsurance premiums ceded	(190,290		)	(224,462		)
Net premiums written	$	459,703		$	436,868
Earned premiums	$	487,254		$	477,867
Earned premiums ceded	(141,352		)	(139,692		)
Net premiums earned	345,902			338,175
Net investment income	49,099			58,678
Net realized and unrealized gains (losses) on investments (includes $19,720 accumulated other comprehensive income reclassifications for net unrealized gains on available for sale and held to maturity securities)	40,395			25,493
Total other-than-temporary impairment losses	(369		)	(5,467		)
Portion of loss recognized in other comprehensive income, before taxes	217			98
Net impairment losses recognized in earnings	(152		)	(5,369		)
Other income	5,701			5,362
Total revenues	440,945			422,339
LOSSES AND EXPENSES
Net losses and loss expenses	203,557			206,029
Claims and policy benefits	13,887			13,466
Acquisition costs	56,902			59,724
Interest expense	8,132			8,628
Net foreign exchange losses (gains)	15			(32		)
Merger and acquisition expenses	626			—
General and administrative expenses	57,923			60,082
Total losses and expenses	341,042			347,897
INCOME BEFORE TAXES	99,903			74,442
Income tax expense (benefit)	719			(4,582		)
NET INCOME	99,184			79,024
Other comprehensive income
Holding (losses) gains on available for sale securities arising in period, net of tax	(24,013		)	24,675
Net realized gains on available for sale and held to maturity securities included in net income, net of tax	(19,045		)	(7,758		)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of tax	(217		)	(98		)
Foreign currency translation adjustment	(8,144		)	1,370
Other comprehensive (loss) income	(51,419		)	18,189
COMPREHENSIVE INCOME	$	47,765		$	97,213
Net income per share	$	1.04		$	0.78
Net income per diluted share	$	0.99		$	0.77
Weighted average common shares outstanding—basic	95,721,183			101,002,884
Weighted average common shares outstanding—diluted	100,513,656			103,154,081

See accompanying notes to unaudited interim consolidated financial statements.

4

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Expressed in thousands of U.S. Dollars)

	Three Months Ended March 31,
	2013			2012
Common shares
Balance, beginning of period	$	96,060		$	102,102
Issuance of common shares, net	332			677
Repurchase of shares	(200		)	(2,072		)
Balance, end of period	96,192			100,707
Additional paid-in capital
Balance, beginning of period	1,721,241			1,847,034
Issuance of common shares, net	4,191			(472		)
Stock based compensation expense	4,779			7,486
Repurchase of shares	(5,950		)	(46,761		)
Balance, end of period	1,724,261			1,807,287
Accumulated other comprehensive income
Unrealized holdings gains:
Balance, beginning of period	287,113			204,301
Holding (losses) gains on available for sale fixed maturities arising in period, net of tax	(24,013		)	24,675
Net realized gains on available for sale and held to maturity securities included in net income, net of tax	(19,045		)	(7,758		)
Portion of other-than-temporary impairment losses recognized in other comprehensive income, net of tax	(217		)	(98		)
Balance, end of period	243,838			221,120
Cumulative foreign currency translation adjustment:
Balance, beginning of period	(42,941		)	(37,344		)
Foreign currency translation adjustment	(8,144		)	1,370
Balance, end of period	(51,085		)	(35,974		)
Total accumulated other comprehensive income, end of period	192,753			185,146
Retained earnings
Balance, beginning of period	778,249			693,142
Net income	99,184			79,024
Dividends	(15,282		)	(14,044		)
Balance, end of period	862,151			758,122
Total shareholders’ equity	$	2,875,357		$	2,851,262

See accompanying notes to unaudited interim consolidated financial statements.

5

ALTERRA CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Expressed in thousands of U.S. Dollars)

	Three Months Ended March 31,
	2013			2012
OPERATING ACTIVITIES
Net income	$	99,184		$	79,024
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation	4,779			7,486
Net amortization of premium on fixed maturities	9,176			5,616
Accretion of deposit liabilities	1,278			960
Net realized and unrealized (gains) losses on investments	(40,395		)	(25,493		)
Net impairment losses recognized in earnings	152			5,369
Changes in:
Accrued interest income	8,660			7,108
Premiums receivable	(104,408		)	(146,066		)
Losses and benefits recoverable from reinsurers	(18,777		)	(32,372		)
Deferred acquisition costs	(23,536		)	(28,975		)
Prepaid reinsurance premiums	(54,707		)	(85,417		)
Other assets	(3,206		)	(7,625		)
Property and casualty losses	6,300			81,529
Life and annuity benefits	(11,354		)	(11,836		)
Funds withheld from reinsurers	(937		)	(19,676		)
Unearned property and casualty premiums	158,445			193,161
Reinsurance balances payable	22,930			66,102
Accounts payable and accrued expenses	(24,640		)	(20,853		)
Cash provided by operating activities	28,944			68,042
INVESTING ACTIVITIES
Purchases of available for sale securities	(252,267		)	(520,816		)
Sales of available for sale securities	507,907			290,644
Redemptions/maturities of available for sale securities	267,666			213,629
Purchases of trading securities	(22,739		)	(24,898		)
Sales of trading securities	27,793			21,001
Redemptions/maturities of trading securities	7,403			14,190
Sales of held to maturity securities	19,892			—
Redemptions/maturities of held to maturity securities	16,997			8,821
Net sales (purchases) of other investments	39,869			(32,951		)
Net purchases of equity method investments	(66,619		)	(62,053		)
Return of capital/dividends from equity method investments	46,770			—
Change in restricted cash and cash equivalents	(85,871		)	3,138
Cash provided by (used in) investing activities	506,801			(89,295		)
FINANCING ACTIVITIES
Net proceeds from issuance of common shares	4,523			205
Repurchase of common shares	(6,150		)	(48,833		)
Dividends paid	(15,161		)	(13,734		)
Additions to deposit liabilities	362			427
Payments of deposit liabilities	(1,934		)	(1,363		)
Cash used in financing activities	(18,360		)	(63,298		)
Effect of exchange rate changes on foreign currency cash and cash equivalents	425			9,588
Net increase in cash and cash equivalents	517,810			(74,963		)
Cash and cash equivalents, beginning of period	440,298			469,477
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	958,108		$	394,514

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid totaled $10,938 and $11,137 for the three months ended March 31, 2013 and 2012, respectively.

Income taxes paid totaled $2,289 and $4,197 for the three months ended March 31, 2013 and 2012, respectively.

See accompanying notes to unaudited interim consolidated financial statements.

6

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. GENERAL

Alterra Capital Holdings Limited (“Alterra” and, collectively with its subsidiaries, the “Company”) 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 December 18, 2012 Alterra entered into an Agreement and Plan of Merger, or the Merger Agreement, with Markel Corporation, or Markel, and Commonwealth Merger Subsidiary Limited, a direct wholly-owned subsidiary of Markel, or Merger Sub, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub will merge with and into Alterra, or the Merger, with Alterra as the surviving company becoming a wholly-owned subsidiary of Markel. Pursuant to the Merger Agreement, upon the closing of the Merger, each issued and outstanding Alterra common share (other than any restricted stock that does not vest in connection with the Merger), will automatically be converted into the right to receive (a) 0.04315 validly issued, fully paid and nonassessable shares of Markel voting common stock, without par value, together with any cash paid in lieu of fractional shares, and (b) $10.00 in cash, without interest. The Merger Agreement is governed by Bermuda law and subject to the jurisdiction of Bermuda courts. The Merger will be a taxable event for Alterra shareholders. The Merger is expected to close on May 1, 2013, subject to customary closing conditions.

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
Alterra Brazil	Alterra Resseguradora do Brasil S.A.
Alterra Capital UK	Alterra Capital UK Limited
Alterra E&S	Alterra Excess & Surplus Insurance Company
Alterra Europe	Alterra Europe plc
Alterra Finance	Alterra Finance LLC
Alterra Holdings	Alterra Holdings Limited
Alterra Insurance USA	Alterra Insurance USA Inc.
Alterra Re USA	Alterra Reinsurance USA Inc.
Alterra USA	Alterra USA Holdings Limited
New Point IV	New Point IV Limited
New Point Re IV	New Point Re IV Limited
New Point V	New Point V Limited
New Point Re V	New Point Re V Limited

The Company’s Bermuda insurance and reinsurance operations are conducted through Alterra Bermuda, which is registered as both a Class 4 commercial and Class C long-term insurer under the insurance laws of Bermuda.

The Company’s U.S. reinsurance operations are conducted through Alterra Re USA, a Connecticut-domiciled reinsurance company. The Company’s U.S. insurance operations are conducted through 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 insurance and reinsurance operations are based primarily in Dublin, Ireland and are conducted through Alterra Europe and its branches in London, England and Zurich, Switzerland.

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, with locations in Dublin, Ireland and Zurich, Switzerland. As of March 31, 2013, the Company’s proportionate share of Syndicates 1400, 2525 and 2526 for the 2013 year of account are 100%, niland approximately 20%, respectively.

The Company’s Latin America operations are conducted through Alterra at Lloyd’s in Rio de Janeiro, Brazil, using Lloyd’s admitted status, through Alterra Europe using a representative office in Bogotá, Colombia and a service company in Buenos Aires, Argentina and through Alterra Brazil, a local reinsurance company in Rio de Janeiro.

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, 2012 filed on February 28, 2013, and Amendment No. 1 to the Company's Annual Report filed on April 30, 2013.

The consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, or 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.

2. RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2012-02, Intangibles—Goodwill and Other (350)—Testing Indefinite-Lived Intangible Assets for Impairment

Accounting Standards Update, or ASU, 2012-02 permits an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets. An entity that elects to perform a qualitative assessment is required to perform the quantitative impairment test for an indefinite-lived intangible asset if it is more likely than not that the asset is impaired. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. This standard did not have a material impact on the Company’s interim unaudited consolidated financial statements.

ASU 2013-02, Comprehensive Income (220) - Reporting of Amounts Reclassified Out of Accumulated Other

Comprehensive Income

ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for fiscal periods beginning after December 15, 2012 with early adoption permitted. This standard did not have a material impact on the Company’s interim unaudited consolidated financial statements.

3. SEGMENT INFORMATION

The Company monitors the performance of its underwriting operations in five segments: global insurance, U.S. insurance, reinsurance, Alterra at Lloyd's, and life and annuity reinsurance. 

Global Insurance Segment

The Company’s global insurance segment offers property and casualty excess of loss insurance from its offices in Bermuda, Dublin and London primarily to U.S. and international Fortune 1000 companies. Insurance offered from the Company’s U.S. offices is included within the U.S. insurance segment. Principal lines of business for this segment include aviation, excess liability, professional liability and property.

U.S. Insurance Segment

The Company’s U.S. insurance segment offers property and casualty insurance coverage from its offices in the United States primarily to Fortune 3000 companies. Principal lines of business for this segment include general/excess liability, marine, professional liability and property.

Reinsurance Segment

The Company’s reinsurance segment offers property and casualty quota share and excess of loss reinsurance from its offices in Bermuda, Bogotà, Buenos Aires, Dublin, London, Rio de Janeiro and the United States to insurance and reinsurance companies worldwide. Principal lines of business for this segment include agriculture,

7

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

auto, aviation, credit/surety, general casualty, marine & energy, medical malpractice, professional liability, property, whole account and workers’ compensation.

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, Dublin and Zurich, primarily to medium-to large-sized international clients. Principal lines of business for this segment include accident & health, agriculture, aviation, financial institutions, international casualty, marine, professional liability and property.

Life and Annuity Reinsurance Segment

The Company’s life and annuity reinsurance segment previously offered reinsurance products that focused on blocks of life and annuity business, which took the form of co-insurance transactions whereby the risks are reinsured on the same basis as the original policies. In 2010 the Company 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.

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. Because of the longer duration of liabilities on life and annuity reinsurance business, and the accretion of the discounted carrying value of life and annuity benefits, investment returns are important in evaluating the profitability of this segment. Consequently, the Company allocates 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.

Operations by Segment

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

8

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A summary of operations by segment for the three months ended March 31, 2013 and 2012 follows:

(Expressed in thousands of U.S. Dollars)

	Three Months Ended March 31, 2013
	Property & Casualty															Life & Annuity Reinsurance (a)			Corporate			Consolidated
	Global Insurance			U.S. Insurance			Reinsurance			Alterra at Lloyd’s			Total
Gross premiums written	$	75,554		$	99,473		$	315,858		$	158,384		$	649,269		$	724		$	—		$	649,993
Reinsurance premiums ceded	(45,053		)	(62,682		)	(57,474		)	(24,998		)	(190,207		)	(83		)	—			(190,290		)
Net premiums written	$	30,501		$	36,791		$	258,384		$	133,386		$	459,062		$	641		$	—		$	459,703
Earned premiums	$	93,585		$	99,926		$	214,887		$	78,132		$	486,530		$	724		$	—		$	487,254
Earned premiums ceded	(47,213		)	(49,963		)	(34,835		)	(9,258		)	(141,269		)	(83		)	—			(141,352		)
Net premiums earned	46,372			49,963			180,052			68,874			345,261			641			—			345,902
Net losses and loss expenses	(34,922		)	(33,215		)	(94,662		)	(40,758		)	(203,557		)	—			—			(203,557		)
Claims and policy benefits	—			—			—			—			—			(13,887		)	—			(13,887		)
Acquisition costs	(43		)	(4,327		)	(40,438		)	(11,965		)	(56,773		)	(129		)	—			(56,902		)
General and administrative expenses	(5,977		)	(10,445		)	(15,100		)	(10,035		)	(41,557		)	(106		)	—			(41,663		)
Other income	884			—			4,864			—			5,748			—			—			5,748
Underwriting income	$	6,314		$	1,976		$	34,716		$	6,116		$	49,122		n/a			—			n/a
Net investment income																13,526			35,573			49,099
Net realized and unrealized gains on investments																			40,395			40,395
Net impairment losses recognized in earnings																			(152		)	(152		)
Corporate other income																			(47		)	(47		)
Interest expense																			(8,132		)	(8,132		)
Net foreign exchange losses																			(15		)	(15		)
Merger and acquisition expenses																			(626		)	(626		)
Corporate general and administrative expenses																			(16,260		)	(16,260		)
Income before taxes																$	45		$	50,736		$	99,903
Loss ratio (b)	75.3		%	66.5		%	52.6		%	59.2		%	59.0		%
Acquisition cost ratio (c)	0.1		%	8.7		%	22.5		%	17.4		%	16.4		%
General and administrative expense ratio (d)	12.9		%	20.9		%	8.4		%	14.6		%	12.0		%
Combined ratio (e)	88.3		%	96.0		%	83.4		%	91.1		%	87.4		%

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

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

(e)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.

