Q2 2014 10-Q

10-Q 1 axs10-qq22014.htm FORM 10-Q Q2 2014 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-31721

AXIS CAPITAL HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

BERMUDA

(State or other jurisdiction of incorporation or organization)

98-0395986

(I.R.S. Employer Identification No.)

92 Pitts Bay Road, Pembroke, Bermuda HM 08

(Address of principal executive offices and zip code)

(441) 496-2600

(Registrant’s telephone number, including area code)

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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

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

As of July 23, 2014, there were 105,318,185 Common Shares, $0.0125 par value per share, of the registrant outstanding.

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AXIS CAPITAL HOLDINGS LIMITED

INDEX TO FORM 10-Q



		Page
	PART I
	Financial Information	3
Item 1.	Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	71
Item 4.	Controls and Procedures	71
	PART II
	Other Information	72
Item 1.	Legal Proceedings	72
Item 1A.	Risk Factors	72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 6.	Exhibits	73
	Signatures	74

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PART I	FINANCIAL INFORMATION

This quarterly report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report may include information regarding our estimates of losses related to catastrophes and other large losses, measurements of potential losses in the fair value of our investment portfolio and derivative contracts, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity prices, credit spreads and foreign currency rates. Forward-looking statements only reflect our expectations and are not guarantees of performance.

These statements involve risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following:


•	the occurrence and magnitude of natural and man-made disasters,


•	actual claims exceeding our loss reserves,


•	general economic, capital and credit market conditions,


•	the failure of any of the loss limitation methods we employ,


•	the effects of emerging claims, coverage and regulatory issues, including uncertainty related to coverage definitions, limits, terms and conditions,


•	the failure of our cedants to adequately evaluate risks,


•	inability to obtain additional capital on favorable terms, or at all,


•	the loss of one or more key executives,


•	a decline in our ratings with rating agencies,


•	loss of business provided to us by our major brokers,


•	changes in accounting policies or practices,


•	the use of industry catastrophe models and changes to these models,


•	changes in governmental regulations,


•	increased competition,


•	changes in the political environment of certain countries in which we operate or underwrite business,


•	fluctuations in interest rates, credit spreads, equity prices and/or currency values, and


•	the other matters set forth under Item 1A, ‘Risk Factors’ and Item 7, ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ included in our Annual Report on Form 10-K for the year ended December 31, 2013.

We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



	Page

Consolidated Balance Sheets at June 30, 2014 (Unaudited) and December 31, 2013	5
Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013 (Unaudited)	6
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013 (Unaudited)	7
Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2014 and 2013 (Unaudited)	8
Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (Unaudited)	9
Notes to Consolidated Financial Statements (Unaudited)	10
Note 1 - Basis of Presentation and Accounting Policies	10
Note 2 - Segment Information	11
Note 3 - Investments	13
Note 4 - Fair Value Measurements	20
Note 5 - Derivative Instruments	29
Note 6 - Reserve for Losses and Loss Expenses	31
Note 7 - Share-Based Compensation	32
Note 8 - Earnings Per Common Share	34
Note 9 - Shareholders' Equity	34
Note 10 - Noncontrolling Interest	35
Note 11 - Debt and Financing Arrangements	36
Note 12 - Commitments and Contingencies	37
Note 13 - Other Comprehensive Income (Loss)	37

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AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2014 (UNAUDITED) AND DECEMBER 31, 2013



	2014			2013
	(in thousands)
Assets
Investments:
Fixed maturities, available for sale, at fair value (Amortized cost 2014: $12,428,133; 2013: $11,987,146)	$	12,598,897		$	11,986,327
Equity securities, available for sale, at fair value (Cost 2014: $614,174; 2013: $566,219)	744,760			701,987
Other investments, at fair value	1,044,492			1,045,810
Short-term investments, at fair value and amortized cost	100,166			46,212
Total investments	14,488,315			13,780,336
Cash and cash equivalents	1,044,026			923,326
Restricted cash and cash equivalents	145,377			64,550
Accrued interest receivable	91,278			97,132
Insurance and reinsurance premium balances receivable	2,422,983			1,688,957
Reinsurance recoverable on unpaid and paid losses	1,954,985			1,929,988
Deferred acquisition costs	623,573			456,122
Prepaid reinsurance premiums	337,608			330,261
Receivable for investments sold	366			1,199
Goodwill and intangible assets	90,025			89,528
Other assets	247,921			273,385
Total assets	$	21,446,457		$	19,634,784

Liabilities
Reserve for losses and loss expenses	$	9,805,988		$	9,582,140
Unearned premiums	3,411,108			2,683,849
Insurance and reinsurance balances payable	272,062			234,412
Senior notes	1,490,427			995,855
Payable for investments purchased	237,019			21,744
Other liabilities	221,348			248,822
Total liabilities	15,437,952			13,766,822

Shareholders’ equity
Preferred shares	627,843			627,843
Common shares (2014: 175,315; 2013: 174,134 shares issued and 2014: 103,906; 2013: 109,485 shares outstanding)	2,189			2,174
Additional paid-in capital	2,261,084			2,240,125
Accumulated other comprehensive income	272,664			117,825
Retained earnings	5,331,199			5,062,706
Treasury shares, at cost (2014: 71,409; 2013: 64,649 shares)	(2,539,269		)	(2,232,711		)
Total shareholders’ equity attributable to AXIS Capital	5,955,710			5,817,962
Noncontrolling interests	52,795			50,000
Total shareholders’ equity	6,008,505			5,867,962

Total liabilities and shareholders’ equity	$	21,446,457		$	19,634,784

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013



	Three months ended						Six months ended
	2014			2013			2014			2013
	(in thousands, except for per share amounts)
Revenues
Net premiums earned	$	1,000,400		$	945,873		$	1,946,349		$	1,819,911
Net investment income	114,867			83,112			197,610			192,019
Other insurance related income	1,683			435			4,766			1,030
Net realized investment gains:
Other-than-temporary impairment (OTTI) losses	(1,905		)	(5,127		)	(2,690		)	(6,025		)
Non-credit portion of OTTI losses recognized in other comprehensive income	—			—			—			—
Other realized investment gains	35,166			21,362			46,572			66,738
Total net realized investment gains	33,261			16,235			43,882			60,713
Total revenues	1,150,211			1,045,655			2,192,607			2,073,673

Expenses
Net losses and loss expenses	565,829			642,899			1,110,036			1,081,313
Acquisition costs	191,862			169,719			363,899			315,209
General and administrative expenses	151,081			149,034			303,810			290,508
Foreign exchange losses (gains)	9,705			(10,320		)	13,939			(45,201		)
Interest expense and financing costs	19,975			15,260			36,569			31,095
Total expenses	938,452			966,592			1,828,253			1,672,924

Income before income taxes	211,759			79,063			364,354			400,749
Income tax expense (benefit)	9,500			(4,662		)	13,625			5,469
Net income	202,259			83,725			350,729			395,280
Net income attributable to noncontrolling interests	1,573			—			2,795			—
Net income attributable to AXIS Capital	200,686			83,725			347,934			395,280
Preferred share dividends	10,022			8,197			20,044			16,938
Loss on repurchase of preferred shares	—			3,081			—			3,081
Net income available to common shareholders	$	190,664		$	72,447		$	327,890		$	375,261

Per share data
Net income per common share:
Basic net income	$	1.81		$	0.63		$	3.06		$	3.23
Diluted net income	$	1.79		$	0.62		$	3.03		$	3.19
Weighted average number of common shares outstanding - basic	105,118			115,163			107,075			116,088
Weighted average number of common shares outstanding - diluted	106,289			116,671			108,329			117,660
Cash dividends declared per common share	$	0.27		$	0.25		$	0.54		$	0.50

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013



	Three months ended						Six months ended
	2014			2013			2014			2013
	(in thousands)
Net income	$	202,259		$	83,725		$	350,729		$	395,280
Other comprehensive income (loss), net of tax:
Available for sale investments:
Unrealized gains (losses) arising during the period	120,550			(262,901		)	191,933			(281,426		)
Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income	(33,929		)	(4,066		)	(43,543		)	(37,914		)
Unrealized gains (losses) arising during the period, net of reclassification adjustment	86,621			(266,967		)	148,390			(319,340		)
Non-credit portion of OTTI losses	—			—			—			—
Foreign currency translation adjustment	3,790			(18,386		)	6,449			(18,527		)
Total other comprehensive income (loss), net of tax	90,411			(285,353		)	154,839			(337,867		)
Comprehensive income (loss)	$	292,670		$	(201,628	)	$	505,568		$	57,413

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013



	2014			2013
	(in thousands)
Preferred shares
Balance at beginning of period	$	627,843		$	502,843
Shares issued	—			225,000
Shares repurchased	—			(100,000		)
Balance at end of period	627,843			627,843

Common shares (par value)
Balance at beginning of period	2,174			2,146
Shares issued	15			26
Balance at end of period	2,189			2,172

Additional paid-in capital
Balance at beginning of period	2,240,125			2,179,034
Shares issued - common shares	2,549			2,777
Cost of treasury shares reissued	(11,524		)	(3,984		)
Issue costs on newly issued preferred shares	—			(6,551		)
Reversal of issue costs on repurchase of preferred shares	—			3,081
Stock options exercised	2,134			12,017
Share-based compensation expense	27,800			26,830
Balance at end of period	2,261,084			2,213,204

Accumulated other comprehensive income
Balance at beginning of period	117,825			362,622
Unrealized appreciation on available for sale investments, net of tax:
Balance at beginning of period	124,945			348,328
Unrealized gains (losses) arising during the period, net of reclassification adjustment	148,390			(319,340		)
Non-credit portion of OTTI losses	—			—
Balance at end of period	273,335			28,988
Cumulative foreign currency translation adjustments, net of tax:
Balance at beginning of period	(7,120		)	14,294
Foreign currency translation adjustments	6,449			(18,527		)
Balance at end of period	(671		)	(4,233		)
Balance at end of period	272,664			24,755