9

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	Three Months Ended March 31, 2012
	Property & Casualty															Life  & Annuity Reinsurance (a)			Corporate			Consolidated
	Global Insurance			U.S. Insurance			Reinsurance			Alterra at Lloyd’s			Total
Gross premiums written	$	66,771		$	104,282		$	343,694		$	146,143		$	660,890		$	440		$	—		$	661,330
Reinsurance premiums ceded	(43,251		)	(70,494		)	(72,109		)	(38,590		)	(224,444		)	(18		)	—			(224,462		)
Net premiums written	$	23,520		$	33,788		$	271,585		$	107,553		$	436,446		$	422		$	—		$	436,868
Earned premiums	$	94,103		$	96,241		$	214,184		$	72,899		$	477,427		$	440		$	—		$	477,867
Earned premiums ceded	(47,133		)	(40,456		)	(32,036		)	(20,049		)	(139,674		)	(18		)	—			(139,692		)
Net premiums earned	46,970			55,785			182,148			52,850			337,753			422			—			338,175
Net losses and loss expenses	(18,061		)	(37,564		)	(111,729		)	(38,675		)	(206,029		)	—			—			(206,029		)
Claims and policy benefits	—			—			—			—			—			(13,466		)	—			(13,466		)
Acquisition costs	(59		)	(7,696		)	(42,416		)	(9,434		)	(59,605		)	(119		)	—			(59,724		)
General and administrative expenses	(6,481		)	(12,257		)	(19,311		)	(9,095		)	(47,144		)	(34		)	—			(47,178		)
Other income	815			81			4,441			—			5,337			—			—			5,337
Underwriting income (loss)	$	23,184		$	(1,651	)	$	13,133		$	(4,354	)	$	30,312		n/a			—			n/a
Net investment income																14,776			43,902			58,678
Net realized and unrealized gains on investments																			25,493			25,493
Net impairment losses recognized in earnings																			(5,369		)	(5,369		)
Corporate other income																			25			25
Interest expense																			(8,628		)	(8,628		)
Net foreign exchange gains																			32			32
Corporate general and administrative expenses																			(12,904		)	(12,904		)
Income before taxes																$	1,579		$	42,551		$	74,442
Loss ratio (b)	38.5		%	67.3		%	61.3		%	73.2		%	61.0		%
Acquisition cost ratio (c)	0.1		%	13.8		%	23.3		%	17.9		%	17.6		%
General and administrative expense ratio (d)	13.8		%	22.0		%	10.6		%	17.2		%	14.0		%
Combined ratio (e)	52.4		%	103.1		%	95.2		%	108.2		%	92.6		%

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

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

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

10

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 three months ended March 31, 2013 were:

(Expressed in thousands of U.S dollars)	North America			Europe			Rest of the world			Total
Gross premiums written	$	455,192		$	146,158		$	47,919		$	649,269
Reinsurance ceded	(142,390		)	(29,755		)	(18,062		)	(190,207		)
	$	312,802		$	116,403		$	29,857		$	459,062

Property and casualty gross premiums written and reinsurance premiums ceded by geographic region for the three months ended March 31, 2012 were:

(Expressed in thousands of U.S dollars)	North America			Europe			Rest of the world			Total
Gross premiums written	$	436,885		$	190,803		$	33,202		$	660,890
Reinsurance ceded	(120,082		)	(67,262		)	(37,100		)	(224,444		)
	$	316,803		$	123,541		$	(3,898	)	$	436,446

The largest client in each of the three months ended March 31, 2013 and 2012 accounted for 3.7% and 6.3% 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 three months ended March 31, 2013 and 2012 were from North America. There were no new life and annuity transactions written in the three months ended March 31, 2013 and 2012.

4. BUSINESS COMBINATION

On May 12, 2010, Harbor Point Limited, or Harbor Point, amalgamated with Alterra Holdings, a direct, wholly-owned subsidiary of Alterra, or the Amalgamation. The Amalgamation was accounted for as a business combination, with Alterra the accounting acquirer. The Company recorded the acquired assets and liabilities of Harbor Point at their fair values.

The net loss reserves acquired included 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 sheets. This amount is being 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 months ended March 31,2013 and 2012, $4.2 million and $6.2 million, respectively, was amortized. As of March 31, 2013, the unamortized balance of this fair value adjustment was $27.9 million.

The net unearned premiums acquired included 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 is being amortized to acquisition costs in the consolidated statements of operations and comprehensive income over 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 months ended March 31,2013 and 2012, $0.9 million and $4.5 million, respectively, was amortized. As of March 31, 2013, the unamortized balance of this fair value adjustment was $1.0 million.

11

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. INVESTMENTS

Fixed Maturities—Available for Sale

The fair values and amortized cost of available for sale fixed maturities as of March 31, 2013 and December 31, 2012 were:

			Included in Accumulated Other Comprehensive Income
					Gross Unrealized Losses
March 31, 2013 (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	$	729,037	$	21,942	$	(233	)	$	—		$	750,746
Non-U.S. governments	142,681		9,487		(172		)	—			151,996
Corporate securities	2,094,910		115,961		(4,716		)	—			2,206,155
Municipal securities	230,252		29,916		(269		)	—			259,899
Asset-backed securities	285,624		3,847		(902		)	(2,483		)	286,086
Residential mortgage-backed securities (1)	919,513		44,812		(501		)	(99		)	963,725
Commercial mortgage-backed securities	417,109		33,943		(1,139		)	—			449,913
	$	4,819,126	$	259,908	$	(7,932	)	$	(2,582	)	$	5,068,520

(1) Included within residential mortgage-backed securities are securities issued by U.S. agencies with a fair value of $955,764.

			Included in Accumulated Other Comprehensive Income
					Gross Unrealized Losses
			Gross Unrealized Gain		Non-OTTI Unrealized Loss			OTTI Unrealized Loss
December 31, 2012 (Expressed in thousands of U.S. Dollars)	Amortized Cost										Fair Value
U.S. government and agencies	$	727,516	$	28,950	$	(377	)	$	—		$	756,089
Non-U.S. governments	170,030		12,498		(43		)	—			182,485
Corporate securities	2,294,516		138,211		(4,334		)	(24		)	2,428,369
Municipal securities	243,025		30,720		(409		)	—			273,336
Asset-backed securities	358,289		4,084		(2,096		)	(2,888		)	357,389
Residential mortgage-backed securities (1)	1,145,076		56,487		(465		)	(284		)	1,200,814
Commercial mortgage-backed securities	410,955		38,908		(1,042		)	—			448,821
	$	5,349,407	$	309,858	$	(8,766	)	$	(3,196	)	$	5,647,303

(1) Included within residential mortgage-backed securities are securities issued by U.S. agencies with a fair value of $1,179,093.

12

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table sets forth certain information regarding the investment ratings of the Company’s available for sale fixed maturities (using the lower of the ratings from Standard and Poor's Ratings Services, or S&P, and Moody's Investor Services, Inc., or Moody's), as of March 31, 2013 and December 31, 2012; 

	March 31, 2013			December 31, 2012
(Expressed in thousands of U.S. Dollars)	Fair Value		%	Fair Value		%
U.S. government and agencies (1)	$	1,706,510	33.7	$	1,935,182	34.3
AAA	854,680		16.9	1,059,425		18.8
AA	691,937		13.7	649,507		11.5
A	1,345,532		26.5	1,411,853		25.0
BBB	271,691		5.4	312,564		5.5
BB	41,725		0.8	67,041		1.2
B	107,494		2.1	158,934		2.8
CCC or lower	38,759		0.7	38,420		0.7
Not rated	10,192		0.2	14,377		0.2
	$	5,068,520	100.0	$	5,647,303	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 $955,764 (December 31, 2012—$1,179,093).

The maturity distribution for available for sale fixed maturities held as of March 31, 2013 was:

(Expressed in thousands of U.S. Dollars)	Amortized Cost		Fair Value
Within one year	$	596,225	$	600,785
After one year through five years	1,615,648		1,666,694
After five years through ten years	618,522		673,265
More than ten years	366,485		428,052
	3,196,880		3,368,796
Asset-backed securities	285,624		286,086
Mortgage-backed securities	1,336,622		1,413,638
	$	4,819,126	$	5,068,520

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

On March 31, 2013, the Company reclassified securities with a fair value of $18.1 million from available for sale to held to maturity in the consolidated financial statements as the Company determined it has the intent to hold such securities to maturity. The unrealized appreciation at the date of the transfer will continue to be reported as a separate component of shareholders' equity and will be amortized over the remaining lives of the securities as an adjustment to yield in a manner consistent with the amortization of any premium or discount. The unrealized appreciation on the date of transfer was $1.9 million. During the three months ended March 31, 2013, the Company sold held to maturity securities with an amortized cost of $15.2 million and an unrealized loss within accumulated other comprehensive income of $2.5 million, for proceeds of $19.9 million, resulting in a net realized gain of $2.2 million in net income.

13

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The fair values and amortized cost of held to maturity fixed maturities as of March 31, 2013 and December 31, 2012 were:

March 31, 2013 (Expressed in thousands of U.S. Dollars)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
U.S. government and agencies	$	27,651	$	3,457	$	—	$	31,108
Non-U.S. governments	513,960		137,887		—		651,847
Corporate securities	274,958		53,628		—		328,586
Municipal securities	1,879		—		—		1,879
Asset-backed securities	208		—		—		208
	$	818,656	$	194,972	$	—	$	1,013,628

December 31, 2012 (Expressed in thousands of U.S. Dollars)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
U.S. government and agencies	$	27,639	$	3,842	$	—	$	31,481
Non-U.S. governments	527,843		152,251		—		680,094
Corporate securities	296,360		61,948		—		358,308
Asset-backed securities	424		1		—		425
	$	852,266	$	218,042	$	—	$	1,070,308

The following tables set forth certain information regarding the investment ratings of the Company’s held to maturity fixed maturities (using the lower of the ratings from S&P and Moody's) as of March 31, 2013 and December 31, 2012: 

March 31, 2013 (Expressed in thousands of U.S. Dollars)	Amortized Cost		%	Fair Value		%
U.S. government and agencies	$	27,651	3.4	$	31,108	3.1
AAA	395,824		48.4	511,802		50.5
AA	265,912		32.5	319,165		31.5
A	101,354		12.4	118,321		11.7
BBB	26,519		3.2	31,768		3.1
BB	1,396		0.1	1,464		0.1
	$	818,656	100.0	$	1,013,628	100.0

December 31, 2012 (Expressed in thousands of U.S. Dollars)	Amortized Cost		%	Fair Value		%
U.S. government and agencies	$	27,639	3.2	$	31,481	2.9
AAA	406,659		47.7	532,741		49.8
AA	284,282		33.4	344,170		32.2
A	99,235		11.6	119,756		11.2
BBB	32,031		3.8	39,755		3.7
Not rated	2,420		0.3	2,405		0.2
	$	852,266	100.0	$	1,070,308	100.0

14

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The maturity distribution for held to maturity fixed maturities held as of March 31, 2013 was:

(Expressed in thousands of U.S. Dollars)	Amortized Cost		Fair Value
Within one year	$	31,748	$	31,941
After one year through five years	90,129		98,231
After five years through ten years	151,699		182,486
More than ten years	544,872		700,761
	818,448		1,013,419
Asset-backed securities	208		209
	$	818,656	$	1,013,628

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.

Net Investment Income

Net investment income earned for the three months ended March 31, 2013 and 2012 was:

	Three Months Ended March 31,
(Expressed in thousands of U.S. Dollars)	2013			2012
Interest earned on investments and cash and cash equivalents	$	61,060		$	66,271
Net amortization of premium on fixed maturities	(9,176		)	(5,616		)
Investment expenses	(2,785		)	(1,977		)
	$	49,099		$	58,678

Net Realized and Unrealized Gains and Losses

The net realized and unrealized gains and losses on investments for the three months ended March 31, 2013 and 2012 were:

	Three Months Ended March 31,
(Expressed in thousands of U.S. Dollars)	2013			2012
Gross realized gains on available for sale and held to maturity securities	$	26,210		$	11,451
Gross realized losses on available for sale securities	(1,837		)	(3,692		)
Net realized and unrealized (losses) gains on trading securities	(861		)	1,066
Increase in fair value of hedge funds	12,660			3,679
Increase in fair value of structured deposit	—			365
Income from equity method investments	4,395			4,927
(Decrease) increase in fair value of derivatives	(172		)	7,697
Net realized and unrealized gains on investments	$	40,395		$	25,493
Net other-than-temporary impairment losses recognized in earnings	$	(152	)	$	(5,369	)
(Decrease) increase in net unrealized gains on available for sale fixed maturities, before tax	$	(48,502	)	$	18,181

Included in net realized and unrealized (losses) gains on trading securities were $0.1 million and $0.1 million of net realized gains recognized on trading securities sold during the three months ended March 31, 2013 and 2012, respectively.

15

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 security’s fair value is less than its cost, resulting in unrealized losses.

Any other-than-temporary impairment, or 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: (i) the Company has the intent to sell the debt security; or (ii) 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 $0.2 million of OTTI in earnings for the three months ended March 31, 2013, of which $0.1 million related to estimated credit losses and $0.1 million was recorded due to the decision to sell certain securities prior to their recovery in value ($5.4 million in the three months ended March 31, 2012, of which $0.2 million related to estimated credit losses and $5.2 million was recorded due to the decision to sell certain securities prior to their recovery in value).

The following methodology and significant inputs were used to determine the estimated credit losses during the three months ended March 31, 2013:

• Residential mortgage-backed securities ($0.1 million credit loss recognized for the three months ended March 31,2013) - 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.