Retained earnings
Balance at beginning of period	5,062,706			4,497,789
Net income	350,729			395,280
Net income attributable to noncontrolling interests	(2,795		)	—
Preferred share dividends	(20,044		)	(16,938		)
Loss on repurchase of preferred shares	—			(3,081		)
Common share dividends	(59,397		)	(59,363		)
Balance at end of period	5,331,199			4,813,687

Treasury shares, at cost
Balance at beginning of period	(2,232,711		)	(1,764,673		)
Shares repurchased for treasury	(318,082		)	(359,025		)
Cost of treasury shares reissued	11,524			3,984
Balance at end of period	(2,539,269		)	(2,119,714		)

Total shareholders’ equity attributable to AXIS Capital	5,955,710			5,561,947
Noncontrolling interests	52,795			—
Total shareholders' equity	$	6,008,505		$	5,561,947

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013



	2014			2013
	(in thousands)
Cash flows from operating activities:
Net income	$	350,729		$	395,280
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(43,882		)	(60,713		)
Net realized and unrealized gains on other investments	(49,252		)	(55,279		)
Amortization of fixed maturities	56,122			72,853
Other amortization and depreciation	10,919			11,413
Share-based compensation expense, net of cash payments	27,763			30,936
Changes in:
Accrued interest receivable	5,929			2,122
Reinsurance recoverable balances	(20,663		)	(117,622		)
Deferred acquisition costs	(167,095		)	(153,821		)
Prepaid reinsurance premiums	(5,590		)	(15,852		)
Reserve for loss and loss expenses	217,924			284,086
Unearned premiums	721,870			754,363
Insurance and reinsurance balances, net	(696,877		)	(670,328		)
Other items	(15,654		)	(20,518		)
Net cash provided by operating activities	392,243			456,920

Cash flows from investing activities:
Purchases of:
Fixed maturities	(6,581,006		)	(6,079,805		)
Equity securities	(209,381		)	(130,544		)
Other investments	(37,512		)	(109,232		)
Short-term investments	(463,051		)	(72,093		)
Proceeds from the sale of:
Fixed maturities	5,784,439			5,334,043
Equity securities	197,354			218,523
Other investments	88,080			45,634
Short-term investments	391,966			115,072
Proceeds from redemption of fixed maturities	532,445			778,819
Proceeds from redemption of short-term investments	16,503			19,119
Purchase of other assets	(16,039		)	(10,641		)
Change in restricted cash and cash equivalents	(80,827		)	(14,710		)
Net cash provided by (used in) investing activities	(377,029		)	94,185

Cash flows from financing activities:
Net proceeds from issuance of senior notes	494,344			—
Net proceeds from issuance of preferred shares	—			218,449
Repurchase of preferred shares	—			(100,000		)
Repurchase of common shares	(318,082		)	(340,621		)
Dividends paid - common shares	(60,903		)	(62,312		)
Dividends paid - preferred shares	(20,044		)	(18,750		)
Proceeds from issuance of common shares	4,698			14,819
Net cash provided by (used in) financing activities	100,013			(288,415		)

Effect of exchange rate changes on foreign currency cash and cash equivalents	5,473			(11,702		)
Increase in cash and cash equivalents	120,700			250,988
Cash and cash equivalents - beginning of period	923,326			759,817
Cash and cash equivalents - end of period	$	1,044,026		$	1,010,805

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.	BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

These interim consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”) and its subsidiaries (herein referred to as “we,” “us,” “our,” or the “Company”).

The consolidated balance sheet at June 30, 2014 and the consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the periods ended June 30, 2014 and 2013 have not been audited. The balance sheet at December 31, 2013 is derived from our audited financial statements.

These financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission's (“SEC”) 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 financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated.

The following information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. Tabular dollar and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars.

Significant Accounting Policies

There were no notable changes in our significant accounting policies subsequent to our Annual Report on Form 10-K for the year ended December 31, 2013.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


2.	SEGMENT INFORMATION

Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re. Therefore we have determined that we have two reportable segments, insurance and reinsurance. We do not allocate our assets by segment, with the exception of goodwill and intangible assets, as we evaluate the underwriting results of each segment separately from the results of our investment portfolio.

The following tables summarize the underwriting results of our reportable segments, as well as the carrying values of allocated goodwill and intangible assets:



	2014									2013
Three months ended and at June 30,	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written	$	754,110		$	477,169		$	1,231,279		$	781,055		$	438,750		$	1,219,805
Net premiums written	541,097			459,065			1,000,162			559,584			433,823			993,407
Net premiums earned	457,670			542,730			1,000,400			422,345			523,528			945,873
Other insurance related income	—			1,683			1,683			435			—			435
Net losses and loss expenses	(290,466		)	(275,363		)	(565,829		)	(330,992		)	(311,907		)	(642,899		)
Acquisition costs	(71,039		)	(120,823		)	(191,862		)	(58,749		)	(110,970		)	(169,719		)
General and administrative expenses	(83,512		)	(34,299		)	(117,811		)	(88,526		)	(35,243		)	(123,769		)
Underwriting income (loss)	$	12,653		$	113,928		126,581			$	(55,487	)	$	65,408		9,921

Corporate expenses							(33,270		)							(25,265		)
Net investment income							114,867									83,112
Net realized investment gains							33,261									16,235
Foreign exchange (losses) gains							(9,705		)							10,320
Interest expense and financing costs							(19,975		)							(15,260		)
Income before income taxes							$	211,759								$	79,063

Net loss and loss expense ratio	63.5		%	50.7		%	56.6		%	78.4		%	59.6		%	68.0		%
Acquisition cost ratio	15.5		%	22.3		%	19.2		%	13.9		%	21.2		%	17.9		%
General and administrative expense ratio	18.2		%	6.3		%	15.0		%	20.9		%	6.7		%	15.8		%
Combined ratio	97.2		%	79.3		%	90.8		%	113.2		%	87.5		%	101.7		%

Goodwill and intangible assets	$	90,025		$	—		$	90,025		$	91,370		$	—		$	91,370

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


2.	SEGMENT INFORMATION (CONTINUED)



	2014									2013
Six months ended and at June 30,	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written	$	1,355,831		$	1,696,847		$	3,052,678		$	1,377,769		$	1,588,518		$	2,966,287
Net premiums written	997,789			1,666,957			2,664,746			992,264			1,571,582			2,563,846
Net premiums earned	906,884			1,039,465			1,946,349			824,224			995,687			1,819,911
Other insurance related income	—			4,766			4,766			1,030			—			1,030
Net losses and loss expenses	(569,889		)	(540,147		)	(1,110,036		)	(548,328		)	(532,985		)	(1,081,313		)
Acquisition costs	(136,096		)	(227,803		)	(363,899		)	(116,009		)	(199,200		)	(315,209		)
General and administrative expenses	(171,459		)	(70,375		)	(241,834		)	(175,415		)	(68,283		)	(243,698		)
Underwriting income (loss)	$	29,440		$	205,906		235,346			$	(14,498	)	$	195,219		180,721

Corporate expenses							(61,976		)							(46,810		)
Net investment income							197,610									192,019
Net realized investment gains							43,882									60,713
Foreign exchange (losses) gains							(13,939		)							45,201
Interest expense and financing costs							(36,569		)							(31,095		)
Income before income taxes							$	364,354								$	400,749

Net loss and loss expense ratio	62.8		%	52.0		%	57.0		%	66.5		%	53.5		%	59.4		%
Acquisition cost ratio	15.0		%	21.9		%	18.7		%	14.1		%	20.0		%	17.3		%
General and administrative expense ratio	19.0		%	6.7		%	15.6		%	21.3		%	6.9		%	16.0		%
Combined ratio	96.8		%	80.6		%	91.3		%	101.9		%	80.4		%	92.7		%

Goodwill and intangible assets	$	90,025		$	—		$	90,025		$	91,370		$	—		$	91,370

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS

a) Fixed Maturities and Equities

The amortized cost or cost and fair values of our fixed maturities and equities were as follows:



	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-credit OTTI in AOCI⁽⁵⁾

At June 30, 2014
Fixed maturities
U.S. government and agency	$	1,607,568	$	4,761	$	(14,009	)	$	1,598,320	$	—
Non-U.S. government	1,238,471		30,486		(21,290		)	1,247,667		—
Corporate debt	4,177,454		91,862		(5,342		)	4,263,974		—
Agency RMBS⁽¹⁾	2,076,932		37,725		(9,078		)	2,105,579		—
CMBS⁽²⁾	923,294		17,187		(787		)	939,694		—
Non-Agency RMBS	80,243		5,069		(366		)	84,946		(879		)
ABS⁽³⁾	1,309,555		5,162		(7,792		)	1,306,925		—
Municipals⁽⁴⁾	1,014,616		39,099		(1,923		)	1,051,792		—
Total fixed maturities	$	12,428,133	$	231,351	$	(60,587	)	$	12,598,897	$	(879	)

Equity securities
Common stocks	$	307,392	$	80,750	$	(3,140	)	$	385,002
Exchange-traded funds	193,582		41,790		—			235,372
Non-U.S. bond mutual funds	113,200		11,186		—			124,386
Total equity securities	$	614,174	$	133,726	$	(3,140	)	$	744,760

At December 31, 2013
Fixed maturities
U.S. government and agency	$	1,421,245	$	1,405	$	(33,952	)	$	1,388,698	$	—
Non-U.S. government	1,208,384		17,990		(49,992		)	1,176,382		—
Corporate debt	3,533,585		84,881		(10,228		)	3,608,238		—
Agency RMBS⁽¹⁾	2,485,139		21,979		(58,291		)	2,448,827		—
CMBS⁽²⁾	790,095		11,285		(3,966		)	797,414		—
Non-Agency RMBS	65,590		2,375		(398		)	67,567		(868		)
ABS⁽³⁾	955,274		6,871		(8,694		)	953,451		—
Municipals⁽⁴⁾	1,527,834		32,432		(14,516		)	1,545,750		—
Total fixed maturities	$	11,987,146	$	179,218	$	(180,037	)	$	11,986,327	$	(868	)

Equity securities
Common stocks	$	345,759	$	98,742	$	(6,183	)	$	438,318
Exchange-traded funds	106,762		32,085		—			138,847
Non-U.S. bond mutual funds	113,698		11,124		—			124,822
Total equity securities	$	566,219	$	141,951	$	(6,183	)	$	701,987


(1)	Residential mortgage-backed securities (RMBS) originated by U.S. agencies.


(2)	Commercial mortgage-backed securities (CMBS).


(3)	Asset-backed securities (ABS) include debt tranched securities collateralized primarily by auto loans, student loans, credit cards, and other asset types. This asset class also includes collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs).


(4)	Municipals include bonds issued by states, municipalities and political subdivisions.


(5)	Represents the non-credit component of the other-than-temporary impairment (OTTI) losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.

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3.	INVESTMENTS (CONTINUED)

In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we also invest in limited partnerships (hedge funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 3(b)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly we are not the primary beneficiary for any of these VIEs. Our maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.

Contractual Maturities

The contractual maturities of fixed maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Amortized Cost		Fair Value		% of Total Fair Value

At June 30, 2014
Maturity
Due in one year or less	$	496,073	$	502,045	4.0	%
Due after one year through five years	5,399,655		5,503,744		43.7	%
Due after five years through ten years	1,907,336		1,913,017		15.2	%
Due after ten years	235,045		242,947		1.9	%
	8,038,109		8,161,753		64.8	%
Agency RMBS	2,076,932		2,105,579		16.7	%
CMBS	923,294		939,694		7.5	%
Non-Agency RMBS	80,243		84,946		0.7	%
ABS	1,309,555		1,306,925		10.3	%
Total	$	12,428,133	$	12,598,897	100.0	%

At December 31, 2013
Maturity
Due in one year or less	$	710,079	$	717,052	5.9	%
Due after one year through five years	5,030,728		5,116,060		42.7	%
Due after five years through ten years	1,852,877		1,791,835		14.9	%
Due after ten years	97,364		94,121		0.8	%
	7,691,048		7,719,068		64.3	%
Agency RMBS	2,485,139		2,448,827		20.4	%
CMBS	790,095		797,414		6.7	%
Non-Agency RMBS	65,590		67,567		0.6	%
ABS	955,274		953,451		8.0	%
Total	$	11,987,146	$	11,986,327	100.0	%

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3.	INVESTMENTS (CONTINUED)

Gross Unrealized Losses

The following table summarizes fixed maturities and equities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:



	12 months or greater					Less than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

At June 30, 2014
Fixed maturities
U.S. government and agency	$	400,317	$	(13,879	)	$	242,865	$	(130	)	$	643,182	$	(14,009	)
Non-U.S. government	186,998		(20,060		)	133,205		(1,230		)	320,203		(21,290		)
Corporate debt	62,552		(2,713		)	539,287		(2,629		)	601,839		(5,342		)
Agency RMBS	366,449		(8,547		)	101,488		(531		)	467,937		(9,078		)
CMBS	82,434		(638		)	24,935		(149		)	107,369		(787		)
Non-Agency RMBS	8,884		(366		)	215		—			9,099		(366		)
ABS	309,814		(5,670		)	372,067		(2,122		)	681,881		(7,792		)
Municipals	95,013		(1,717		)	48,227		(206		)	143,240		(1,923		)
Total fixed maturities	$	1,512,461	$	(53,590	)	$	1,462,289	$	(6,997	)	$	2,974,750	$	(60,587	)

Equity securities
Common stocks	$	9,909	$	(1,339	)	$	44,822	$	(1,801	)	$	54,731	$	(3,140	)
Total equity securities	$	9,909	$	(1,339	)	$	44,822	$	(1,801	)	$	54,731	$	(3,140	)

At December 31, 2013
Fixed maturities
U.S. government and agency	$	—	$	—		$	982,307	$	(33,952	)	$	982,307	$	(33,952	)
Non-U.S. government	35,577		(3,430		)	420,622		(46,562		)	456,199		(49,992		)
Corporate debt	27,696		(802		)	606,592		(9,426		)	634,288		(10,228		)
Agency RMBS	144,468		(5,247		)	1,478,527		(53,044		)	1,622,995		(58,291		)
CMBS	13,319		(116		)	298,863		(3,850		)	312,182		(3,966		)
Non-Agency RMBS	4,287		(315		)	5,319		(83		)	9,606		(398		)
ABS	37,765		(2,941		)	553,803		(5,753		)	591,568		(8,694		)
Municipals	8,408		(615		)	543,474		(13,901		)	551,882		(14,516		)
Total fixed maturities	$	271,520	$	(13,466	)	$	4,889,507	$	(166,571	)	$	5,161,027	$	(180,037	)

Equity securities
Common stocks	$	3,499	$	(398	)	$	48,828	$	(5,785	)	$	52,327	$	(6,183	)
Total equity securities	$	3,499	$	(398	)	$	48,828	$	(5,785	)	$	52,327	$	(6,183	)

Fixed Maturities

At June 30, 2014, 687 fixed maturities (2013: 1,127) were in an unrealized loss position of $61 million (2013: $180 million), of which $2 million (2013: $2 million) was related to securities below investment grade or not rated.

At June 30, 2014, 317 (2013: 99) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $1,512 million (2013: $272 million). Following our credit impairment review, we concluded that these securities as well as

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3.	INVESTMENTS (CONTINUED)

the remaining securities in an unrealized loss position in the above table were temporarily impaired at June 30, 2014, and were expected to recover in value as the securities approach maturity. Further, at June 30, 2014, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that we will not be required to sell these securities before the anticipated recovery of their amortized costs.

Equity Securities

At June 30, 2014, 58 securities (2013: 63) were in an unrealized loss position of $3 million (2013: $6 million).

At June 30, 2014, 10 (2013: 9) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $10 million (2013: $3 million). Based on our impairment review process and our ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, we concluded that the above equities in an unrealized loss position were temporarily impaired at June 30, 2014.

b) Other Investments

The following table provides a breakdown of our investments in hedge funds, direct lending funds and CLO Equities, together with additional information relating to the liquidity of each category:



	Fair Value				Redemption Frequency (if currently eligible)	Redemption Notice Period

At June 30, 2014
Long/short equity funds	$	373,539	36	%	Quarterly, Semi-annually	30-60 days
Multi-strategy funds	306,215		29	%	Quarterly, Semi-annually	60-95 days
Event-driven funds	191,735		18	%	Quarterly, Annually	45-60 days
Leveraged bank loan funds	48,430		5	%	Quarterly	65 days
Direct lending funds	33,467		3	%	n/a	n/a
CLO - Equities	91,106		9	%	n/a	n/a
Total other investments	$	1,044,492	100	%

At December 31, 2013
Long/short equity funds	$	425,444	41	%	Monthly, Quarterly, Semi-annually	30-60 days
Multi-strategy funds	285,155		27	%	Quarterly, Semi-annually	60-95 days
Event-driven funds	190,458		18	%	Quarterly, Annually	45-60 days
Leveraged bank loan funds	48,753		5	%	Quarterly	65 days
Direct lending funds	22,134		2	%	n/a	n/a
CLO - Equities	73,866		7	%	n/a	n/a
Total other investments	$	1,045,810	100	%

n/a - not applicable

The investment strategies for the above funds are as follows:


•	Long/short equity funds: Seek to achieve attractive returns by executing an equity trading strategy involving both long and short investments in publicly-traded equities.


•	Multi-strategy funds: Seek to achieve above-market returns by pursuing multiple investment strategies to diversify risks and reduce volatility. This category includes funds of hedge funds which invest in a large pool of hedge funds across a diversified range of hedge fund strategies.

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3.	INVESTMENTS (CONTINUED)


•	Event-driven funds: Seek to achieve attractive returns by exploiting situations where announced or anticipated events create opportunities.


•	Leveraged bank loan funds: Seek to achieve attractive returns by investing primarily in bank loan collateral that has limited interest rate risk exposure.


•	Direct lending funds: Seek to achieve attractive risk-adjusted returns, including current income generation, by investing in funds which provide financing directly to borrowers.

Two common redemption restrictions which may impact our ability to redeem our hedge funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund's net assets which may otherwise hinder the general partner or investment manager's ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2014 and 2013, neither of these restrictions impacted our redemption requests. At June 30, 2014, $71 million (2013: $99 million), representing 8% (2013: 10%) of our total hedge funds, relate to holdings where we are still within the lockup period. The expiries of these lockup periods range from September 2014 to April 2016.

At June 30, 2014, $8 million (2013: $11 million) was invested in hedge funds that are not accepting redemption requests. Of this amount, substantially all relates to a leveraged bank loan fund in a period of planned principal distributions. Based on market conditions and payments made to date, management's current expectation is that the distribution process will be completed in 2014. The remainder primarily relates to funds that entered liquidation or had their assets side pocketed as a result of the global financial crisis which began in late 2008. For these funds, management is currently unable to estimate when those funds will be distributed.

At June 30, 2014, we have $77 million (2013: $88 million) of unfunded commitments within our other investments portfolio relating to our future investments in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to three years.

During 2013, we made a $60 million commitment as a limited partner in a multi-strategy hedge fund. Once the full amount of committed capital has been called by the General Partner, the assets will not be fully returned until the completion of the fund's investment term which ends in December, 2018. The General Partner then has the option to extend the term by up to three years. At June 30, 2014, $47 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the multi-strategy funds line of the table above.

During 2013, we made a $60 million commitment as a limited partner in a fund that invests primarily in CLO equities ("CLO fund"). We will not be eligible to redeem our investment until December, 2017 but expect to receive interest distributions on a quarterly basis. At June 30, 2014, $7 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the CLO - Equities line of the table above. The CLO - Equities line also includes direct investment in the equity tranches of CLOs.