Available for sale fixed maturities with unrealized losses, and the duration of such conditions as of March 31, 2013 and as of December 31, 2012, were:

	Less Than 12 Months				12 Months or Longer				Total
March 31, 2013 (Expressed in thousands of U.S. Dollars)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government and agencies	$	51,423	$	182	$	10,148	$	51	$	61,571	$	233
Non-U.S. governments	11,290		135		2,228		37		13,518		172
Corporate securities	147,607		4,716		—		—		147,607		4,716
Municipal securities	9,814		269		—		—		9,814		269
Asset-backed securities	77,711		3,242		328		143		78,039		3,385
Residential mortgage-backed securities	44,954		600		—		—		44,954		600
Commercial mortgage-backed securities	101,717		1,139		—		—		101,717		1,139
	$	444,516	$	10,283	$	12,704	$	231	$	457,220	$	10,514

16

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	Less Than 12 Months				12 Months or Longer				Total
December 31, 2012 (Expressed in thousands of U.S. Dollars)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government and agencies	$	25,745	$	298	$	4,153	$	79	$	29,898	$	377
Non-U.S. governments	9,694		34		1,564		9		11,258		43
Corporate securities	128,818		4,358		—		—		128,818		4,358
Municipal securities	20,622		409		—		—		20,622		409
Asset-backed securities	66,568		4,833		252		151		66,820		4,984
Residential mortgage-backed securities	41,414		749		—		—		41,414		749
Commercial mortgage-backed securities	54,347		1,042		—		—		54,347		1,042
	$	347,208	$	11,723	$	5,969	$	239	$	353,177	$	11,962

Of the total holdings of 2,989 (as of December 31, 2012—3,262) available for sale securities, 263 (as of December 31, 2012—262) had unrealized losses as of March 31, 2013.

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:

	Three Months Ended March 31,
(Expressed in thousands of U.S. Dollars)	2013			2012
Beginning balance at January 1	$	4,479		$	5,283
Addition for credit loss impairment recognized in the current period on securities not previously impaired	38			90
Addition for credit loss impairment recognized in the current period on securities previously impaired	35			66
Reduction for securities the Company intends to sell	—			—
Reduction for securities sold during the period	(1,041		)	(468		)
Ending balance at March 31	$	3,511		$	4,971

Equity Method Investments

The Company owns 30.3% of the common shares of New Point V. As of March 31, 2013, the carrying value of this investment was $70.9 million (December 31, 2012 - $nil). The Company’s equity share of net income for this investment for the three months ended March 31, 2013 was $4.3 million. The Company owns 34.8% of the common shares of New Point IV. As of March 31, 2013, the carrying value of this investment was $41.9 million (December 31, 2012 - $88.5 million). The Company’s equity share of net income for this investment for the three months ended March 31, 2013 and 2012 was $0.2 million and $4.9 million, respectively. The Company also owns 7.5% of the common shares of Grand Central Re Limited, or Grand Central Re, and 13.8% of the common shares of Bay Point Holdings Limited, or Bay Point. The Company’s equity share of net income for all equity method investments is included in net realized and unrealized investment gains (losses) on investments in the consolidated statement of operations and comprehensive income.

Other Investments

The following is a summary of other investments as of March 31, 2013 and December 31, 2012:

	March 31, 2013					December 31, 2012
(Expressed in thousands of U.S. Dollars)				Allocation %					Allocation %
Hedge funds, at fair value	$	290,861		92.5		$	293,193		92.5
Structured deposits, at fair value	24,250			7.7		24,250			7.7
Derivatives, at fair value	(592		)	(0.2	)	(488		)	(0.2	)
	$	314,519		100.0		$	316,955		100.0

17

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 March 31, 2013 and December 31, 2012 was:

	March 31, 2013			December 31, 2012
(Expressed in thousands of U.S. Dollars)	Fair Value		Allocation %	Fair Value		Allocation %
Distressed securities	$	878	0.3	$	11,214	3.8
Diversified arbitrage	8,772		3.0	12,171		4.2
Emerging markets	5,241		1.8	3,576		1.2
Event-driven arbitrage	26,392		9.1	7,026		2.4
Fund of funds	18,742		6.4	18,316		6.2
Global macro	77,618		26.7	61,145		20.9
Long/short credit	21,296		7.3	377		0.1
Long/short equity	131,922		45.4	177,708		60.6
Opportunistic	—		—	1,660		0.6
Total hedge fund portfolio	$	290,861	100.0	$	293,193	100.0

Redemptions receivable of $2.8 million and $27.8 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 March 31, 2013, and December 31, 2012, respectively.

As of March 31, 2013, the hedge fund portfolio was invested in eight strategies in 35 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 outstanding redemptions receivable of $2.8 million at March 31, 2013, none of which is gated, $1.9 million was received in cash prior to April 29, 2013. The fair value of the Company’s holdings in funds with gates imposed as of March 31, 2013 was $6.8 million (December 31, 2012—$7.0 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 in the side-pocket. As of March 31, 2013, the fair value of hedge funds held in side-pockets was $34.1 million (December 31, 2012—$37.2 million).

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Details regarding the redemption of the hedge fund portfolio as of March 31, 2013 were 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	$	878	$	878	$	—
Diversified arbitrage	8,772		8,772		—
Emerging markets	5,241		5,241		—
Event-driven arbitrage	26,392		11,620		14,772		Quarterly	92 days
Fund of funds	18,742		1,109		17,633		Annually (3)	95-370 days
Global macro	77,618		1,012		76,606		Monthly - Quarterly	30-90 days
Long/short credit	21,296		5,223		16,073		Quarterly	60 days
Long/short equity	131,922		7,042		124,880		Monthly - Annually	30-60 days
Total hedge funds	$	290,861	$	40,897	$	249,964

(1) For those investments that are restricted by gates or that are invested in side pockets, the Company cannot reasonably estimate, as of March 31, 2013, 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 fund of funds investment is being redeemed effective June 30, 2013.

As of March 31, 2013, the Company had one unfunded commitment of $5.3 million related to its hedge fund portfolio (December 31, 2012—$5.8 million).

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.

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 index over the term of the deposit. The Company elected to account for this structured deposit at fair value. As of March 31, 2013, the estimated fair value of the deposit was $24.3 million (December 31, 2012—$24.3 million).

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, foreign currency forwards and money market futures, 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. Refer to Note 7 for additional details of derivative holdings.

Restricted Assets

The total restricted assets as of March 31, 2013 and December 31, 2012 were as follows:

(Expressed in thousands of U.S. Dollars)	March 31, 2013		December 31, 2012
Restricted cash and cash equivalents	$	340,329	$	254,458
Restricted assets included in fixed maturities, at fair value	3,904,465		3,992,104
Restricted assets included in other investments	157,863		151,727
Total	$	4,402,657	$	4,398,289

As of March 31, 2013 and December 31, 2012, of the $4,402.7 million and $4,398.3 million, respectively, of restricted cash and cash equivalents and restricted investments, $3,611.6 million and $3,655.3 million, respectively, were on deposit with various state or government insurance departments or pledged in favor of ceding companies. As of March 31, 2013 and

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2012, the remaining $791.1 million and $743.0 million, respectively, of restricted cash and cash equivalents and restricted investments were pledged as security in favor of letters of credit issued. The Company has issued secured letters of credit collateralized against the Company’s investment portfolio.

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 March 31, 2013, 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, 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 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 of prices between two independent sources, with significant differences requiring additional price sources; (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, including a review of the inputs used for pricing; 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 and liabilities classified as Level 2, the market approach is utilized. The significant inputs used to determine the fair value of those assets and liabilities 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. For syndicated bank loan securities held

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

within the corporate category, broker/dealer quotes are the principal source fair value. The principal inputs for corporate securities are considered observable market inputs and, therefore, the fair value of these securities are classified within Level 2.

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

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

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

• Derivatives consist of convertible bond equity call options, interest rate linked derivative instruments and foreign exchange forward contracts, money market futures and credit derivatives. 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 trade in the over-the-counter derivative market, or are priced based on broker/dealer quotes or 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.

• 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.

• Senior notes are not recorded at fair value but the fair value is disclosed. The fair value is obtained from an independent pricing service, which determines fair value using the spread above the risk-free yield curve, reported trades, broker/ dealer quotes, benchmark yields and industry and market indicators. The principal inputs are considered observable market inputs and, therefore, the fair value is 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 March 31, 2013 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 March 31, 2013, 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.

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Based on the review process applied by management, the permitted practical expedient has not been applied to one hedge fund investment. During the year ended December 31, 2010, a reduction of $2.5 million was made to the net asset value reported by the fund manager to adjust the carrying value of the fund to $nil. As of March 31, 2013, the carrying value of this hedge fund investment remains $nil, which is the Company's best estimate of the fund's fair value.

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

The following table presents the Company’s fair value hierarchy for those assets or liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:

March 31, 2013 (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	$	387,523	$	488,085		$	—	$	875,608
Non-U.S. governments	—		209,547			—		209,547
Corporate securities	—		2,379,205			—		2,379,205
Municipal securities	—		259,899			—		259,899
Asset-backed securities	—		301,698			—		301,698
Residential mortgage-backed securities	—		994,401			—		994,401
Commercial mortgage-backed securities	—		454,540			—		454,540
Total fixed maturities	387,523		5,087,375			—		5,474,898
Hedge funds	—		249,964			40,897		290,861
Structured deposit	—		24,250			—		24,250
Derivative assets, net	—		(592		)	—		(592		)
Other investments	—		273,622			40,897		314,519
	$	387,523	$	5,360,997		$	40,897	$	5,789,417

December 31, 2012 (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	$	387,572	$	497,798		$	—	$	885,370
Non-U.S. governments	—		246,712			—		246,712
Corporate securities	—		2,610,605			—		2,610,605
Municipal securities	—		273,336			—		273,336
Asset-backed securities	—		371,597			—		371,597
Residential mortgage-backed securities	—		1,234,670			—		1,234,670
Commercial mortgage-backed securities	—		454,259			—		454,259
Total fixed maturities	387,572		5,688,977			—		6,076,549
Hedge funds	—		249,053			44,140		293,193
Structured deposit	—		24,250			—		24,250
Derivative assets, net	—		(488		)	—		(488		)
Other investments	—		272,815			44,140		316,955
	$	387,572	$	5,961,792		$	44,140	$	6,393,504

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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 not carried at fair value in the consolidated balance sheet but for which disclosure of the fair value is required as of March 31, 2013and December 31, 2012: 

March 31, 2013 (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	$	10,025	$	21,083	$	—	$	31,108
Non-U.S. governments	—		651,847		—		651,847
Corporate securities	—		328,586		—		328,586
Municipal securities	—		1,879		—		1,879
Asset-backed securities	—		208		—		208
Total held to maturity fixed maturities	$	10,025	$	1,003,603	$	—	$	1,013,628

December 31, 2012 (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	$	10,224	$	21,257	$	—	$	31,481
Non-U.S. governments	—		680,094		—		680,094
Corporate securities	—		358,308		—		358,308
Asset-backed securities	—		425		—		425
Total held to maturity fixed maturities	$	10,224	$	1,060,084	$	—	$	1,070,308

The fair value of the Company’s senior notes as of March 31, 2013 was $508.2 million (December 31, 2012 - $501.1 million) and is classified within Level 2 of the fair value hierarchy.

The Company has no assets or liabilities measured at fair value on a non-recurring basis as of March 31, 2013.

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 months ended March 31, 2013 and 2012:

	Other Investments
(Expressed in thousands of U.S. Dollars)	2013			2012
Beginning balance at January 1	$	44,140		$	102,866
Total gains or losses (realized/unrealized)
Included in net income	1,911			(1,380		)
Included in other comprehensive income	—			—
Purchases	499			503
Issuances	—			—
Settlements	(5,653		)	(1,233		)
Transfers in and/or out of Level 3	—			—
Ending balance at March 31	$	40,897		$	100,756
The amount of total gains (losses) for the three months ended March 31, included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31	$	1,910		$	(1,380	)

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.

The Company uses various interest rate-linked derivatives, including swaptions, swaps and futures to manage the interest rate exposure of its fixed maturity investment portfolio. The Company also uses various foreign currency forward contracts, money market futures, credit derivatives and interest rate swaps as part of a total investment strategy applied to a portion of the Company’s investment portfolio. The Company may also hold convertible bond securities, with embedded equity call options, for their total return potential. None of the derivatives used were designated as hedging investments.

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The fair values of derivative instruments as of March 31, 2013 were:

Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	Derivative assets Fair Value		Derivative liabilities Fair Value
Foreign exchange forward contracts	$	355	$	(947	)
Total derivatives	$	355	$	(947	)

The fair values of derivative instruments as of December 31, 2012 were:

Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	Derivative assets Fair Value		Derivative liabilities Fair Value
Interest rate-linked derivatives	$	132	$	(574	)
Foreign exchange forward contracts	330		(376		)
Total derivatives	$	462	$	(950	)

The derivative assets and liabilities are included within other investments in the consolidated balance sheets.

As of March 31, 2013, the Company had outstanding interest rate swaps and swaptions of $nil in notional long positions and $nil in notional short positions (December 31, 2012—$52.0 million and $62.7 million, respectively). As of March 31, 2013, the Company had outstanding foreign currency forward contracts of $138.7 million in long positions and $238.9 million in short positions (December 31, 2012—$10.4 million and $145.9 million, respectively).

The impact of derivative instruments on the consolidated statement of operations and comprehensive income for the three months ended March 31, 2013 and 2012, was:

Derivatives not designated as hedging instruments (Expressed in thousands of U.S. Dollars)	2013 Amount of Gain or (Loss) Recognized in Income on Derivatives			2012 Amount of Gain or (Loss) Recognized in Income on Derivatives
Convertible bond equity call options	$	—		$	1,964
Interest rate-linked derivatives	(733		)	6,856
Credit default swaps	—			65
Money market futures	—			234
Foreign exchange forward contracts	561			(1,422		)
Total derivatives	$	(172	)	$	7,697

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.

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, or 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 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, or 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

24

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 March 31, 2013 was $90.6 million.

The Company has the option to redeem both the 6.25% senior notes and the 7.20% senior notes at any time, in whole or in part, at a “make-whole” redemption price, which is equal to the greater of the aggregate principal amount or the sum of the present values of the remaining scheduled payments of principal and interest.

Interest expense in connection with the senior notes was $7.1 million and $7.1 million for the three months ended March 31,2013 and 2012, 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 2035. 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, 2013 and the year ended December 31, 2012. 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 2013 and 2012:

Date Declared	Dividend per share		Dividend to be paid to shareholders of record on	Payable On
February 5, 2013	$	0.16	February 19, 2013	March 5, 2013
November 6, 2012	$	0.16	November 20, 2012	December 4, 2012
August 7, 2012	$	0.16	August 21, 2012	September 4, 2012
May 8, 2012	$	0.14	May 22, 2012	June 5, 2012
February 8, 2012	$	0.14	February 22, 2012	March 7, 2012

During the three months ended March 31, 2013, the Company repurchased 200,282 common shares at an average price of $30.71 per common share for a total amount of $6.2 million, including the costs incurred to effect the repurchases. These repurchases were in connection with our 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. As of March 31, 2013, the remaining authorization under the Company’s Board-approved share repurchase program was $301.7 million.