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3.	INVESTMENTS (CONTINUED)

c) Net Investment Income

Net investment income was derived from the following sources:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013

Fixed maturities	$	78,523		$	74,503		$	151,480		$	144,185
Other investments	32,492			11,848			49,252			55,279
Equity securities	5,301			3,134			7,587			4,548
Cash and cash equivalents	6,183			1,265			7,046			2,533
Short-term investments	246			397			459			929
Gross investment income	122,745			91,147			215,824			207,474
Investment expenses	(7,878		)	(8,035		)	(18,214		)	(15,455		)
Net investment income	$	114,867		$	83,112		$	197,610		$	192,019

d) Net Realized Investment Gains

The following table provides an analysis of net realized investment gains:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013

Gross realized gains
Fixed maturities and short-term investments	$	26,650		$	34,355		$	60,420		$	66,986
Equities	32,609			10,132			51,876			36,282
Gross realized gains	59,259			44,487			112,296			103,268
Gross realized losses
Fixed maturities and short-term investments	(14,392		)	(29,538		)	(48,096		)	(46,812		)
Equities	(2,546		)	(3,715		)	(4,984		)	(7,010		)
Gross realized losses	(16,938		)	(33,253		)	(53,080		)	(53,822		)
Net OTTI recognized in earnings	(1,905		)	(5,127		)	(2,690		)	(6,025		)
Change in fair value of investment derivatives⁽¹⁾	(7,155		)	10,128			(12,644		)	17,292
Net realized investment gains	$	33,261		$	16,235		$	43,882		$	60,713

(1) Refer to Note 5 – Derivative Instruments

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3.	INVESTMENTS (CONTINUED)

The following table summarizes the OTTI recognized in earnings by asset class:



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013

Fixed maturities:
Non-U.S. government	$	1,774	$	25	$	1,812	$	25
Corporate debt	67		3,535		81		3,950
ABS	—		—		56		129
	1,841		3,560		1,949		4,104
Equity Securities
Common stocks	64		1,046		741		1,400
Exchange-traded funds	—		521		—		521
	64		1,567		741		1,921
Total OTTI recognized in earnings	$	1,905	$	5,127	$	2,690	$	6,025

The following table provides a roll forward of the credit losses, before income taxes, for which a portion of the OTTI was recognized in AOCI:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013

Balance at beginning of period	$	1,590		$	1,712		$	1,594		$	1,809
Credit impairments recognized on securities not previously impaired	—			—			—			—
Additional credit impairments recognized on securities previously impaired	—			—			—			—
Change in timing of future cash flows on securities previously impaired	—			—			—			—
Intent to sell of securities previously impaired	—			—			—			—
Securities sold/redeemed/matured	(9		)	(13		)	(13		)	(110		)
Balance at end of period	$	1,581		$	1,699		$	1,581		$	1,699

e) Reverse Repurchase Agreements

At June 30, 2014, we held $55 million (2013: $34 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of cash and cash equivalents on our consolidated balance sheet. The required collateral for these loans is either cash or U.S. Treasuries at a minimum rate of 102% of the loan principal. Upon maturity, we receive principal and interest income.

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4.	FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

Fair value is defined as the price to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:


•	Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.


•	Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.


•	Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own judgments about assumptions that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead us to change the selection of our valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels within the fair value hierarchy.

We used the following valuation techniques and assumptions in estimating the fair value of our financial instruments as well as the general classification of such financial instruments pursuant to the above fair value hierarchy.

Fixed Maturities

At each valuation date, we use the market approach valuation technique to estimate the fair value of our fixed maturities portfolio, when possible. This market approach includes, but is not limited to, prices obtained from third party pricing services for identical or comparable securities and the use of “pricing matrix models” using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services is sourced from multiple vendors, when available, and we maintain a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, we obtain non-binding quotes from broker-dealers who are active in the corresponding markets.

The following describes the significant inputs generally used to determine the fair value of our fixed maturities by asset class.

U.S. government and agency

U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. As the fair values of our U.S. Treasury securities are based on unadjusted market prices in active markets, they are classified within Level 1. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.

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Non-U.S. government

Non-U.S. government securities comprise bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair value of these securities is based on prices obtained from international indices or a valuation model that includes the following inputs: interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the sovereign bond in terms of issuer, maturity and seniority. As the significant inputs are observable market inputs, the fair value of non-U.S. government securities are classified within Level 2.

Corporate debt

Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our corporate debt securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3.

MBS

Our portfolio of RMBS and CMBS are originated by both agencies and non-agencies. The fair values of these securities are determined through the use of a pricing model (including Option Adjusted Spread) which uses prepayment speeds and spreads to determine the appropriate average life of the MBS. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the significant inputs used to price MBS are observable market inputs, the fair values of the MBS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3.

ABS

ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and CLO Debt originated by a variety of financial institutions. Similarly to MBS, the fair values of ABS are priced through the use of a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers or use a discounted cash flow model to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are priced within Level 3.

Municipals

Our municipal portfolio comprises revenue and general obligation bonds issued by U.S. domiciled state and municipal entities. The fair value of these securities is determined using spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipals are observable market inputs, municipals are classified within Level 2.

Equity Securities

Equity securities include U.S. and non-U.S. common stocks, exchange-traded funds, and non-U.S. bond mutual funds. For common stocks and exchange-traded funds, we classified these within Level 1 as their fair values are based on unadjusted quoted market prices in active markets. Our investments in non-U.S. bond mutual funds have daily liquidity, with redemption based on the net asset value (NAV) of the funds. Accordingly, we have classified these investments as Level 2.

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4.	FAIR VALUE MEASUREMENTS (CONTINUED)

Other Investments

As a practical expedient, we estimate fair values for hedge funds, direct lending funds and the CLO fund using NAVs as advised by external fund managers or third party administrators. For each of these funds, the NAV is based on the manager's or administrator's valuation of the underlying holdings in accordance with the fund's governing documents and in accordance with U.S. GAAP. For any funds for which we have not yet received a NAV concurrent with our period end date, we record an estimate of the change in fair value for the period subsequent to the most recent NAV. Such estimates are based on return estimates for the period between the most recently issued NAV and the period end date; these estimates are obtained from the relevant fund managers. Accordingly, we do not typically have a reporting lag in our fair value measurements for these funds. Historically, our valuation estimates incorporating these return estimates have not significantly diverged from the subsequent NAVs.

Within the hedge fund, direct lending fund and CLO fund industries, there is a general lack of transparency necessary to facilitate a detailed independent assessment of the values placed on the securities underlying the NAV provided by the fund manager or fund administrator. To address this, on a quarterly basis, we perform a number of monitoring procedures designed to assist us in the assessment of the quality of the information provided by managers and administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager, regular evaluation of fund performance against applicable benchmarks and the backtesting of our fair value estimates against subsequently received NAVs. Backtesting involves comparing our previously reported values for each individual fund against NAVs per audited financial statements (for year-end values) and final NAVs from fund managers and fund administrators (for interim values).

For our hedge fund investments with liquidity terms allowing us to fully redeem our holdings at the applicable NAV in the near term, we have classified these investments as Level 2. Certain investments in hedge funds, all of our direct lending funds and our CLO fund have redemption restrictions (see Note 3(b) for further details) that prevent us from redeeming in the near term and therefore we have classified these investments as Level 3.

At June 30, 2014, our direct investments in CLO - Equities were classified within Level 3 as we estimated the fair value for these securities using an income approach valuation technique (discounted cash flow model) due to the lack of observable and relevant trades in the secondary markets.

Short-Term Investments

Short-term investments primarily comprise highly liquid securities with maturities greater than three months but less than one year from the date of purchase. These securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value.

Derivative Instruments

Our foreign currency forward contracts, interest rate swaps and commodity contracts are customized to our economic hedging strategies and trade in the over-the-counter derivative market. We use the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. Accordingly, we classified these derivatives within Level 2.

We also participate in non-exchange traded derivative-based risk management products addressing weather risks. We use observable market inputs and unobservable inputs in combination with industry or internally-developed valuation and forecasting techniques to determine fair value. We classify these instruments within Level 3.

Cash Settled Awards

Cash settled awards comprise restricted stock units that form part of our compensation program. Although the fair value of these awards is determined using observable quoted market prices in active markets, the stock units themselves are not actively traded. Accordingly, we have classified these liabilities within Level 2.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


4.	FAIR VALUE MEASUREMENTS (CONTINUED)

The table below presents the financial instruments measured at fair value on a recurring basis:



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value

At June 30, 2014
Assets
Fixed maturities
U.S. government and agency	$	1,435,966	$	162,354	$	—	$	1,598,320
Non-U.S. government	—		1,247,667		—		1,247,667
Corporate debt	—		4,263,974		—		4,263,974
Agency RMBS	—		2,105,579		—		2,105,579
CMBS	—		935,761		3,933		939,694
Non-Agency RMBS	—		84,946		—		84,946
ABS	—		1,276,042		30,883		1,306,925
Municipals	—		1,051,792		—		1,051,792
	1,435,966		11,128,115		34,816		12,598,897
Equity securities
Common stocks	385,002		—		—		385,002
Exchange-traded funds	235,372		—		—		235,372
Non-U.S. bond mutual funds	—		124,386		—		124,386
	620,374		124,386		—		744,760
Other investments
Hedge funds	—		443,111		476,808		919,919
Direct lending funds	—		—		33,467		33,467
CLO - Equities	—		—		91,106		91,106
	—		443,111		601,381		1,044,492
Short-term investments	—		100,166		—		100,166
Derivative instruments (see Note 5)	—		9,191		—		9,191
Total Assets	$	2,056,340	$	11,804,969	$	636,197	$	14,497,506
Liabilities
Derivative instruments (see Note 5)	$	—	$	2,283	$	750	$	3,033
Cash settled awards (see Note 7)	—		8,656		—		8,656
Total Liabilities	$	—	$	10,939	$	750	$	11,689

At December 31, 2013
Assets
Fixed maturities
U.S. government and agency	$	1,119,632	$	269,066	$	—	$	1,388,698
Non-U.S. government	—		1,176,382		—		1,176,382
Corporate debt	—		3,608,238		—		3,608,238
Agency RMBS	—		2,448,827		—		2,448,827
CMBS	—		793,396		4,018		797,414
Non-Agency RMBS	—		67,567		—		67,567
ABS	—		922,652		30,799		953,451
Municipals	—		1,545,750		—		1,545,750
	1,119,632		10,831,878		34,817		11,986,327
Equity securities
Common stocks	438,318		—		—		438,318
Exchange-traded funds	138,847		—		—		138,847
Non-U.S. bond mutual funds	—		124,822		—		124,822
	577,165		124,822		—		701,987
Other investments
Hedge funds	—		488,755		461,055		949,810
Direct lending funds	—		—		22,134		22,134
CLO - Equities	—		—		73,866		73,866
	—		488,755		557,055		1,045,810
Short-term investments	—		46,212		—		46,212
Derivative instruments (see Note 5)	—		6,824		984		7,808
Total Assets	$	1,696,797	$	11,498,491	$	592,856	$	13,788,144
Liabilities
Derivative instruments (see Note 5)	$	—	$	1,152	$	815	$	1,967
Cash settled awards (see Note 7)	—		8,693		—		8,693
Total Liabilities	$	—	$	9,845	$	815	$	10,660

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


4.	FAIR VALUE MEASUREMENTS (CONTINUED)

During 2014 and 2013, we had no transfers between Levels 1 and 2.

Level 3 Fair Value Measurements

Except for hedge funds, direct lending funds and our CLO fund priced using NAV as a practical expedient and certain fixed maturities priced using broker-dealer quotes (underlying inputs are not available), the following table quantifies the significant unobservable inputs we have used in estimating fair value at June 30, 2014 for our investments classified as Level 3 in the fair value hierarchy. These significant unobservable inputs have not changed significantly from December 31, 2013. Where appropriate, this table has been reconciled back to the asset class total Level 3 holdings.



	Fair Value			Valuation Technique	Unobservable Input	Range	Weighted Average

ABS - CLO Debt	$	30,091		Discounted cash flow	Credit spreads	3.0% - 4.7%	3.5%
					Illiquidity discount⁽¹⁾	5.0%	5.0%
	792			Broker-dealer quote	n/a	n/a	n/a
	$	30,883

Other investments - CLO - Equities	$	37,719		Discounted cash flow	Default rates	4.0% - 5.0%	4.3%
					Loss severity rate	53.5%	53.5%
					Collateral spreads	2.6% - 3.5%	3.3%
					Estimated maturity dates	3.5 - 4.5 years	4.0 years
	53,387			Net asset value	n/a	n/a	n/a
	$	91,106

Derivatives - Weather derivatives, net	$	(750	)	Simulation model	Weather curve	21 - 106⁽²⁾	n/a⁽³⁾
					Weather standard deviation	12 - 58⁽²⁾	n/a⁽³⁾

(1) Judgmentally determined based on limited trades of similar securities observed in the secondary markets.

(2) Measured in Heating Degree Days ("HDD") which is the number of degrees the daily temperature is below a reference temperature. The cumulative HDD for the duration of the derivatives contract is compared to the strike value to determine the necessary settlement.


(3)	Due to the diversity of the portfolio, the range of unobservable inputs can be widespread; therefore, presentation of a weighted average is not useful. Weather parameters may include various temperature and/or precipitation measures that will naturally vary by geographic location of each counterparty's operations.

Our CLO Debt represent holdings of investment-grade debt tranches within collateralized loan obligations with underlying collateral of loans originated primarily by U.S. corporations. The CLO Debt in the table represent securities where broker-dealer quotes are unavailable so we estimate fair value through the use of a discounted cash flow model (income approach). This model estimates fair values by discounting the estimated cash flows based on current credit spreads for similar securities, derived from observable offer prices. As these securities are thinly traded in the secondary market, we apply an illiquidity discount to these discounted cash flows in developing our estimate of fair value. Significant increases (decreases) in either of the significant unobservable inputs (credit spread, illiquidity discount) in isolation would result in lower (higher) fair value estimates for our CLO Debt. The interrelationship between these inputs is insignificant. These inputs are updated on a quarterly basis and the reasonableness of the resulting prices is assessed through a comparison to observable offer prices for similar securities.

The CLO - Equities market continues to be mostly inactive with only a small number of transactions being observed in the market and fewer still involving transactions in our CLO - Equities. Accordingly, we continue to rely on the use of our internal discounted cash flow model (income approach) to estimate fair value of our direct investments in CLO - Equities. Of the significant inputs into this model, the default and loss severity rates are the most judgmental unobservable market inputs to which the valuation of CLO - Equities is most sensitive. A significant increase (decrease) in either of these significant inputs in isolation would result in lower (higher) fair value estimates for direct investments in our CLO - Equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs as they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (decrease) in either of these significant inputs in isolation would result in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


4.	FAIR VALUE MEASUREMENTS (CONTINUED)

higher (lower) fair value estimates for direct investments in our CLO - Equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.

On a quarterly basis, our valuation processes for both CLO Debt and CLO - Equities include a review of the underlying cash flows and key assumptions used in the discounted cash flow models. We review and update the above significant unobservable inputs based on information obtained from secondary markets, including from the managers of the CLOs we hold. These inputs are the responsibility of management and, in order to ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we update our assumptions through regular communication with industry participants and ongoing monitoring of the deals in which we participate (e.g. default and loss severity rate trends), we maintain a current understanding of the market conditions, historical results, as well as emerging trends that may impact future cash flows. By maintaining this current understanding, we are able to assess the reasonableness of the inputs we ultimately use in our models.

Weather derivatives relate to non-exchange traded risk management products addressing weather risks. We use observable market inputs and unobservable inputs in combination with industry or internally-developed simulation models to determine fair value; these models may reference market price information for similar instruments. The pricing models are internally reviewed by Risk Management personnel prior to implementation and are reviewed periodically thereafter.

Observable and unobservable inputs to these models vary by contract type and would typically include the following:


•	Observable inputs: market prices for similar instruments, notional, option strike, term to expiry, contractual limits;


•	Unobservable inputs: correlation; and


•	Both observable and unobservable inputs: weather curves, weather standard deviation.

In general, weather curves are the most significant contributing input to fair value determination; changes in this variable can result in higher or lower fair value depending on the underlying position. In addition, changes in any or all of the unobservable inputs identified above may contribute positively or negatively to overall portfolio value. The correlation input will quantify the interrelationship, if any, amongst the other variables.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


4.	FAIR VALUE MEASUREMENTS (CONTINUED)

The following tables present changes in Level 3 for financial instruments measured at fair value on a recurring basis for the periods indicated:



	Opening Balance		Transfers into Level 3		Transfers out of Level 3		Included in earnings⁽¹⁾			Included in OCI⁽²⁾			Purchases		Sales		Settlements/ Distributions			Closing Balance		Change in unrealized investment gain/(loss)⁽³⁾

Three months ended June 30, 2014
Fixed maturities
Corporate debt	$	—	$	—	$	—	$	—		$	—		$	—	$	—	$	—		$	—	$	—
Non-Agency RMBS	—		—		—		—			—			—		—		—			—		—
CMBS	3,969		—		—		—			(23		)	—		—		(13		)	3,933		—
ABS	30,724		—		—		—			273			—		—		(114		)	30,883		—
	34,693		—		—		—			250			—		—		(127		)	34,816		—
Other investments
Hedge funds	464,666		—		—		12,746			—			3,000		—		(3,604		)	476,808		12,746
Direct lending funds	26,003		—		—		367			—			7,300		—		(203		)	33,467		367
CLO - Equities	86,179		—		—		5,181			—			6,422		—		(6,676		)	91,106		5,181
	576,848		—		—		18,294			—			16,722		—		(10,483		)	601,381		18,294
Other assets
Derivative instruments	1,707		—		—		293			—			—		—		(2,000		)	—		—
	1,707		—		—		293			—			—		—		(2,000		)	—		—
Total assets	$	613,248	$	—	$	—	$	18,587		$	250		$	16,722	$	—	$	(12,610	)	$	636,197	$	18,294

Other liabilities
Derivative instruments	$	—	$	—	$	—	$	(90	)	$	—		$	840	$	—	$	—		$	750	$	(90	)
Total liabilities	$	—	$	—	$	—	$	(90	)	$	—		$	840	$	—	$	—		$	750	$	(90	)

Six months ended June 30, 2014
Fixed maturities
Corporate debt	$	—	$	—	$	—	$	—		$	—		$	—	$	—	$	—		$	—	$	—
Non-Agency RMBS	—		—		—		—			—			—		—		—			—		—
CMBS	4,018		—		—		—			(43		)	—		—		(42		)	3,933		—
ABS	30,799		128		—		—			178			—		—		(222		)	30,883		—
	34,817		128		—		—			135			—		—		(264		)	34,816		—
Other investments
Hedge funds	461,055		—		—		20,923			—			7,500		—		(12,670		)	476,808		20,923
Direct lending funds	22,134		—		—		919			—			10,745		—		(331		)	33,467		919
CLO - Equities	73,866		—		—		11,331			—			19,267		—		(13,358		)	91,106		11,331
	557,055		—		—		33,173			—			37,512		—		(26,359		)	601,381		33,173
Other assets
Derivative instruments	984		—		—		5,011			—			—		—		(5,995		)	—		—
	984		—		—		5,011			—			—		—		(5,995		)	—		—
Total assets	$	592,856	$	128	$	—	$	38,184		$	135		$	37,512	$	—	$	(32,618	)	$	636,197	$	33,173

Other liabilities
Derivative instruments	$	815	$	—	$	—	$	896		$	—		$	840	$	—	$	(1,801	)	$	750	$	(90	)
Total liabilities	$	815	$	—	$	—	$	896		$	—		$	840	$	—	$	(1,801	)	$	750	$	(90	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