As of March 31, 2013, 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.

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables set forth the computation of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
(Expressed in thousands U.S. Dollars, except share and per share amounts)	2013		2012
Basic earnings per share:
Net income	$	99,184	$	79,024
Weighted average common shares outstanding—basic	95,721,183		101,002,884
Basic earnings per share	$	1.04	$	0.78
Diluted earnings per share:
Net income	$	99,184	$	79,024
Weighted average common shares outstanding—basic	95,721,183		101,002,884
Conversion of warrants	4,045,080		1,931,251
Conversion of options	359,324		116,024
Conversion of employee stock purchase plan	—		6,405
Non participating restricted shares	388,069		97,517
Weighted average common shares outstanding—diluted	100,513,656		103,154,081
Diluted earnings per share	$	0.99	$	0.77

For the three months ended March 31, 2013, the impact of the conversion of 80,088 options was excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive. For the three months ended March 31, 2012, the impact of the conversion of warrants of 293,924 and options of 2,447,987 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, or Chubb Re, the assumed reinsurance division of The Chubb Corporation, or 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, or 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 since the Amalgamation:

(Expressed in thousands of U.S. Dollars)	As of March 31, 2013		As of December 31, 2012
Balance Sheets
Premiums receivable	$	2,751	$	4,409
Losses and benefits recoverable from reinsurers	5,213		5,146
Unearned property and casualty premiums	12,359		14,967
Property and casualty losses	199,642		202,294
Funds withheld from reinsurers	564		575

26

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	Three Months Ended
(Expressed in thousands of U.S. Dollars)	March 31, 2013		March 31, 2012
Statements of Operations
Gross premiums written	$	2,748	$	2,605
Net earned premiums	4,994		5,360
Net losses and loss expenses	3,870		(905		)
Acquisition costs	1,099		1,110

Grand Central Re Limited

The Company owns 7.5% of the ordinary shares of Grand Central Re. 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.

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:

(Expressed in thousands of U.S. Dollars)	As of March 31, 2013		As of December 31, 2012
Balance Sheets
Losses and benefits recoverable from reinsurers	$	33,814	$	34,277
Deposit liabilities	10,786		11,038
Funds withheld from reinsurers	56,271		57,498
Reinsurance balance payable	60		207

	Three Months Ended
(Expressed in thousands of U.S. Dollars)	March 31, 2013			March 31, 2012
Statements of Operations
Reinsurance premiums ceded	$	83		$	18
Earned premiums ceded	83			18
Other income	25			25
Net losses and loss expenses	—			—
Claims and policy benefits	(604		)	(368		)
Interest expense	(82		)	(78		)

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.

New Point IV Limited

The Company owns 34.8% of the outstanding common shares of New Point IV, a Bermuda domiciled company incorporated in 2011. In conjunction with this investment, Alterra Agency and Alterra Bermuda entered into an underwriting services agreement with New Point Re IV, a wholly-owned subsidiary of New Point IV. The fees associated with this agreement for the three months ended March 31, 2013 and 2012 were $0.1 million and $4.3 million, respectively.

New Point V Limited

The Company owns 30.3% of the outstanding common shares of New Point V, a Bermuda domiciled company incorporated in 2012. In conjunction with this investment, Alterra Agency and Alterra Bermuda entered into an underwriting services agreement with New Point Re V, a wholly-owned subsidiary of New Point V. The fees associated with this agreement for the three months ended March 31, 2013 were $4.8 million.

Bay Point Holdings Limited

The Company owns 13.8% of the outstanding common shares of Bay Point. In conjunction with this investment, Alterra Bermuda entered into a quota share reinsurance agreement to cede 30% of its property-related lines of business to Bay Point Re

27

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 March 31, 2013, $2.2 million (December 31, 2012—$2.5 million) was included in premiums receivable and $2.9 million (December 31, 2012—$3.3 million) in losses and benefits recoverable from reinsurers related to this agreement.

13. COMMITMENTS AND CONTINGENCIES

Credit Facilities

On December 16, 2011, Alterra and Alterra Bermuda entered into a $1,100.0 million four-year secured credit facility, or the Senior Credit Facility, with Bank of America and various other financial institutions. The Senior Credit Facility provides for secured letters of credit to be issued for the account of Alterra, Alterra Bermuda and certain other subsidiaries of Alterra and for loans to Alterra and Alterra Bermuda. Loans under the facility are subject to a sublimit of $250.0 million. Subject to certain conditions and at the request of Alterra, the aggregate commitments of the lenders under the Senior Credit Facility may be increased up to a total of $1,600.0 million.

In July 2009, Harbor Point Re Limited (now Alterra Bermuda) 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 the London branch of Alterra Europe, an indirect subsidiary of Alterra Bermuda.

In December 2012, Alterra Bermuda renewed a $75.0 million letter of credit facility with The Bank of Nova Scotia, which expires on December 13, 2013.

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 March 31, 2013 and December 31, 2012:

	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:
March 31, 2013	$	1,175,000	GBP	30,000
December 31, 2012	$	1,175,000	GBP	30,000
Letters of credit issued and outstanding as of:
March 31, 2013	$	527,098	GBP	16,774
December 31, 2012	$	670,861	GBP	16,774
Cash and fixed maturities at fair value pledged as collateral as of:
March 31, 2013	$	756,515	GBP	22,760
December 31, 2012	$	706,671	GBP	22,355

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 March 31, 2013.

Legal Proceedings

The Company's insurance and reinsurance subsidiaries are subject to litigation and arbitration in the normal course of their operations. These disputes principally relate to claims on policies of insurance and contracts of reinsurance and are typical for the Company and for participants in the property and casualty insurance and reinsurance industries in general. Such legal proceedings are considered in connection with estimating the Company's reserve for property and casualty losses. An estimate of any amounts payable under such proceedings is included in the reserve for property and casualty losses in the consolidated balance sheet. As of March 31, 2013, based on available information, it was the opinion of the Company's management that the ultimate resolution of pending or threatened litigation or arbitrations, both individually and in the aggregate, would not have a material effect on the Company's financial condition, results of operations or liquidity.

Commitments

On June 19, 2012, Alterra Holdings, a wholly-owned subsidiary of the Company, along with private equity funds sponsored by Stone Point Capital, LLC, including Trident V L.P., and several third party investors, executed a subscription agreement with New Point V to purchase common shares of New Point V. Following execution of the subscription agreement and subsequent issuances of common shares, Alterra Holdings holds approximately 30.3% of the issued and outstanding

28

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

common shares of New Point V. As of March 31, 2013 Alterra Holdings’ remaining commitment under the subscription agreement with New Point V was $8.4 million.

On March 1, 2013 the Company granted long term incentive awards in the form of cash to certain employees under which the Company has committed to the payment of up to an aggregate of $22.1 million in cash compensation to such employees on March 1, 2016, provided they remain employed with the Company on that date. Payments may be accelerated prior to March 1, 2016 for certain qualifying employment terminations.

In connection with and contingent upon the closing of the planned Merger with Markel, the Company has instituted a retention plan for certain employees under which the Company has committed to the payment of stay bonuses up to an aggregate of $23.6 million in cash compensation to such employees one year from the closing of the Merger, provided they remain employed with the Company to that date. Payments may be accelerated for certain qualifying employment terminations.

In connection with the planned Merger with Markel, the Company has a commitment for professional fees of $19.0 million which will be incurred upon the successful closing of the Merger.

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, or 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 and other awards. The 2008 Plan is administered by the Compensation Committee of the Board of Directors, or 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, or 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. 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, or 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.

Warrants

On May 12, 2010, the Company issued 8,911,449 replacement warrants in connection with the Amalgamation. The warrants were originally issued by Harbor Point to founding shareholders and employees in connection with the purchase of shares at the time of its formation. The warrants held by non-employees are subject to anti-dilution provisions which, in the event of certain specified events including payment of cash dividends, provide 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 dividends upon exercise of the warrant. 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.

Warrant related activity is as follows:

	Warrants Outstanding	Warrants Exercisable	Weighted Average Exercise Price		Weighted Average Fair Value		Range of Exercise Prices
Balance, December 31, 2012	10,684,539	10,684,539	$	18.83	$	7.05	$18.60 - $26.48
Additional warrants issued as a result of dividends declared	54,834	54,834	$	18.54	$	7.09	$18.50 - $18.59
Balance, March 31, 2013	10,739,373	10,739,373	$	18.74	$	7.05	$18.50 - $26.48

On February 5, 2013, Alterra declared a dividend of $0.16 per share. This dividend resulted in a reduction in the weighted average exercise price of $0.09 and an increase in the number of warrants outstanding by 54,834 (issued at a weighted average grant date fair value per warrant of $7.09). As of March 31, 2013, a deferred dividend liability of $2.7 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.

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

29

ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

provision results in a lower number of shares being issued than the number of warrants exercised. No warrants were exercised during the three months ended March 31, 2013.

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 18,095 options during the three months ended March 31, 2013.

The fair value of options issued was estimated using the Black-Scholes option pricing model with the weighted average assumptions detailed below.

	2013
Option valuation assumptions:
Expected remaining option life	0.7 years
Expected dividend yield	1.57	%
Expected volatility	26.10	%
Risk-free interest rate	0.30	%
Forfeiture rate	—	%

A summary of the 2000 Plan related activity follows:

	Options Outstanding	Options Exercisable	Weighted Average Exercise Price		Fair Value of Options		Range  of Exercise Prices
Balance, December 31, 2012	606,198	606,198	$	21.81	$	6.57	$10.75 - $29.76
Options granted	18,095		$	31.07	$	2.39	$30.91 - $31.69
Options exercised	(44,041)		$	20.08	$	4.90	$10.75 - $24.74
Options forfeited	(7,388)		$	24.74	$	4.94	$24.74
Balance, March 31, 2013	572,864	572,864	$	22.20	$	6.59	$10.75 - $31.69

A summary of the 2008 Plan related activity follows:

	Awards Available for Grant	Options Outstanding	Options Exercisable	Weighted Average Exercise Price		Fair Value of Options		Range  of Exercise Prices
Balance, December 31, 2012	727,876	108,333	108,333	$	15.75	$	6.01	$	15.75
Restricted stock forfeited	1,693
Balance, March 31, 2013	729,569	108,333	108,333	$	15.75	$	6.01	$	15.75

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, 2012	1,775,127	1,158,539		1,158,539	$	26.78	$	5.21	$26.48 - $30.82
Restricted stock forfeited	870
Options forfeited	755	(755	)		$	26.48	$	5.19	$	26.48
Options exercised	—	(158,579	)		$	26.88	$	5.23	$26.48 - $30.82
Balance, March 31, 2013	1,776,752	999,205		999,205	$	26.76	$	5.21	$26.48 - $30.82

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Restricted Stock Awards

Restricted stock and restricted stock units, or RSUs, issued under the Plans have terms set by the Committee. These restricted stock 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 book value per share or diluted book value per share over a three or a five year period.

Total compensation cost recognized for restricted stock and RSU awards recorded in general and administrative expenses was $4.8 million and $7.5 million for the three months ended March 31, 2013 and 2012, respectively. Included within compensation cost was $0.8 million and $0.6 million related to performance based awards for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there was $21.0 million of unrecognized compensation costs related to restricted stock and RSU awards, including $7.2 million related to performance based awards. These costs are expected to be recognized over weighted average periods of 1.8 years and 2.2 years , respectively.

A summary of the Company’s unvested restricted stock awards as of December 31, 2012 and changes during the three months ended March 31, 2013 follow:

	Non-vested Restricted Stock		Weighted - Average Grant - Date Fair Value		Non-vested RSUs		Weighted - Average Grant - Date Fair Value
Balance, December 31, 2012	3,474,367		$	22.15	376,528		$	22.53
Awards vested	(815,906	)	$	23.88	(152,985	)	$	23.97
Awards forfeited	(2,563	)	$	21.61	—		$	—
Balance, March 31, 2013	2,655,898		$	21.60	223,543		$	21.55

Employee Stock Purchase Plan

On July 1, 2008, the Company introduced an employee stock purchase plan, or the ESPP. The ESPP gives participating employees the right to purchase common shares through payroll deductions during subscription periods, or the Subscription Periods. The Subscription Periods ran from January 1 to June 30 and from July 1 to December 31 each year. Effective January 1, 2013 the ESPP was suspended. The Company recorded an expense for the ESPP of $nil and $0.1 million for the three months ended March 31, 2013 and 2012, respectively.

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

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

The following is a discussion and analysis of our results of operations for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012 and our financial condition as of March 31, 2013. 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, 2012.

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;

• the integration of new business ventures Alterra may enter into; and

• 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. As of March 31, 2013, we had $2,875.4 million in consolidated shareholders’ equity.

In Bermuda, we conduct our insurance and reinsurance operations through Alterra Bermuda, which is registered as a Class 4 commercial and Class C long-term insurer under the insurance laws of Bermuda.

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In Europe, we conduct our non-Lloyd’s operations through Alterra Europe. Alterra Europe principally operates from Dublin and also operates branches in London and Zurich. Our Lloyd’s operations are conducted through the Syndicates. Alterra at Lloyd’s operations are based primarily in London, with locations in Dublin and Zurich. As of March 31, 2013, our proportionate share of Syndicates 1400, 2525 and 2526 for the 2013 year of account is 100%, nil, and approximately 20%, respectively.

In the United States, our U.S. reinsurance operations are conducted through Alterra Re USA, a Connecticut-domiciled reinsurance company. Our insurance operations in the United States 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.

In Latin America, we provide reinsurance to clients through Alterra at Lloyd’s in Rio de Janeiro, using Lloyd’s admitted status, through Alterra Europe using a representative office in Bogotá and a service company in Buenos Aires and through our local reinsurance company in Brazil. Our local reinsurance company in Brazil commenced writing business in the first quarter of 2012.

We employ certain personnel and hold certain assets within our global service companies incorporated and located in Bermuda, Ireland, 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 March 31, 2013, the allocation of invested assets was 94.6% in cash and fixed maturities and 5.4% in other investments, principally hedge funds.

Key Performance Indicators

Our principal objective as a global diversified 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 this 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 diluted 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 global insurer and reinsurer, which includes underwriting property catastrophe risks, we have substantial exposure to losses resulting from natural and man-made catastrophes. The frequency 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.