4.	FAIR VALUE MEASUREMENTS (CONTINUED)



	Opening Balance		Transfers into Level 3		Transfers out of Level 3			Included in earnings⁽¹⁾			Included in OCI⁽²⁾			Purchases		Sales			Settlements/ Distributions			Closing Balance		Change in unrealized investment gain/(loss)⁽³⁾

Three months ended June 30, 2013
Fixed maturities
Corporate debt	$	—	$	—	$	—		$	—		$	—		$	—	$	—		$	—		$	—	$	—
Non-Agency RMBS	1,300		—		(1,223		)	—			(77		)	—		—			—			—		—
CMBS	12,600		—		—			—			(69		)	—		—			(746		)	11,785		—
ABS	266,749		—		(213,212		)	—			693			—		—			(105		)	54,125		—
	280,649		—		(214,435		)	—			547			—		—			(851		)	65,910		—
Other investments
Hedge funds	414,716		29,953		—			6,962			—			—		—			(7,411		)	444,220		6,962
Direct lending funds	2,436		—		—			—			—			1,796		—			—			4,232		—
CLO - Equities	64,255		—		—			5,072			—			—		—			(16,283		)	53,044		5,072
	481,407		29,953		—			12,034			—			1,796		—			(23,694		)	501,496		12,034
Other assets
Derivative instruments	—		—		—			—			—			—		—			—			—		—
	—		—		—			—			—			—		—			—			—		—
Total assets	$	762,056	$	29,953	$	(214,435	)	$	12,034		$	547		$	1,796	$	—		$	(24,545	)	$	567,406	$	12,034

Other liabilities
Derivative instruments	$	—	$	—	$	—		$	—		$	—		$	—	$	—		$	—		$	—	$	—
Total liabilities	$	—	$	—	$	—		$	—		$	—		$	—	$	—		$	—		$	—	$	—

Six months ended June 30, 2013
Fixed maturities
Corporate debt	$	1,550	$	—	$	—		$	1,550		$	—		$	—	$	(3,100	)	$	—		$	—	$	—
Non-Agency RMBS	1,110		—		(1,223		)	—			135			—		—			(22		)	—		—
CMBS	4,296		8,382		—			—			(147		)	—		—			(746		)	11,785		—
ABS	63,975		—		(213,212		)	(112		)	981			212,889		(10,190		)	(206		)	54,125		—
	70,931		8,382		(214,435		)	1,438			969			212,889		(13,290		)	(974		)	65,910		—
Other investments
Hedge funds	359,996		29,953		—			25,490			—			50,000		—			(21,219		)	444,220		25,490
Direct lending funds	—		—		—			—			—			4,232		—			—			4,232		—
CLO - Equities	62,435		—		—			15,025			—			—		—			(24,416		)	53,044		15,025
	422,431		29,953		—			40,515			—			54,232		—			(45,635		)	501,496		40,515
Other assets
Derivative instruments	—		—		—			—			—			—		—			—			—		—
	—		—		—			—			—			—		—			—			—		—
Total assets	$	493,362	$	38,335	$	(214,435	)	$	41,953		$	969		$	267,121	$	(13,290	)	$	(46,609	)	$	567,406	$	40,515

Other liabilities
Derivative instruments	$	—	$	—	$	—		$	—		$	—		$	—	$	—		$	—		$	—	$	—
Total liabilities	$	—	$	—	$	—		$	—		$	—		$	—	$	—		$	—		$	—	$	—


(1)	Gains and losses included in earnings on fixed maturities are included in net realized investment gains (losses). Gains and (losses) included in earnings on other investments are included in net investment income. Gains (losses) on weather derivatives included in earnings are included in other insurance-related income.


(2)	Gains and losses included in other comprehensive income (“OCI”) on fixed maturities are included in unrealized gains (losses) arising during the period.


(3)	Change in unrealized investment gain/(loss) relating to assets held at the reporting date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


4.	FAIR VALUE MEASUREMENTS (CONTINUED)

The transfers into and out of fair value hierarchy levels reflect the fair value of the securities at the end of the reporting period.

Transfers into Level 3 from Level 2

There were no transfers into Level 3 from Level 2 during the three months ended June 30, 2014. The transfers to Level 3 from Level 2 made during the six months ended June 30, 2014 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities. The transfers to Level 3 from Level 2 made during the three and six months ended June 30, 2013 were primarily due to redemption provisions in hedge fund holdings and the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers.

Transfers out of Level 3 into Level 2

There were no transfers to Level 2 from Level 3 made during the three and six months ended June 30, 2014. The transfers to Level 2 from Level 3 made during the three and six months ended June 30, 2013 were primarily due to the availability of observable market inputs and multiple quotes from pricing vendors and broker-dealers on CLO Debt securities purchased during the first quarter of 2013.

Financial Instruments Not Carried at Fair Value

U.S. GAAP guidance over disclosures about the fair value of financial instruments are also applicable to financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts.

The carrying values of cash equivalents (including restricted amounts), accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated their fair values at June 30, 2014, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.

At June 30, 2014, our senior notes are recorded at amortized cost with a carrying value of $1,490 million (2013: $996 million) and have a fair value of $1,600 million (2013: $1,073 million). The fair values of these securities were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our senior notes are classified within Level 2.

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5.	DERIVATIVE INSTRUMENTS

The following table summarizes the balance sheet classification of derivatives recorded at fair values. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of our derivative activities. Notional amounts are not reflective of credit risk.



	June 30, 2014						December 31, 2013
	Derivative Notional Amount		Asset Derivative Fair Value⁽¹⁾		Liability Derivative Fair Value⁽¹⁾		Derivative Notional Amount		Asset Derivative Fair Value⁽¹⁾		Liability Derivative Fair Value⁽¹⁾

Derivatives not designated as hedging instruments
Relating to investment portfolio:
Foreign exchange forward contracts	$	132,230	$	12	$	2,011	$	254,023	$	1,214	$	1,032
Interest rate swaps	281,250		—		272		281,250		873		—
Relating to underwriting portfolio:
Foreign exchange forward contracts	605,076		5,608		—		390,663		4,737		120
Weather-related contracts	3,000		—		750		24,451		984		815
Commodity contracts	100,850		3,571		—		—		—		—
Total derivatives			$	9,191	$	3,033			$	7,808	$	1,967


(1)	Asset and liability derivatives are classified within other assets and other liabilities on the Consolidated Balance Sheets.

Offsetting Assets and Liabilities

Our derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements, which establish terms that apply to all transactions. In the event of a bankruptcy or other stipulated event, master netting agreements provide that individual positions be replaced with a new amount, usually referred to as the termination amount, determined by taking into account market prices and converting into a single currency. Effectively, this contractual close-out netting reduces credit exposure from gross to net exposure. The table below presents a reconciliation of our gross derivative assets and liabilities to the net amounts presented in our Consolidated Balance Sheets, with the difference being attributable to the impact of master netting agreements.



	June 30, 2014							December 31, 2013
	Gross Amounts		Gross Amounts Offset			Net Amounts⁽¹⁾		Gross Amounts		Gross Amounts Offset			Net Amounts⁽¹⁾

Derivative assets	$	11,985	$	(2,794	)	$	9,191	$	9,796	$	(1,988	)	$	7,808
Derivative liabilities	5,827		(2,794		)	3,033		3,955		(1,988		)	1,967


(1)	Net asset and liability derivatives are classified within other assets and other liabilities on the Consolidated Balance Sheets.

Refer to Note 3 - Investments for information on reverse repurchase agreements.

Derivative Instruments not Designated as Hedging Instruments

a) Relating to Investment Portfolio

Foreign Currency Risk

Within our investment portfolio we are exposed to foreign currency risk. Accordingly, the fair values for our investment portfolio are partially influenced by the change in foreign exchange rates. We may enter into foreign exchange forward contracts to manage the effect of this currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


5.	DERIVATIVE INSTRUMENTS (CONTINUED)

In addition, our external equity investment managers have the discretion to hold foreign currency exposures as part of their total return strategy.

The decrease in the notional amount of investment-related derivatives since December 31, 2013 was due to a decrease in sterling and Canadian dollar-denominated fixed maturities being hedged.

Interest Rate Risk

Our investment portfolio contains a large percentage of fixed maturities which exposes us to significant interest rate risk. As part of our overall management of this risk, we may use interest rate swaps. The interest rate swaps held at June 30, 2014 convert part of our overall fixed rate exposure to a variable rate exposure which effectively reduces the duration of our overall portfolio.

b) Relating to Underwriting Portfolio

Foreign Currency Risk

Our (re)insurance subsidiaries and branches operate in various foreign countries. Consequently, some of our business is written in currencies other than the U.S. dollar and, therefore, our underwriting portfolio is exposed to significant foreign currency risk. We manage foreign currency risk by seeking to match our foreign-denominated net liabilities under (re)insurance contracts with cash and investments that are denominated in such currencies. We may also use derivative instruments, specifically forward contracts and currency options, to economically hedge foreign currency exposures.

The increase in the notional amount of underwriting related derivatives since December 31, 2013, was primarily due to new business written in the first half of 2014.

Weather Risk

During 2013, we began to write derivative-based risk management products designed to address weather risks with the objective of generating profits on a portfolio basis. The majority of this business consists of receiving a payment at contract inception in exchange for bearing the risk of variations in a quantifiable weather-related phenomenon, such as temperature. Where a client wishes to minimize the upfront payment, these transactions may be structured as swaps or collars. In general, our portfolio of such derivative contracts is of short duration, with contracts being predominantly seasonal in nature. In order to economically hedge a portion of this portfolio, we may also purchase weather derivatives.

Commodity Risk

Within our (re)insurance portfolio we are exposed to commodity price risk. During 2014, we began to hedge this price risk by entering into commodity derivative contracts.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


5.	DERIVATIVE INSTRUMENTS (CONTINUED)

The total unrealized and realized gains (losses) recognized in earnings for derivatives not designated as hedges were as follows:



	Location of Gain (Loss) Recognized in Income on Derivative	Three months ended June 30,						Six months ended June 30,
	Location of Gain (Loss) Recognized in Income on Derivative	2014			2013			2014			2013

Derivatives not designated as hedging instruments
Relating to investment portfolio:
Foreign exchange forward contracts	Net realized investment gains	$	(2,355	)	$	10,128		$	(3,684	)	$	17,292
Interest rate swaps	Net realized investment gains	(4,800		)	—			(8,960		)	—
Relating to underwriting portfolio:
Foreign exchange forward contracts	Foreign exchange losses (gains)	1,058			(4,685		)	13,131			(2,197		)
Weather-related contracts	Other insurance related income	383			—			4,061			—
Commodity contracts	Other insurance related income	1,713			—			1,713			—
Total		$	(4,001	)	$	5,443		$	6,261		$	15,095


6.	RESERVE FOR LOSSES AND LOSS EXPENSES

The following table presents a reconciliation of our beginning and ending gross reserve for losses and loss expenses and net reserve for unpaid losses and loss expenses for the periods indicated:




Six months ended June 30,	2014			2013

Gross reserve for losses and loss expenses, beginning of period	$	9,582,140		$	9,058,731
Less reinsurance recoverable on unpaid losses, beginning of period	(1,900,112		)	(1,825,617		)
Net reserve for unpaid losses and loss expenses, beginning of period	7,682,028			7,233,114

Net incurred losses and loss expenses related to:
Current year	1,238,883			1,177,926
Prior years	(128,847		)	(96,613		)
	1,110,036			1,081,313
Net paid losses and loss expenses related to:
Current year	(93,218		)	(54,732		)
Prior years	(857,004		)	(732,135		)
	(950,222		)	(786,867		)

Foreign exchange and other	35,122			(130,536		)

Net reserve for unpaid losses and loss expenses, end of period	7,876,964			7,397,024
Reinsurance recoverable on unpaid losses, end of period	1,929,024			1,945,793
Gross reserve for losses and loss expenses, end of period	$	9,805,988		$	9,342,817

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


6.	RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)

Prior year reserve development arises from changes to loss and loss expense estimates recognized in the current year but relating to losses incurred in previous calendar years. Such development is summarized by segment in the following table:



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013

Insurance	$	32,963	$	6,693	$	44,571	$	12,290
Reinsurance	52,391		35,422		84,276		84,323
Total	$	85,354	$	42,115	$	128,847	$	96,613

The majority of the net favorable prior year reserve development in each period related to short-tail lines of business. Net favorable prior year reserve development for liability reinsurance and professional lines reinsurance business also contributed in the three and six months ended June 30, 2014 and 2013.

The underlying exposures in the property, marine and aviation reserving classes within our insurance segment and the property reserving class within our reinsurance segment largely relate to short-tail business. Development from these classes contributed $73 million and $32 million of the total net favorable prior year reserve development for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, these short-tail lines contributed $101 million and $62 million, respectively, of net favorable prior year reserve development. The net favorable development for these classes primarily reflected the recognition of better than expected loss emergence.

In the first quarter of 2013, we began to give weight to actuarial methods that reflect our actual experience for liability reinsurance business, as we believe that our older accident years are now at a stage of expected development where such methods will produce meaningful actuarial indications. Favorable development was recognized of $6 million and $22 million for the three months ended June 30, 2014 and 2013, respectively, and $12 million and $38 million for the six months ended June 30, 2014 and 2013, respectively, primarily reflecting the greater weight management is giving to experience based indications and our experience which has been favorable for the 2004 through 2008 accident years.

Our professional lines reinsurance business contributed further net favorable prior year reserve development of $6 million and $12 million in the three and six months ended June 30, 2014, respectively. This prior year reserve development was driven by increased weight being given to experience based actuarial methods in selecting our ultimate loss estimates for accident years 2008 and prior. As our loss experience has generally been better than expected, this resulted in the recognition of favorable development.

The frequency and severity of natural catastrophe and weather activity was high in recent years and our June 30, 2014 net reserve for losses and loss expenses continues to include estimated amounts for numerous events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular Storm Sandy, the 2011 Japanese earthquake and tsunami and 2010 and 2011 New Zealand earthquakes, inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.


7.	SHARE-BASED COMPENSATION

For the three months ended June 30, 2014, we incurred share-based compensation costs of $19 million (2013: $17 million) and recorded associated tax benefits of $3 million (2013: $3 million). For the six months ended June 30, 2014, we incurred share-based compensation costs of $37 million (2013: $31 million) and recorded tax benefits thereon of $6 million (2013:$6 million).

The fair value of shares vested during the six months ended June 30, 2014 was $65 million (2013: $67 million). At June 30, 2014 there were $148 million of unrecognized share-based compensation costs, which are expected to be recognized over the weighted average period of 2.6 years.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


7.	SHARE-BASED COMPENSATION (CONTINUED)

Awards to settle in shares

The following table provides a reconciliation of the beginning and ending balance of nonvested restricted stock (including restricted stock units) for the six months ended June 30, 2014:



	Performance-based Stock Awards			Service-based Stock Awards
	Number of Restricted Stock	Weighted Average Grant Date Fair Value		Number of Restricted Stock		Weighted Average Grant Date Fair Value

Nonvested restricted stock - beginning of period	283	$	35.74	3,430		$	34.72
Granted	68	44.33		1,036		44.42
Vested	—	—		(1,415	)	33.76
Forfeited	—	—		(157	)	36.26
Nonvested restricted stock - end of period	351	$	37.41	2,894		$	38.47

Cash-settled awards

During 2014 we also granted 1,000,551 restricted stock units that will settle in cash rather than shares when the awards ultimately vest; of which 22,837 restricted stock units are performance based and 977,714 restricted stock units are service based. At June 30, 2014, the corresponding liability for cash-settled units, included in other liabilities on the Consolidated Balance Sheet, was $9 million (2013: $9 million).

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


8.	EARNINGS PER COMMON SHARE

The following table sets forth the comparison of basic and diluted earnings per common share:



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013

Basic earnings per common share
Net income	$	202,259	$	83,725	$	350,729	$	395,280
Less: noncontrolling interests	1,573		—		2,795		—
Less: preferred shares dividends	10,022		8,197		20,044		16,938
Less: loss on repurchase of preferred shares	—		3,081		—		3,081
Net income available to common shareholders	190,664		72,447		327,890		375,261
Weighted average common shares outstanding - basic	105,118		115,163		107,075		116,088
Basic earnings per common share	$	1.81	$	0.63	$	3.06	$	3.23

Diluted earnings per common share
Net income available to common shareholders	$	190,664	$	72,447	$	327,890	$	375,261

Weighted average common shares outstanding - basic	105,118		115,163		107,075		116,088
Stock compensation plans	1,171		1,508		1,254		1,572
Weighted average common shares outstanding - diluted	106,289		116,671		108,329		117,660

Diluted earnings per common share	$	1.79	$	0.62	$	3.03	$	3.19

Anti-dilutive shares excluded from the dilutive computation	73		35		562		473


9.	SHAREHOLDERS' EQUITY

The following table presents our common shares issued and outstanding:



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013

Shares issued, balance at beginning of period	175,195		173,595		174,134		171,867
Shares issued	120		311		1,181		2,039
Total shares issued at end of period	175,315		173,906		175,315		173,906

Treasury shares, balance at beginning of period	(68,450	)	(57,289	)	(64,649	)	(53,947	)
Shares repurchased	(3,058	)	(5,122	)	(7,094	)	(8,491	)
Shares reissued from treasury	99		93		334		120
Total treasury shares at end of period	(71,409	)	(62,318	)	(71,409	)	(62,318	)

Total shares outstanding	103,906		111,588		103,906		111,588

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


9.	SHAREHOLDERS' EQUITY (CONTINUED)

Treasury Shares

The following table presents our share repurchases:



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013

In the open market:
Total shares	2,970		5,048		6,680		5,048
Total cost	$	135,395	$	225,000	$	300,000	$	225,000
Average price per share⁽¹⁾	$	45.59	$	44.57	$	44.91	$	44.57

From employees:
Total shares	88		74		414		443
Total cost	$	3,985	$	3,256	$	18,082	$	17,925
Average price per share⁽¹⁾	$	45.57	$	44.10	$	43.66	$	40.47

From founding shareholder:⁽²⁾
Total shares	—		—		—		3,000
Total cost	$	—	$	—	$	—	$	116,100
Average price per share⁽¹⁾	$	—	$	—	$	—	$	38.70

Total shares repurchased:
Total shares	3,058		5,122		7,094		8,491
Total cost	$	139,380	$	228,256	$	318,082	$	359,025
Average price per share⁽¹⁾	$	45.59	$	44.57	$	44.84	$	42.28


(1)	Calculated using whole figures.

(2) During the first quarter of 2013, we privately negotiated the repurchase of 3,000,000 common shares held by Trident II, L.P. and affiliated entities.


10.	NONCONTROLLING INTERESTS

During November 2013, the Company formed AXIS Ventures Reinsurance Limited (Ventures Re), a Bermuda domiciled insurer. Ventures Re was formed to write reinsurance on a fully collateralized basis.

In conjunction with the formation of Ventures Re, third party investors purchased $50 million of non-voting redeemable preferred share capital issued by this entity. The preferred shares are redeemable at the sole discretion of Ventures Re's Board of Directors, and are expected to be redeemed on or before July 1, 2016.

Ventures Re is considered to be a variable interest entity. The Company has concluded that it is the primary beneficiary of Ventures Re as it has the power to direct, and has more than an insignificant economic interest in, the activities of this entity. Following this determination, Ventures Re was consolidated by the Company. Shareholders' equity attributable to Ventures Re's third party investors is recorded in the Consolidated Financial Statements as noncontrolling interests.