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The table below illustrates our key performance indicators as of March 31, 2013 and December 31, 2012, and for the three months ended March 31, 2013 and 2012:

	As of March 31, 2013		As of December 31, 2012
Book value per share (1)	$	29.89	$	29.56
Diluted book value per share (1)	$	28.44	$	28.34

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012
	(in thousands of U.S. Dollars, except percentages)
Increase in diluted book value per share, including dividends (2)	0.9		%	3.3		%
Net operating income (3)	$	77,220		$	67,756
Combined ratio (4)	87.4		%	92.6		%
Annualized return on average shareholders’ equity (5)	13.9		%	11.2		%
Annualized net operating return on average shareholders’ equity (3)(5)	10.8		%	9.6		%

(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) The increase in diluted book value per share including dividends is calculated by dividing adjusted diluted book value per share at the end of the period by diluted book value per share at the beginning of the period. Adjusted book value per share is calculated by adding the amount of dividends declared during the period to ending shareholders' equity and dividing the result by the number of diluted common shares outstanding using the treasury stock method.

(3) 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 most directly comparable U.S. GAAP financial measure.

(4) 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 for the property and casualty business.

(5) 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.

We consider growth in diluted book value per share to be the most important financial performance measure in assessing whether we are meeting our business objectives. We believe that a comparison of diluted book value per share growth should be adjusted for dividends to fully reflect the value created for shareholders. For the quarter ended March 31, 2013, our diluted book value per share including dividends increased by 0.9%. The increase was principally due to net income generated of $99.2 million, partially offset by dividends of $15.3 million and a decrease in accumulated other comprehensive income of $51.4 million, driven by a decrease in net unrealized gains on investments.

Our net operating income for the quarter ended March 31, 2013 increased compared with the prior year period principally due to improved underwriting income within our reinsurance, Alterra at Lloyd's and U.S. insurance segments partially offset by a reduction in investment income. The improved underwriting income was principally driven by a $9.8 million increase in net favorable development on prior year loss reserves and improved acquisition cost and general and administrative expense ratios. Net favorable development of prior year loss reserves was $20.6 million for the quarter ended March 31, 2013, principally within our reinsurance segment, and which reduced the combined ratio by 6.0 percentage points. This compares to net favorable development of prior year loss reserves of $10.8 million in the prior year period. The decline in investment income was principally due to lower reinvestment yields on new investment purchases and higher cash balances. We have not been investing as much of our cash from operations into fixed maturity and alternative investments as we normally would be, instead building up our cash and cash equivalents balance to satisfy a requirement under the Merger Agreement, to have $500.0 million of cash available at the closing of the Merger.

The increase in net favorable prior year loss development was the principal contributor to the decrease in our combined ratio for the quarter ended March 31, 2013 and the increase in our annualized net return on average shareholders' equity and annualized net operating return on average shareholders' equity for the quarter ended March 31, 2013 compared to the prior year period. We target a long-term net operating return on average shareholders' equity, or net operating ROE, of the risk free

34

rate plus 10% over the cycle. We believe that in the current stage of the cycle, our net operating ROE is consistent with this long-term target.

We seek to manage and monitor our short tail catastrophe exposed business so that the estimated maximum impact of a catastrophic event in any geographic zone is less than 25% of our beginning of year shareholders’ equity for a modeled 1 in 250 year event. As of March 31, 2013, our aggregate exposure was below this target. We intend to continue to monitor the pricing environment and believe we have the capital and operational flexibility to adjust our aggregate exposure should market conditions change materially over the course of 2013.

On December 18, 2012 we entered into the Merger Agreement with Markel. The Merger is expected to close on May 1, 2013, subject to customary closing conditions.

Business Outlook

The markets in which we operate historically have been cyclical. During periods of excess underwriting capacity, competition can result in lower pricing and less favorable policy terms for insurers and reinsurers. During periods of reduced underwriting capacity, pricing and policy terms are generally more favorable for insurers and reinsurers. We believe that the industry has been in a period of excess underwriting capacity, and while 2011 and 2012’s property catastrophe events likely eroded some of that capacity, there was not sufficient pressure on the industry to improve pricing significantly in 2012. In addition, a significant amount of capital has entered the industry in recent years from investors who have not traditionally invested in the insurance industry, but have been attracted by the potential for returns that can be uncorrelated with the rest of the financial services industry. The industry is also operating in a low interest rate environment, which makes it more difficult to generate significant investment income growth. Both of these factors generally result in lower net operating income, return on average shareholders’ equity and net operating return on average shareholders’ equity.

Although there remains uncertainty regarding the timing, location and scale of a favorable turn in the market, we believe that the industry has shown signs of improvement for 2013. However, we intend to maintain our underwriting discipline while actively managing our expenses.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires 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 ended March 31, 2013. We believe that the critical accounting policies set forth in our Annual Report on Form 10-K for the year ended December 31, 2012 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.

35

Consolidated Results of Operations—For the quarter ended March 31, 2013 and 2012

Our consolidated results of operations for the quarter ended March 31, 2013 and 2012 are summarized below:

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012			% change
	(Expressed in thousands of U.S. Dollars)
Gross premiums written	$	649,993		$	661,330		(1.7	)%
Reinsurance premiums ceded	(190,290		)	(224,462		)	(15.2	)%
Net premiums written	$	459,703		$	436,868		5.2	%
Net premiums earned	$	345,902		$	338,175		2.3	%
Net investment income	49,099			58,678			(16.3	)%
Net realized and unrealized gains (losses) on investments	40,395			25,493			58.5	%
Net impairment losses recognized in earnings	(152		)	(5,369		)	(97.2	)%
Other income	5,701			5,362			6.3	%
Total revenues	440,945			422,339			4.4	%
Net losses and loss expenses	203,557			206,029			(1.2	)%
Claims and policy benefits	13,887			13,466			3.1	%
Acquisition costs	56,902			59,724			(4.7	)%
Interest expense	8,132			8,628			(5.7	)%
Net foreign exchange losses (gains)	15			(32		)	n/m
Merger and acquisition expenses	626			—			n/m
General and administrative expenses	57,923			60,082			(3.6	)%
Total losses and expenses	341,042			347,897			(2.0	)%
Income before taxes	99,903			74,442			34.2	%
Income tax expense (benefit)	719			(4,582		)	n/m
Net income	$	99,184		$	79,024		25.5	%
Loss ratio (a)	59.0		%	61.0		%
Acquisition cost ratio (b)	16.4		%	17.6		%
General and administrative expense ratio (c)	12.0		%	14.0		%
Combined ratio (d)	87.4		%	92.6		%

(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 premiums earned for the property and casualty business.

n/m Not meaningful.

Premiums. Gross premiums written for the quarter ended March 31, 2013 decreased 1.7% compared to the prior year period. Decreased gross premiums written in our U.S. insurance and reinsurance segments was partially offset by growth in our global insurance and Alterra at Lloyd's segments. In our global insurance segment the growth was principally in the professional liability line of business and in our Alterra at Lloyd's segment the growth was in the newer product lines, including professional indemnity and international casualty. These areas have expanded due to underwriting teams added over the last year. In our U.S insurance segment, the decrease in premiums was principally due to the discontinuation of the business written through our contracted general agent distribution channel (our "contract binding business"). In the reinsurance segment the decrease was

36

principally in the professional liability and agriculture lines of business partially offset by growth in auto, general casualty and workers' compensation lines of business.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter ended March 31, 2013 was 29.3% compared to 33.9% in the prior year period. The decrease in the ratio for the quarter was principally due to a reduction in the property reinsurance purchased in our reinsurance and Alterra at Lloyd's segments. The ratio for the quarter ended March 31, 2012 was also impacted by the 100% retrocession of our contract binding business in our U.S. insurance segment starting from August 1, 2011. We ceased writing and ceding the contract binding business in the second quarter of 2012 which results in a lower ratio of reinsurance premiums ceded to gross premiums written in the quarter ended March 31, 2013 compared to the prior year period.

During the past several years, we have shifted our mix of business written from predominantly long-tail business to predominantly short-tail business, principally in response to market conditions. This greater emphasis on short-tail lines of business, with property being the largest component, and including our investment in the New Point sidecars, has increased our probable maximum loss from property catastrophe events compared to three years ago. We regularly monitor our need for reinsurance based on aggregate risk exposures and revise our reinsurance ceded program accordingly.

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.

Net investment income. Net investment income for the quarter ended March 31, 2013 decreased by 16.3% compared to the prior year quarter. As investments in our fixed maturity portfolio mature, lower reinvestment yields on new purchases have reduced the weighted average book yield of our portfolio. In addition, our ratio of average cash to average invested assets has increased from 10.8% for the quarter ended March 31, 2012 to 12.0% for the quarter ended March 31, 2013. This increase was driven by a requirement of the Merger Agreement to have $500.0 million in cash available upon closing of the Merger, which has reduced the amount of cash being invested into fixed maturity investments during the quarter.

Net realized and unrealized gains (losses) on investments. Net realized and unrealized gains and losses on investments may vary significantly from period to period. For the quarter ended March 31, 2013, the principal components of the net gain were $22.2 million of net realized gains from sales of our available for sale fixed maturities, compared to $7.8 million of gains in the prior year period and a $12.7 million increase in fair value of the hedge fund portfolio, compared to an increase in fair value of $3.7 million in the prior year period. In addition the quarter ended March 31, 2013 included $4.4 million of income from equity method investments, compared to $4.9 million in the prior year period, principally related to our investments in New Point V and New Point IV.

Other income. Other income for the quarters ended March 31, 2013 and 2012 principally comprised underwriting fees and profit commission earned from New Point Re V and New Point Re IV, respectively.

Net losses and loss expenses. The loss ratio decreased for the quarter ended March 31, 2013 by 2.0 percentage points compared to the prior year period. Significant items impacting the loss ratio were:

• Net favorable development of prior year loss reserves in the quarter ended March 31, 2013 of $20.6 million compared to $10.8 million in the quarter ended March 31, 2012;

• Net favorable development of $0.6 million was recognized in our global insurance segment, $0.2 million in our U.S. insurance segment, $17.1 million in our reinsurance segment and $2.6 million in our Alterra at Lloyd's segment in the quarter ended March 31, 2013;

• The prior year loss reserve development reduced the loss ratio by 6.0 percentage points for the quarter ended March 31, 2013, compared to 3.2 percentage points for the quarter ended March 31, 2012. Excluding the impact of net favorable loss development, the loss ratio for the quarter ended March 31, 2013 was 64.9%, compared to 64.2% for the quarter ended March 31, 2012; and

• For both the quarter ended March 31, 2013 and March 31, 2012, our results do not include significant losses related to property catastrophe events.

Acquisition costs. Our acquisition cost ratio for the quarter ended March 31, 2013 decreased by 1.2 percentage points compared to the prior year period. The insurance and reinsurance contracts we write have a wide range of acquisition cost ratios. Changes in the mix of business written and earned and the amount and type of reinsurance purchased impact our acquisition cost ratio from period to period.

Interest expense. Interest expense reflects interest on our senior notes, interest on funds withheld from reinsurers, and accretion on deposit liability contracts. Interest expense for the quarter ended March 31, 2013 decreased compared to the prior year period principally due to a reduction in the interest expense charged on funds withheld from Grand Central Re.

37

General and administrative expenses. General and administrative expenses for the quarter ended March 31, 2013 decreased by $2.2 million compared to the prior year period. The decrease was principally due to a decrease in employee compensation expense in our reinsurance segment due to lower headcount, partially offset by additional employee compensation triggered by the resignation of a senior executive in our corporate group.

Income tax expense (benefit). Income tax expense or benefit is generated through our foreign operations outside of Bermuda, principally in the United States, Europe and Latin America. The effective tax rate was 0.7% for the quarter ended March 31, 2013, compared with a negative 6.2% for the prior year period. Our effective income tax rate, which we calculate as income tax expense or benefit divided by income or loss before taxes, may fluctuate significantly from period to period depending on the geographic distribution of pre-tax income or loss in any given period between different jurisdictions with different tax rates.

Segment Results of Operations—For the quarter ended March 31, 2013 and 2012

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

• Global insurance —We offer property and casualty excess of loss capacity from our offices in Bermuda, Dublin and London primarily to U.S. and international Fortune 1000 companies. Insurance offered from our U.S. offices is included within our U.S. insurance segment. Principal lines of business include aviation, excess liability, professional lines and property.

• U.S. insurance —We offer property and casualty insurance coverage from our offices in the United States primarily to Fortune 3000 companies. Principal lines of business include general/excess liability, marine, professional liability and property.

• Reinsurance—We offer property and casualty quota share and excess of loss reinsurance from our offices in Bermuda, Bogotá, Buenos Aires, Dublin, London, Rio de Janeiro and the United States to insurance and reinsurance 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.

• Alterra at Lloyd’s—We offer property and casualty quota share and excess of loss insurance and reinsurance from our offices in London, Dublin and Zurich, primarily to medium- to large- sized international clients. Principal lines of business include accident & health, agriculture, aviation, financial institutions, international casualty, marine, professional liability and property.

• Life and annuity reinsurance—We previously offered reinsurance products focusing on blocks of life and annuity business, which took the form of co-insurance transactions whereby the risks are reinsured on the same basis as the original policies. In 2010 we 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.

We manage our invested assets on an aggregated basis, and do not allocate investment income and realized and unrealized gains on investments to the property and casualty segments. However, due to the longer duration of liabilities on life and annuity reinsurance business, and the accretion of the discounted carrying value of life and annuity benefits, investment returns are important in evaluating the profitability of this segment. Consequently, we allocate investment returns to this segment 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.

We monitor the performance of all of our segments other than life and annuity reinsurance on the basis of underwriting income, loss ratio, acquisition cost ratio, general and administrative expense ratio and combined ratio along with other metrics. 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 and allocated net investment income, and expenses from claims and policy benefits, acquisition costs and general and administrative expenses.

38

Global Insurance Segment

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012			% change
	(Expressed in thousands of U.S. Dollars)
Gross premiums written	$	75,554		$	66,771		13.2	%
Reinsurance premiums ceded	(45,053		)	(43,251		)	4.2	%
Net premiums written	$	30,501		$	23,520		29.7	%
Net premiums earned	$	46,372		$	46,970		(1.3	)%
Net losses and loss expenses	(34,922		)	(18,061		)	93.4	%
Acquisition costs	(43		)	(59		)	(27.1	)%
General and administrative expenses	(5,977		)	(6,481		)	(7.8	)%
Other income	884			815			8.5	%
Underwriting income	$	6,314		$	23,184		(72.8	)%
Loss ratio (a)	75.3		%	38.5		%
Acquisition cost ratio (b)	0.1		%	0.1		%
General and administrative expense ratio (c)	12.9		%	13.8		%
Combined ratio (d)	88.3		%	52.4		%

(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 March 31, 2013		% of Premium Written		% Ceded		Quarter Ended March 31, 2012		% of Premium Written		% Ceded
	(Expressed in thousands of U.S. Dollars)
Gross Premiums Written by Type of Risk:
Aviation	$	1,585	2.1	%	320.1	%	$	1,302	1.9	%	279.3	%
Excess liability	20,242		26.8	%	51.5	%	25,186		37.7	%	58.5	%
Professional liability	36,252		48.0	%	53.4	%	24,466		36.7	%	59.3	%
Property	17,475		23.1	%	58.5	%	15,817		23.7	%	65.6	%
	$	75,554	100.0	%	59.6	%	$	66,771	100.0	%	64.8	%

Premiums. Gross premiums written for the quarter ended March 31, 2013increased by 13.2% compared to the prior year period. The increase for the quarter was principally due to more favorable pricing in the professional liability line of business. This increase was partially offset by a reduction in the renewal of contracts in the excess liability line of business in the quarter ended March 31, 2013.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter ended March 31, 2013 was 59.6% compared to 64.8% in the prior year period. The amount of reinsurance that we purchase can vary significantly by line of business and within lines of business.

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.

Net losses and loss expenses. The loss ratio for the quarter ended March 31, 2013increased by 36.8 percentage points compared to the prior year period. Significant items impacting the loss ratio were:

39

• Net favorable development of prior year loss reserves in the quarter ended March 31, 2013 of $0.6 million compared to $18.3 million in the quarter ended March 31, 2012;

• Net favorable loss development in the quarter ended March 31, 2013 was principally in the following lines of business and accident years: property (2011), aviation (2009 and 2010) and general liability (2005 and 2006) partially offset by net unfavorable prior year loss development in the professional liability line of business. Predominantly favorable prior year development of the professional liability reserves was more than offset by increased case reserve estimates on a limited number of contracts;

• The prior year loss reserve development reduced the loss ratio by 1.3 percentage points for the quarter ended March 31, 2013, compared to 39.0 percentage points for the quarter ended March 31, 2012. Excluding the impact of net favorable loss development, the loss ratio was 76.6% for the quarter ended March 31, 2013, compared to 77.4% for the quarter ended March 31, 2012. The decrease was principally due to a reduction in the level of significant per risk property losses during the quarter ended March 31, 2013 compared to the prior year period; and

• For the quarters ended March 31, 2013 and 2012, we had no significant losses associated with significant property catastrophe events.

Acquisition costs. Acquisition costs are presented net of ceding commission income associated with reinsurance premiums ceded. These ceding commissions compensate us for the costs of producing the portfolio of risks ceded to our reinsurers. The acquisition cost ratio was consistent for the quarters ended March 31, 2013 and 2012.

General and administrative expenses. General and administrative expenses decreased $0.5 million for the quarter ended March 31, 2013 compared to the prior year period. The decrease was principally due to a reduction in incentive-based compensation expense.

U.S. Insurance Segment

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012			% change
	(Expressed in thousands of U.S. Dollars)
Gross premiums written	$	99,473		$	104,282		(4.6	)%
Reinsurance premiums ceded	(62,682		)	(70,494		)	(11.1	)%
Net premiums written	$	36,791		$	33,788		8.9	%
Net premiums earned	$	49,963		$	55,785		(10.4	)%
Net losses and loss expenses	(33,215		)	(37,564		)	(11.6	)%
Acquisition costs	(4,327		)	(7,696		)	(43.8	)%
General and administrative expenses	(10,445		)	(12,257		)	(14.8	)%
Other income	—			81			(100.0	)%
Underwriting income (loss)	$	1,976		$	(1,651	)	n/m
Loss ratio (a)	66.5		%	67.3		%
Acquisition cost ratio (b)	8.7		%	13.8		%
General and administrative expense ratio (c)	20.9		%	22.0		%
Combined ratio (d)	96.0		%	103.1		%

(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.

n/m Not meaningful.

40

	Quarter Ended March 31, 2013			% of Premium Written		% Ceded		Quarter Ended March 31, 2012		% of Premium Written		% Ceded
	(Expressed in thousands of U.S. Dollars)
Gross Premiums Written by Type of Risk:
General/ Excess Liability	$	29,793		30.0	%	46.3	%	$	21,021	20.2	%	41.5	%
Marine	26,346			26.5	%	30.1	%	25,201		24.2	%	27.5	%
Professional Liability	14,356			14.4	%	56.6	%	11,208		10.7	%	36.9	%
Property	28,161			28.3	%	114.3	%	29,247		28.0	%	114.2	%
Gross Premiums Written excluding Contract binding business	98,656			99.2	%	62.9	%	86,677		83.1	%	61.4	%
Contract binding business - Property	(42		)	—	%	41.9	%	3,959		3.8	%	106.0	%
Contract binding business - General Liability	859			0.8	%	74.8	%	13,646		13.2	%	96.1	%
	$	99,473		100.0	%	63.0	%	$	104,282	100.0	%	67.6	%

Premiums. Gross premiums written for the quarter ended March 31, 2013 decreased 4.6%, compared to the prior year period. Excluding the contract binding business which we ceased writing in the quarter ended June 30, 2012, gross premiums written increased 13.8% for the quarter ended March 31, 2013, compared to the prior year period. Significant factors affecting gross premiums written were:

• Growth in wholesale excess casualty business (which is included within our general/excess liability line of business) of $9.8 million for the quarter ended March 31, 2013;

• Continued expansion of our retail Alterra Insurance USA platform, principally in the professional liability line of business;

• Growth in our marine line of business resulting from the expansion of our underwriting team; and

• A decrease in general liability insurance written through the brokerage distribution channel of $2.0 million for the quarter ended March 31, 2013, compared to the prior year period. We ceased writing this product line in the first quarter of 2012.

During the quarter ended September 30, 2011, Alterra E&S sold the renewal rights to our contract binding business. However, under an agreement with the purchaser, commencing August 1, 2011, the contract binding business continued to be written by Alterra E&S and 100% of the premiums and losses were ceded to the purchaser. The 100% quota share reinsurance of this business meant that we did not retain any written and earned premium or net losses, but earned a ceding commission, on new and renewal policies incepting after August 1, 2011. During the quarter ended June 30, 2012 we stopped writing and ceding this business.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter ended March 31, 2013 was 63.0% compared to 67.6% in the prior year period. The decrease in the percentage of premiums ceded in the quarter ended March 31, 2013 was due principally to the 100% cession of $16.8 million of gross premiums written from the contract binding business affecting both general liability and property lines for the quarter ended March 31, 2012. Excluding the impact of the 100% cession of the contract binding business, the ratio of reinsurance premiums ceded to gross premiums written was 61.4% for the quarter ended March 31, 2012. The increase in our ratio of reinsurance premiums ceded to gross premiums written was due to an increase in the quota share cession rates on our brokerage-sourced property business and the shift in business mix within the segment to newer product lines including our wholesale excess casualty line and our retail Alterra Insurance USA platform on which we purchase more reinsurance than on our more established lines of business.

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.

Net losses and loss expenses. The loss ratio for the quarter ended March 31, 2013decreased0.8 percentage points, compared to the prior year period. Significant items that impacted the loss ratio were:

• Net favorable prior year loss development of $0.2 million for the quarter ended March 31, 2013, compared to net unfavorable loss development of $1.0 million for the quarter ended March 31, 2012. The prior year loss reserve development decreased the loss ratio by 0.5percentage points for the quarter ended March 31, 2013, and increased the loss ratio by 1.8 percentage points for the quarter ended March 31, 2012;

41

• Excluding the impact of prior year loss development, the loss ratio was 67.0% for the quarter ended March 31, 2013, compared to 65.5% for the quarter ended March 31, 2012. The increase in loss ratio was due principally to the change in the mix of business, particularly an increase in excess casualty, marine and professional liability lines of business. These lines of business have a higher average loss ratio than property lines, which declined as a percentage of net premiums earned; and

• Our results for both the quarter ended March 31, 2013 and 2012 included no significant property catastrophe losses.

Acquisition expenses. Acquisition costs decreased $3.4 million for the quarter ended March 31, 2013 compared to the prior year period. The decrease was due partly to a decrease in net premiums earned and also changes in the mix of business with an increase in excess casualty and retail business earned which have lower acquisition cost ratios. In addition, there was an increase in the commission income earned from the quota share reinsurance treaty covering our brokerage-sourced property business. This was partially offset by the decrease in commission income on the contract binding business that was 100% ceded which benefited acquisition expenses in the quarter ended March 31, 2012.

General and administrative expenses. General and administrative expenses decreased $1.8 million for the quarter ended March 31, 2013 compared to the prior year period. The increase was principally due to decreased incentive based compensation costs and reduction in salary costs due to reduced headcount.

Reinsurance Segment

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012			% change
	(Expressed in thousands of U.S. Dollars)
Gross premiums written	$	315,858		$	343,694		(8.1	)%
Reinsurance premiums ceded	(57,474		)	(72,109		)	(20.3	)%
Net premiums written	$	258,384		$	271,585		(4.9	)%
Net premiums earned	$	180,052		$	182,148		(1.2	)%
Net losses and loss expenses	(94,662		)	(111,729		)	(15.3	)%
Acquisition costs	(40,438		)	(42,416		)	(4.7	)%
General and administrative expenses	(15,100		)	(19,311		)	(21.8	)%
Other income	4,864			4,441			9.5	%
Underwriting income	$	34,716		$	13,133		164.3	%
Loss ratio (a)	52.6		%	61.3		%
Acquisition cost ratio (b)	22.5		%	23.3		%
General and administrative expense ratio (c)	8.4		%	10.6		%
Combined ratio (d)	83.4		%	95.2		%

(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.

n/m Not meaningful.

42

	Quarter Ended March 31, 2013			% of Premium written		% Ceded		Quarter Ended March 31, 2012		% of Premium written		% Ceded
	(Expressed in thousands of U.S Dollars)							(Expressed in thousands of U.S Dollars)
Gross Premiums Written by Type of Risk:
Agriculture	$	961		0.3	%	0.6	%	$	17,505	5.1	%	—
Auto	15,170			4.8	%	—		512		0.1	%	—
Aviation	3,694			1.2	%	0.1	%	5,525		1.6	%	21.6	%
Credit/surety	29,817			9.4	%	8.9	%	35,850		10.4	%	15.5	%
General casualty	24,712			7.8	%	2.3	%	14,956		4.4	%	—
Marine & energy	17,754			5.6	%	3.0	%	13,395		3.9	%	3.3	%
Medical malpractice	7,022			2.2	%	—		11,276		3.3	%	—
Other	2,529			0.8	%	—		4,437		1.3	%	—
Professional liability	27,031			8.6	%	—		59,458		17.3	%	—
Property	159,157			50.4	%	33.7	%	161,124		46.9	%	40.9	%
Whole account	(46		)	—		—		1,408		0.4	%	—
Workers’ compensation	28,057			8.9	%	—		18,248		5.3	%	—
	$	315,858		100.0	%	18.2	%	$	343,694	100.0	%	21.0	%

Effective July 1, 2012, we redefined our reporting segments by combining the reinsurance and Latin America segments into a single reinsurance segment. Our Latin America business is now combined with and reported as part of the reinsurance segment. The comparative period has been re-presented to reflect these changes. For the quarter ended March 31, 2013 and 2012, gross premiums written from our Latin America operations, which are now included in the reinsurance segment, were $30.1 million and $25.3 million, respectively.

Premiums. Gross premiums written for the quarter ended March 31, 2013 decreased by 8.1% compared to the prior year period. Significant factors affecting the gross premiums written were:

• Gross premiums written in our professional liability line of business decreased $32.4 million principally resulting from the non renewal of two contracts due to unfavorable pricing and the reduced participation on a significant contract;

• Gross premiums written in our agriculture line of business decreased $16.5 million principally resulting from the non renewal of one contract;

• Gross premiums written in our auto line of business increased $14.7 million. The quarter ended March 31, 2013 included positive premium adjustments of $3.8 million compared to negative premium adjustments of $8.0 million in the prior year period. Excluding the impact of these adjustments, the gross premiums written for the quarter ended March 31, 2013 were $11.4 million compared to $8.5 million in the prior year period;

• Gross premiums written in our general casualty line of business increased $9.8 million principally due to increased participation on a significant quota share treaty; and

• Gross premiums written in our workers' compensation line of business increased $9.8 million principally due to a change in the timing of a contract renewal.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter ended March 31, 2013 was 18.2% compared to 21.0% in the prior year period. The decrease was principally due to changes in our property reinsurance program, including a decrease in the ceding percentage on our property quota share treaties. We regularly 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.

Net losses and loss expenses. The loss ratio decreased by 8.7 percentage points for the quarter ended March 31, 2013 compared to the prior year period. Significant items impacting the loss ratio were:

• Net favorable development of prior year loss reserves in the quarter ended March 31, 2013 of $17.1 million compared to net unfavorable development of $2.1 million in the quarter ended March 31, 2012;

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• Prior year loss development in the quarter ended March 31, 2013 was principally related to net favorable development in our property line of business (2011 and 2012 years). This was partially offset by net unfavorable development in our professional liability (2007-2009 years) and medical malpractice (2009 and 2010 years) lines of business relating to worse than expected claims experiences on a limited number of contracts;

• The prior year loss reserve development reduced the loss ratio by 9.5 percentage points for the quarter ended March 31, 2013 compared to an increase to the loss ratio of 1.1 percentage points for the quarter ended March 31, 2012. Excluding the impact of net favorable loss development, the loss ratio was 62.1% for the quarter ended March 31, 2013, compared to 60.2% for the quarter ended March 31, 2012 principally due to changes in mix of business; and

• There were no significant losses associated with property catastrophe events during the quarters ended March 31, 2013 and 2012.

Acquisition costs. Acquisition costs for the quarter ended March 31, 2013 decreased consistent with decreases in net premiums earned compared to the prior year period. The reinsurance contracts we write have a wide range of acquisition cost ratios and the small decrease in acquisition ratio compared the prior year period is the result of shifts in the mix of business written and earned.

General and administrative expenses. General and administrative expenses for the quarter ended March 31, 2013 decreased by $4.2 million compared to the prior year period, principally due decreased incentive based compensation costs and reduction in salary costs due to reduced headcount.

Other income. Other income for the quarters ended March 31, 2013 and 2012 principally related to underwriting fees and profit commission earned from New Point Re V and New Point Re IV, respectively.

Alterra at Lloyd’s Segment

Our Alterra at Lloyd’s segment comprises all of our Lloyd’s operating businesses, other than underwriting activity related to Latin America, which is included within our reinsurance segment.

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012			% change
	(Expressed in thousands of U.S. Dollars)
Gross premiums written	$	158,384		$	146,143		8.4	%
Reinsurance premiums ceded	(24,998		)	(38,590		)	(35.2	)%
Net premiums written	$	133,386		$	107,553		24.0	%
Net premiums earned	$	68,874		$	52,850		30.3	%
Net losses and loss expenses	(40,758		)	(38,675		)	5.4	%
Acquisition costs	(11,965		)	(9,434		)	26.8	%
General and administrative expenses	(10,035		)	(9,095		)	10.3	%
Underwriting income (loss)	$	6,116		$	(4,354	)	n/m
Loss ratio (a)	59.2		%	73.2		%
Acquisition cost ratio (b)	17.4		%	17.9		%
General and administrative expense ratio (c)	14.6		%	17.2		%
Combined ratio (d)	91.1		%	108.2		%

(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.

n/m Not meaningful.

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	Quarter Ended March 31, 2013		% of Premium Written		% Ceded		Quarter Ended March 31, 2012		% of Premium Written		% Ceded
	(Expressed in thousands of U.S. Dollars)
Gross Premiums Written by Type of Risk:
Accident & health	$	17,656	11.2	%	12.4	%	$	17,432	11.9	%	37.1	%
Agriculture	22,305		14.1	%	—		20,370		14.0	%	—
Aviation	999		0.6	%	44.9	%	2,486		1.7	%	246.4	%
Financial institutions	8,725		5.5	%	42.5	%	6,904		4.7	%	62.6	%
International casualty	54,398		34.3	%	5.5	%	49,268		33.7	%	8.5	%
Marine	3,921		2.5	%	46.1	%	2,726		1.9	%	(9.1	)%
Professional liability	17,654		11.1	%	(3.2	)%	5,428		3.7	%	42.2	%
Property	32,726		20.7	%	43.9	%	41,529		28.4	%	36.6	%
	$	158,384	100.0	%	15.8	%	$	146,143	100.0	%	26.4	%

Premiums. Gross premiums written for the quarter ended March 31, 2013increased8.4% compared to the prior year period. The increase was principally due to growth in our newer professional indemnity product line (included within professional liability) along with growth in our international casualty line of business due to favorable pricing conditions. This was partially offset by a decrease of $8.8 million in property premiums written due to a reduction in our appetite for property catastrophe risks in this segment.

The ratio of reinsurance premiums ceded to gross premiums written for the quarter ended March 31, 2013 was 15.8% compared to 26.4% for the prior year period. The decrease in the ratio was principally due to changes in mix of business and the timing of renewal of certain reinsurance treaties.

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.

Net losses and loss expense. The loss ratio for the quarter ended March 31, 2013 decreased14.0 percentage points compared to the prior year period. Significant items impacting the loss ratios were:

• Net favorable development of prior year loss reserves in the quarter ended March 31, 2013 was $2.6 million compared to net unfavorable development of $4.5 million in the quarter ended March 31, 2012;

• The net favorable development in the quarter ended March 31, 2013 was principally on our property line of business;

• The prior year loss reserve development reduced the loss ratio by 3.7 percentage points for the quarter ended March 31, 2013 and increased the loss ratio by 8.5 percentage points for the quarter ended March 31, 2012. Excluding the impact of prior year loss development, the loss ratio was 62.9% for the quarter ended March 31, 2013, compared to 64.7% for the quarter ended March 31, 2012. The decrease for the quarter ended March 31, 2013 was principally due to changes in the mix of business; and

• There were no significant losses associated with property catastrophe events during the quarters ended March 31, 2013 and 2012.

Acquisition expenses. The acquisition costs increased $2.5 million for the quarter ended March 31, 2013 compared to the prior year period. This increase was in line with the growth in net premiums earned.

General and administrative expenses. General and administrative expenses for the quarter ended March 31, 2013 increased $0.9 million, compared to the prior year period, principally due to increased compensation costs related to growth in headcount due to expansion of underwriting teams. However, the increase in net premiums earned reduced our general and expense ratio by 2.6 percentage points compared to the prior year period.

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Life and Annuity Reinsurance Segment

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012			% change
	(Expressed in thousands of U.S. Dollars)
Net premiums earned	$	641		$	422		51.9	%
Net investment income	13,526			14,776			(8.5	)%
Claims and policy benefits	(13,887		)	(13,466		)	3.1	%
Acquisition costs	(129		)	(119		)	8.4	%
General and administrative expenses	(106		)	(34		)	211.8	%
Income	$	45		$	1,579		n/m

There were no new life and annuity contracts written during the quarter ended March 31, 2013 or during the year ended December 31, 2012. In 2010 we decided not to write any new life and annuity contracts for the foreseeable future. This decision does not affect our existing life and annuity reinsurance contracts and we continue to service our existing life and annuity customer base.

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 derived primarily from the spread between the actual rate of return on our investments and the interest expense related to the discount on our reserves. Over the last several years this spread has narrowed due to declining investment yields. Income can also be impacted by changes in estimated and actual claims, premiums, expenses and persistency of the underlying policies.

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 that are allocated to the life and annuity segment.

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012			% change
	(Expressed in thousands of U.S. Dollars)
Net investment income	$	49,099		$	58,678		(16.3	)%
Net realized and unrealized gains on investments	$	40,395		$	25,493		58.5	%
Net impairment losses recognized in earnings	$	(152	)	$	(5,369	)	(97.2	)%
Average annualized yield on cash and fixed maturities	2.58		%	3.12		%

Net investment income. Net investment income for the quarter ended March 31, 2013 decreased compared to the respective prior year period. The decline in investment income was principally due to lower reinvestment yields on new investment purchases and higher cash balances. As investments in our fixed maturity portfolio mature, lower reinvestment yields on new purchases have reduced the weighted average book yield of our portfolio. In addition, our ratio of average cash to average invested assets has increased from 10.8% for the quarter ended March 31, 2012 to 12.0% for the quarter ended March 31, 2013. This increase was driven by a requirement of the Merger Agreement to have $500.0 million in cash available upon closing of the Merger. Meeting this requirement has reduced the amount of cash being invested into fixed maturity investments during the quarter and increased our cash balance.

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

	Quarter Ended March 31, 2013			Quarter Ended March 31, 2012
	(Expressed in thousands of U.S. Dollars)
Increase in fair value of hedge funds	$	12,660		$	3,679
(Decrease) increase in fair value of derivatives	(172		)	7,697
Increase in fair value of structured deposit	—			365
Increase in fair value of other investments	12,488			11,741
Net realized gains on available for sale and held to maturity securities	24,373			7,759
Net realized and unrealized (losses) gains on trading securities	(861		)	1,066
Income from equity method investments	4,395			4,927
Net realized and unrealized gains on investments	$	40,395		$	25,493

Change in fair value of other investments. Our investments in hedge funds comprises the majority of other investments. The increase in fair value of the hedge fund portfolio was $12.7 million, or a 4.21% rate of return, for the quarter ended March 31, 2013 compared to an increase of $3.7 million, or a 0.98% rate of return, for the quarter ended March 31, 2012. The rate of return of 4.21% for the quarter ended March 31, 2013 compares to the HFRI Fund of Funds Composite Index returning 3.36% over the same period, which we believe is our most relevant benchmark.

The allocation of invested assets to our hedge fund portfolio as of March 31, 2013 was 3.6%, 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 $0.2 million for the quarter ended March 31, 2013 compared to an increase in fair value of $7.7 million for the quarter ended March 31, 2012. We hold various derivative instruments, including convertible bond equity call options, interest rate linked derivative instruments and foreign exchange forward contracts. The loss for the current quarter resulted from interest rate swaps, partially offset by foreign exchange forwards contracts. The majority of the gain for the quarter ended March 31, 2012 resulted from interest rate swap positions. Both taken as part of a total return strategy followed by a portion of our investment portfolio.

As of March 31, 2013, 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 did not change during the quarter ended March 31, 2013.

Income from equity method investments for the quarters ended March 31, 2013 and 2012 principally comprised our equity share of net income from New Point V and New Point IV, respectively.

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 generally 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. 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 ended March 31, 2013 were $23.5 million, compared to gains of $8.8 million for the quarter ended March 31, 2012. Most of the realized gains in the quarter ended March 31, 2013 related to sales of longer duration securities, taking advantage of gains caused by depressed long term interest rates and at the same time reducing our exposure to longer duration securities.

Net impairment losses recognized in earnings. As a result of our quarterly review of securities in an unrealized loss position, we recorded OTTI losses through earnings of $0.2 million for the quarter ended March 31, 2013 and $5.4 million for the prior year period. These impairment losses are presented separately from all other net realized and unrealized gains and losses on

47

investments. A discussion of our process for estimating OTTI 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 $8,022.8 million as of March 31, 2013 compared to $8,032.6 million as of December 31, 2012, a decrease of 0.1%. The decrease in cash and invested assets resulted principally from the combination of the timing of the settlement of premiums and losses, and the decrease in fair value of our available for sale portfolio and the payment of dividends. Our cash and cash equivalents balance increased significantly since December 31, 2012. This increase was driven by a requirement under the Merger Agreement to have $500.0 million in cash available upon closing of the Merger.

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 longer duration securities. Because we intend to hold a number of these longer 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 quarterly 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 March 31, 2013, 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 Aa3/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 currently is a greater risk of defaults on mortgage-backed and asset-backed securities and collateralized mortgage obligations than historically existed, 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 March 31, 2013.

We performed a review of securities in an unrealized loss position as of March 31, 2013 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 credit losses in mortgage-backed and asset-backed securities, and we will make adjustments to the investment portfolio, if and when we deem necessary.

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We continue to monitor the ongoing uncertainty over the financial health of certain European governments and corporate institutions and our exposure to the credit risk of investments in these entities. As of March 31, 2013, we held European government securities with a fair value of $799.2 million, distributed as follows:

	As of March 31, 2013
	Fair Value		% of Total
	(in thousands of U.S. Dollars)
France	$	284,672	35.6	%
Germany	271,888		34.0	%
Netherlands	153,366		19.2	%
United Kingdom	47,531		6.0	%
Belgium	22,196		2.8	%
Norway	10,975		1.4	%
Denmark	4,336		0.5	%
All others	4,282		0.5	%
European government holdings	$	799,246	100.0	%

As of March 31, 2013, we held no government securities issued by Greece, Ireland, Italy, Portugal or Spain.

As of March 31, 2013, we held European corporate securities with a fair value of $749.9 million. The distribution by country was as follows:

	As of March 31, 2013
	Banking Institutions		Other Financial Institutions		Other Corporate		Total
	(in thousands of U.S. Dollars)
United Kingdom	$	97,974	$	28,667	$	104,270	$	230,911
Netherlands	38,462		1,439		58,955		98,856
Germany	87,292		—		11,396		98,688
France	39,886		803		53,086		93,775
Supranational	80,828		—		—		80,828
Switzerland	56,615		—		1,091		57,706
Norway	18,689		—		23,339		42,028
Sweden	28,659		—		—		28,659
Luxembourg	—		—		11,941		11,941
Ireland	—		—		4,375		4,375
Jersey	—		—		1,573		1,573
Spain	—		—		514		514
European corporate holdings	$	448,405	$	30,909	$	270,540	$	749,854

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The distribution by credit rating (using the lower of S&P and Moody's ratings) was as follows:

	As of March 31, 2013
	Banking Institutions		Other Financial Institutions		Other Corporate		Total
	(in thousands of U.S. Dollars)
AAA	$	250,132	$	2,075	$	—	$	252,207
AA	68,578		25,473		57,603		151,654
A	112,337		3,361		180,139		295,837
BBB	12,070		—		26,947		39,017
BB	3,131		—		1,197		4,328
B	2,157		—		4,364		6,521
Not rated	—		—		290		290
European corporate holdings	$	448,405	$	30,909	$	270,540	$	749,854

As of March 31, 2013, we held corporate securities issued by European banking institutions with a fair value of $448.4 million, distributed as follows:

	As of March 31, 2013
	Fair Value		% of Total
	(in thousands of U.S. Dollars)
European Investment Bank	$	71,765	16.0	%
KFW	60,564		13.5	%
HSBC Holdings plc	31,623		7.1	%
Credit Suisse Group	30,061		6.7	%
UBS AG	28,420		6.3	%
Lloyds Banking Group plc	25,855		5.8	%
Barclays plc	23,927		5.3	%
Nordea Bank AB	21,696		4.8	%
BNP Paribas SA	20,460		4.6	%
All other	134,034		29.9	%
European banking institution holdings	$	448,405	100.0	%

All of our European government and corporate holdings are included within our review procedures for other-than-temporary impairments.

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

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 of prices between two independent sources, with significant differences requiring additional price sources; (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 including a review of the inputs used for pricing; 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

50

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 each 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. The timing of the redemption maybe be impacted if the funds in which we invest have a lock up period (this refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem), a gate imposed (where the fund has denied or delayed a redemption in order to allow the execution of an orderly redemption process) or the fund has invested a portion of their assets in illiquid securities, such as private equity and convertible debt, through a side pocket. 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 March 31, 2013, we estimate that over 81% of the underlying assets held by our hedge fund portfolio are traded securities or have broker quotes available.

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 March 31, 2013 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 March 31, 2013
	Fair Value		% of Hedge fund portfolio
	(in thousands of U.S. Dollars)
Liquidity:
Within 90 days	$	168,217	57.8	%
Between 91 to 180 days	65,173		22.4	%
Between 181 to 365 days	16,574		5.7	%
Greater than 365 days	40,897		14.1	%
Total hedge funds	$	290,861	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 $1,304.1 million as of March 31, 2013 compared to $1,289.6 million as of December 31, 2012, an increase of 1.1%. This increase resulted principally from additional losses ceded under our reinsurance and retrocessional agreements resulting from net earned premiums during the quarter ended March 31, 2013, partially offset by amounts recovered.

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Losses recoverable from reinsurers on property and casualty business were $1,272.5 million and $1,257.6 million as of March 31, 2013 and December 31, 2012, respectively. Benefits recoverable from reinsurers on life and annuity business were $31.6 million and $32.0 million as of March 31, 2013 and December 31, 2012, respectively.

As of March 31, 2013, 85.9% of our losses and benefits recoverable were with reinsurers rated “A” or above by A.M. Best Company, 7.6% were rated “A-” and the remaining 6.5% were with “NR-not rated” reinsurers. 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 2.6% of our losses and benefits recoverable as of March 31, 2013. As security for outstanding loss obligations, we retain funds from Grand Central Re amounting to 134.5% of its loss recoverable obligations. Of the remaining amounts with “NR-not rated” retrocessionaires, we retain collateral equal to 77.6% of the losses and benefits recoverable. Our losses and benefits recoverable are not due for payment until the underlying loss has been paid. As of March 31, 2013, 96.6% of our losses and benefits recoverable were not due for payment.

Liabilities for property and casualty losses. Property and casualty losses totaled $4,686.7 million as of March 31, 2013 compared to $4,690.3 million as of December 31, 2012, an decrease of 0.1%. During the quarter ended March 31, 2013, we incurred gross losses of $272.3 million and we paid $245.5million in property and casualty losses. Included in gross losses was gross favorable development on prior year reserves of $22.1 million, excluding reserve movements related to changes in premium estimates. Net of reinsurance, we paid $200.7 million in property and casualty losses during the quarter ended March 31, 2013.

As of March 31, 2013 and December 31, 2012 our gross property and casualty loss reserves by type and by segment were as follows:

	As of March 31, 2013						As of December 31, 2012
	Case		IBNR		Total		Case		IBNR		Total
	(Expressed in thousands of U.S. Dollars)
Global Insurance
Casualty	$	410,613	$	817,146	$	1,227,759	$	387,694	$	802,063	$	1,189,757
Property	112,919		57,688		170,607		115,988		65,992		181,980
	523,532		874,834		1,398,366		503,682		868,055		1,371,737
U.S. Insurance
Casualty	75,004		237,989		312,993		77,814		219,129		296,943
Property	144,241		125,891		270,132		149,347		136,956		286,303
	219,245		363,880		583,125		227,161		356,085		583,246
Reinsurance
Casualty	592,993		1,102,959		1,695,952		572,280		1,102,007		1,674,287
Property	256,877		244,639		501,516		230,778		315,353		546,131
	849,870		1,347,598		2,197,468		803,058		1,417,360		2,220,418
Alterra at Lloyd's
Casualty	56,719		225,672		282,391		49,937		232,275		282,212
Property	93,310		132,045		225,355		99,508		133,223		232,731
	150,029		357,717		507,746		149,445		365,498		514,943
Total	$	1,742,676	$	2,944,029	$	4,686,705	$	1,683,346	$	3,006,998	$	4,690,344
Casualty	$	1,135,329	$	2,383,766	$	3,519,095	$	1,087,725	$	2,355,474	$	3,443,199
Property	607,347		560,263		1,167,610		595,621		651,524		1,247,145
Total	$	1,742,676	$	2,944,029	$	4,686,705	$	1,683,346	$	3,006,998	$	4,690,344

In the above table, the following lines of business are included within property: agriculture, aviation, marine & energy, property and other. The following lines of business are included within casualty: accident & health, auto, credit, excess liability,

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financial institutions, general casualty, international casualty, medical malpractice, professional liability, surety, whole account and workers compensation.

The liability for property and casualty losses, including loss adjustment expenses, represents estimates of the ultimate cost of all losses incurred but not paid as of the balance sheet date. The reserves are estimated on an undiscounted basis. Case reserves are reserves established for individual claims. IBNR represents incurred but not reported reserves. We utilize a variety of standard actuarial methods to estimate our reserves. Although these actuarial methods have been developed over time, assumptions about anticipated size of loss and loss emergence patterns are subject to fluctuations. We review our estimate of reserves on a quarterly basis and consider all significant facts and circumstances then known. New reported loss information from clients or insureds is the principal contributor to adjustments to our loss reserve estimates. These adjustments are recognized in the period in which they are determined, and therefore can impact that period's results either favorably (when reserve estimates established in prior periods prove to be redundant) or unfavorably (when reserve estimates established in prior periods prove to be deficient).

Liabilities for life and annuity benefits. Life and annuity benefits totaled $1,124.6 million at March 31, 2013 compared to $1,159.5 million as of December 31, 2012. The decrease was principally attributable to benefits payments exceeding the change in estimate of the life and annuity benefits liability balance, together with a decrease in the Euro foreign exchange rate. We paid $26.4million of benefit payments during the quarter ended March 31, 2013.

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%.

On April 16, 2007, Alterra USA privately issued $100.0 million principal amount of 7.20% senior notes due April 14, 2017 with interest payable on April 16 and October 16 of each year. The senior notes are Alterra USA’s senior unsecured obligations and rank equally in right of payment with all existing and future senior unsecured indebtedness of Alterra USA. The senior notes are fully and unconditionally guaranteed by Alterra. The principal amount of the senior notes outstanding as of March 31, 2013 was $90.6 million.

Shareholders’ equity. Our shareholders’ equity increased to $2,875.4 million as of March 31, 2013 from $2,839.7 million as of December 31, 2012, an increase of 1.3%, principally due to net income generated of $99.2 million in the quarter ended March 31, 2013, partially offset by a decrease in accumulated other comprehensive income of $51.4 million, which was mostly driven by a decrease in net unrealized gains on investments.

Liquidity. We generated $28.9 million of cash from operations during the quarter ended March 31, 2013 compared to $68.0 million for the quarter ended March 31, 2012. The principal factors that impact our operating cash flow are premium collections and payments, and the timing of loss and benefit payments and recoveries.

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 4.7 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 $250.0 million using our current credit facilities, subject to certain conditions. Our largest credit facility, a $1,100.0 million four-year secured facility, expires in December 2015. Our unrestricted cash and cash equivalents balance was $958.1 million as of March 31, 2013. We believe that we currently maintain sufficient liquidity to cover existing requirements and provide for contingent liquidity. Nonetheless, 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 March 31, 2013. 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.

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A closing condition of the Merger Agreement requires us to have $500.0 million of cash available on closing of the Merger. We believe we have sufficient liquid investments together with cash generated from operations to meet this requirement.

As a holding company, Alterra’s principal source of funds is from interest income on cash balances and cash dividends from its 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 March 31, 2013, Alterra Bermuda met all minimum solvency and liquidity requirements.

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 March 31, 2013, we had two U.S. dollar denominated letter of credit facilities totaling $1,175.0 million with an additional $500.0 million available, subject to certain conditions. On that date, we had $527.1 million in letters of credit outstanding under these facilities. We also had a British pound sterling, or GBP, denominated letter of credit facility of GBP 30.0 million ($45.6 million) to support our London branch of Alterra Europe, of which GBP 16.8 million ($25.5 million)was utilized as of March 31, 2013. Each of our credit facilities requires that we comply with certain financial covenants, which may include covenants related to maximum debt to capital ratio, minimum consolidated tangible net worth, 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 March 31, 2013.

As of March 31, 2013, we provided $290.3 million in Funds at Lloyds. These amounts are not available for distribution for the payment of dividends. Our Funds at Lloyd’s commitments are met using cash and fixed maturity securities. 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 March 31, 2013, total shareholders’ equity was $2,875.4 million compared to $2,839.7 million as of December 31, 2012, an increase of 1.3%. 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 (“SEC”) that permits us to periodically issue debt securities, common shares, preferred shares, depository shares, warrants, share-purchase contracts and share purchase units. The shelf registration statement expires on May 20, 2013. The shelf registration statement also covers debt securities of Alterra Finance 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.

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 March 31, 2013. The senior notes are guaranteed by Alterra.

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

We may repurchase our securities from time to time through the open market, privately negotiated transactions or Rule 10b5-1 stock trading plans. During the quarter ended March 31, 2013, we repurchased 200,282 common shares for $6.2 million. These purchases were not made pursuant to a publicly announced repurchase plan or program. As of March 31, 2013, the aggregate amount available under our Board approved share repurchase plan was $301.7 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, Fitch, Moody’s, and 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 March 31, 2013, 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)	A (strong) (1)	A3 (2)	A (1)
Outlook on financial strength rating	Stable (1)	Stable (1)	Stable (2)	Stable (1)
Lloyd’s financial strength rating applicable to the Syndicates	A (excellent)	A+ (strong)	Not applicable	A+ (strong)

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

(2) Applicable to Alterra Bermuda.

On February 5, 2013, we declared a dividend to shareholders of $0.16 per share for an aggregate amount of $15.3 million. Future cash dividends are at the discretion of the Board of Directors and will be dependent upon our results of operations, cash

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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 March 31, 2013			Quarter Ended March 31, 2012
	(Expressed in thousands of U.S. Dollars, except share and per share amounts)
Net income	$	99,184		$	79,024
Net realized and unrealized (gains) losses on investments not included in operating income, net of tax (a)	(22,578		)	(11,247		)
Net foreign exchange (gains) losses, net of tax	(12		)	(21		)
Merger and acquisition expenses	626			—
Net operating income	$	77,220		$	67,756
Net income per diluted share	$	0.99		$	0.77
Net realized and unrealized (gains) losses on investments not included in operating income, net of tax (a)	(0.22		)	(0.11		)
Net foreign exchange losses, net of tax	—			—
Merger and acquisition expenses	0.01			—
Net operating income per diluted share	$	0.77		$	0.66
Weighted average common shares outstanding - basic	95,721,183			101,002,884
Weighted average common shares outstanding - diluted	100,513,656			103,154,081
Average shareholders’ equity (b)	$	2,857,540		$	2,830,249
Annualized return on average shareholders’ equity	13.9		%	11.2		%
Annualized net operating return on average shareholders’ equity	10.8		%	9.6		%

Per share totals may not add due to rounding.

(a) Net realized and unrealized (gains) losses on investments not included in operating income includes realized and unrealized (gains) losses on trading securities, realized (gains) losses on available for sale securities, net impairment losses recognized in earnings, earnings from equity method investments in run-off, and changes in fair value of investment derivatives, catastrophe bonds and structured deposits.

(b) Average shareholders’ equity is computed as the 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 liabilities. We are exposed to potential loss from various market risks, primarily changes in interest rates, credit spreads and equity prices.

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Accordingly, our earnings are 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 (with limited and specific exceptions) 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 March 31, 2013, 96.8% of the securities held in our fixed maturities portfolio, by carrying value, were rated Baa3/BBB- or above. As of March 31, 2013, 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, generally must have a minimum rating of Baa3/BBB-, or its equivalent, from at least one internationally recognized statistical rating organization. Our guidelines permit three of our investment managers (managing approximately 2.0% of our invested assets by fair value as of March 31, 2013) 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 March 31, 2013, 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 4.8%, or approximately $313.4 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 of5.3%, or approximately $341.9 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 March 31, 2013, 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 3.8%, or approximately $11.1 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 3.8%, or approximately $11.1 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 March 31, 2013, our hedge fund portfolio’s VaR was estimated to be 10.0% 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 March 31, 2013, 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

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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 March 31, 2013 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 such a change during the quarter ended March 31, 2013 in respect of additional internal controls over the sale of fixed maturity securities.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company's insurance and reinsurance subsidiaries are subject to litigation and arbitration in the normal course of their operations. These disputes principally relate to claims on policies of insurance and contracts of reinsurance and are typical for the Company and for participants in the property and casualty insurance and reinsurance industries in general. Such legal proceedings are considered in connection with estimating the Company's reserve for property and casualty losses. An estimate of any amounts payable under such proceedings is included in the reserve for property and casualty losses in the consolidated balance sheet. As of April 30, 2013, based on available information, it was the opinion of the Company's management that the ultimate resolution of pending or threatened litigation or arbitrations, both individually and in the aggregate, would not have a material effect on the Company's financial condition, results of operations or liquidity.

ITEM 1A. Risk Factors

Reference is made to the Risk Factors set forth in Part I, Item 1A of our 2012 Annual Report on Form 10-K filed on February 28, 2013. There were no material changes from these risk factors during the three months ended March 31, 2013.

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

We repurchase our common shares and/or securities convertible into common shares from time to time through the open market, privately negotiated transactions and Rule 10b5-1 stock trading plans. During the three months ended March 31, 2013, we repurchased 200,282 common shares for $6.2 million. As of March 31, 2013, the aggregate amount available under our Board-approved repurchase plan was $301.7 million.

The table below sets forth the information with respect to purchases made by or on behalf of Alterra or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common shares during the three months ended March 31, 2013.

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
(January 1, 2013 to January 31, 2013)	—	$	—	—	$ 301.7 million
(February 1, 2013 to February 28, 2013)	5,006	$	30.97	—	$ 301.7 million
(March 1, 2013 to March 31, 2013)	195,276	$	30.70	—	$ 301.7 million
Total (January 1, 2013 to March 31, 2013) (1)(2)	200,282	$	30.71	—	$ 301.7 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 November 6, 2012 when our Board of Directors authorized an additional $100.0 million in repurchases.

(2) During the three months ended March 31, 2013, we purchased 200,282 of our common shares in connection with our 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.

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ALTERRA CAPITAL HOLDINGS LIMITED

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

ITEM 4. Mine Safety Disclosures

None.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

Exhibit	Description
10.1	Amendment No. 1 dated February 7, 2013 to the Credit Agreement among Alterra Capital Holdings Limited, Alterra Bermuda Limited and Alterra Reinsurance USA, as borrowers, various financial institutions as lenders, Bank of America, N.A., as administrative agent, fronting bank and letter of credit administrator (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on February 11, 2013).
10.2	Amendment No. 12 to Credit Agreement and Consent No. 1 dated February 11, 2013 to the Credit Agreement with The Bank of Nova Scotia (incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on February 11, 2013).
10.3	Amendment, dated February 26, 2013, to 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 February 26, 2013).
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 information from Alterra Capital Holdings Limited's Quarterly Report on Form 10-Q for the three months ended March 31, 2013 formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2013 and December 31, 2012; (ii) Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2013 and 2012; (iii) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012; and (v) Notes to the Interim Consolidated Financial Statements.

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SIGNATURES

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

Alterra Capital Holdings Limited
	/s/    W. MARSTON BECKER
Name:	W. Marston Becker
Title:	Chief Executive Officer
Date:	April 30, 2013
	/s/    JOSEPH W. ROBERTS
Name:	Joseph W. Roberts
Title:	Executive Vice President and Chief Financial Officer
Date:	April 30, 2013
	/s/    DAVID F. SHEAD
Name:	David F. Shead
Title:	Chief Accounting Officer
Date:	April 30, 2013

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