At June 30, 2014, total assets of Ventures Re were $58 million (2013: $50 million), consisting primarily of cash and cash equivalents and insurance receivables. Total liabilities were $5 million (2013: $nil) primarily consisting of unearned premium. The assets of Ventures Re can only be used to settle its own liabilities, and there is no recourse to the Company for any liabilities incurred by this entity.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


10.	NONCONTROLLING INTERESTS (CONTINUED)

The reconciliation of the beginning and ending balance of the noncontrolling interests in Ventures Re for the six months ended June 30, 2014 is as follows:



	Total
	2014

Balance at January 1, 2014	$	50,000
Net income attributable to noncontrolling interests	2,795
Balance at June 30, 2014	$	52,795


11.	DEBT AND FINANCING ARRANGEMENTS


a)	Senior Notes

On March 13, 2014, AXIS Specialty Finance PLC, a 100% owned finance subsidiary, issued $250 million aggregate principal amount of 2.65% senior unsecured notes (the "2.65% Senior Notes") at an issue price of 99.896% and $250 million aggregate principal amount of 5.15% senior unsecured notes (the "5.15% Senior Notes") at an issue price of 99.474%. The net proceeds of the issuance, after consideration of the offering discount and underwriting expenses and commissions, totaled approximately $248 million and $246 million for the 2.65% Senior Notes and the 5.15% Senior Notes, respectively. Interest on the 2.65% Senior Notes and the 5.15% Senior Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. Unless previously redeemed, the 2.65% Senior Notes and the 5.15% Senior Notes will mature on April 1, 2019 and April 1, 2045, respectively. The 2.65% Senior Notes and the 5.15% Senior Notes are ranked as unsecured senior obligations of AXIS Specialty Finance PLC. AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance PLC under the 2.65% Senior Notes and the 5.15% Senior Notes. AXIS Capital's obligations under this guarantee are unsecured and senior and rank equally with all other senior obligations of AXIS Capital. Net proceeds from this offering are expected to be used towards the repayment of $500 million of AXIS Capital’s 5.75% senior unsecured notes which mature on December 1, 2014.

We have the option to redeem the 2.65% Senior Notes and the 5.15% Senior Notes at any time and from time to 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. The related indentures contain various covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. We were in compliance with all the covenants contained in the indentures at June 30, 2014.

Interest expense recognized in relation to all of our senior unsecured notes includes interest payable, amortization of the offering discounts and amortization of debt offering expenses. The offering discounts and debt offering expenses are amortized over the period of time during which the underlying senior notes are outstanding. During the three months ended June 30, 2014, we incurred interest expense of $20 million (2013: $15 million) and for the six months ended June 30, 2014 we incurred $35 million (2013: $30 million), relating to all of our senior unsecured notes.


b)	Credit Facilities

Effective February 10, 2014, AXIS Specialty Finance PLC was added as a guarantor to our $250 million credit facility (the "Credit Facility").

On March 31, 2014, AXIS Capital's subsidiary, AXIS Specialty Limited, terminated the $170 million secured letter of credit facility (the "Lloyd's LOC Facility") with ING Bank N.V., London Branch ("ING"). The Funds at Lloyd's requirements for the Company's subsidiary, AXIS Corporate Capital UK Limited, to support the underwriting capacity of the Company's Lloyd's syndicate, AXIS Syndicate 1686, are now being met by capital pledged in the form of fixed income securities deposited directly with Lloyd's.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


11.	DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

We are party to a $750 million letter of credit facility (the "LOC Facility") in addition to the Credit Facility. At June 30, 2014, letters of credit outstanding under the the LOC Facility and the Credit Facility totaled $470 million and nil, respectively. There was no debt outstanding under the Credit Facility.

We were in compliance with all LOC Facility and Credit Facility covenants at June 30, 2014.


12.	COMMITMENTS AND CONTINGENCIES

We purchase reinsurance coverage for our insurance lines of business. The minimum reinsurance premiums are contractually due in advance on a quarterly basis. Actual payments under the reinsurance contracts will depend on the underlying subject premium and may exceed the minimum premium. In addition, we have entered into a reinsurance agreement that covers both our insurance and reinsurance segments for a period longer than one year. At June 30, 2014, we have outstanding reinsurance purchase commitments of $131 million relating to these annual and multi-year agreements.

Refer 'Note 3 - Investments' for information on commitments related to our investment portfolio.


13.	OTHER COMPREHENSIVE INCOME (LOSS)

The tax effects allocated to each component of other comprehensive income (loss) were as follows:



	2014									2013
	Before Tax Amount			Tax (Expense) Benefit			Net of Tax Amount			Before Tax Amount			Tax (Expense) Benefit		Net of Tax Amount

Three months ended June 30,
Available for sale investments:
Unrealized gains (losses) arising during the period	$	133,575		$	(13,025	)	$	120,550		$	(289,028	)	$	26,127	$	(262,901	)
Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income	(40,259		)	6,330			(33,929		)	(5,697		)	1,631		(4,066		)
Unrealized gains (losses) arising during the period, net of reclassification adjustment	93,316			(6,695		)	86,621			(294,725		)	27,758		(266,967		)
Non-credit portion of OTTI losses	—			—			—			—			—		—
Foreign currency translation adjustment	3,790			—			3,790			(18,386		)	—		(18,386		)
Total other comprehensive income (loss), net of tax	$	97,106		$	(6,695	)	$	90,411		$	(313,111	)	$	27,758	$	(285,353	)

Six months ended June 30,
Available for sale investments:
Unrealized gains (losses) arising during the period	$	214,135		$	(22,202	)	$	191,933		$	(307,629	)	$	26,203	$	(281,426	)
Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income	(56,328		)	12,785			(43,543		)	(42,951		)	5,037		(37,914		)
Unrealized gains (losses) arising during the period, net of reclassification adjustment	157,807			(9,417		)	148,390			(350,580		)	31,240		(319,340		)
Non-credit portion of OTTI losses	—			—			—			—			—		—
Foreign currency translation adjustment	6,449			—			6,449			(18,527		)	—		(18,527		)
Total other comprehensive income (loss), net of tax	$	164,256		$	(9,417	)	$	154,839		$	(369,107	)	$	31,240	$	(337,867	)

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


13.	OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED)

Reclassifications out of AOCI into net income available to common shareholders were as follows:



		Amount Reclassified from AOCI⁽¹⁾
Details About AOCI Components	Consolidated Statement of Operations Line Item That Includes Reclassification	Three months ended June 30,						Six months ended June 30,
Details About AOCI Components		2014			2013			2014			2013

Unrealized appreciation on available for sale investments
	Other realized investment gains	$	42,164		$	10,824		$	59,018		$	48,976
	OTTI losses	(1,905		)	(5,127		)	(2,690		)	(6,025		)
	Total before tax	40,259			5,697			56,328			42,951
	Income tax expense	(6,330		)	(1,631		)	(12,785		)	(5,037		)
	Net of tax	$	33,929		$	4,066		$	43,543		$	37,914


(1)	Amounts in parentheses are debits to net income available to common shareholders.

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ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with the consolidated financial statements and related notes included in Item 1 of this report and also our Management’s Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2013. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.



	Page

Second Quarter 2014 Financial Highlights	40
Executive Summary	41
Underwriting Results – Group	45
Results by Segment: For the three and six months ended June 30, 2014 and 2013	53
i) Insurance Segment	53
ii) Reinsurance Segment	57
Other Expenses, Net	59
Net Investment Income and Net Realized Investment Gains	60
Cash and Investments	62
Liquidity and Capital Resources	64
Critical Accounting Estimates	67
New Accounting Standards	68
Off-Balance Sheet and Special Purpose Entity Arrangements	68
Non-GAAP Financial Measures	68

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SECOND QUARTER 2014 FINANCIAL HIGHLIGHTS

Second Quarter 2014 Consolidated Results of Operations


•	Net income available to common shareholders of $191 million, or $1.81 per common share and $1.79 per diluted common share


•	Operating income of $173 million, or $1.63 per diluted common share⁽¹⁾


•	Gross premiums written of $1.2 billion


•	Net premiums written of $1.0 billion


•	Net premiums earned of $1.0 billion


•	Net favorable prior year reserve development of $85 million


•	Estimated natural catastrophe and weather-related pre-tax net losses of $36 million, primarily related to U.S. weather events


•	Underwriting income of $127 million and combined ratio of 90.8%


•	Net investment income of $115 million


•	Net realized investment gains of $33 million

Second Quarter 2014 Consolidated Financial Condition


•	Total cash and investments of $15.7 billion; fixed maturities, cash and short-term securities comprise 89% of total cash and investments and have an average credit rating of AA-


•	Total assets of $21.4 billion


•	Reserve for losses and loss expenses of $9.8 billion and reinsurance recoverable of $2.0 billion


•	Total debt of $1.5 billion and the debt to total capital ratio was 20.0%


•	Repurchased 3.1 million common shares for a total cost of $139 million; at July 30, 2014 the remaining authorization under the repurchase program approved by our Board of Directors was $450 million


•	Common shareholders’ equity of $5.3 billion and diluted book value per common share of $49.69

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

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EXECUTIVE SUMMARY

Business Overview

We are a Bermuda-based global provider of specialty lines insurance and treaty reinsurance products with operations in Bermuda, the United States, Europe, Singapore, Canada, Australia and Latin America. Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Re.

Our mission is to provide our clients and distribution partners with a broad range of risk transfer products and services and meaningful capacity, backed by significant financial strength. We manage our portfolio holistically, aiming to construct the optimum consolidated portfolio of funded and unfunded risks, consistent with our risk appetite and development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a leading global, diversified specialty insurance and reinsurance company, as measured by quality, sustainability and profitability. Our execution on this strategy in the first six months of 2014 included:


•	continued expansion of our agriculture reinsurance business;


•	the addition of a number of underwriting and support staff including underwriting specialists in areas such as healthcare liability insurance, as we continue to build-out the Company's global platform, explore opportunities in new and existing lines of business and grow our business internationally;


•	continued growth of our accident and health line, which launched in 2010 and is focused on specialty accident and health products;


•	the commencement of operations of our new syndicate at Lloyd's which provides us with access to Lloyd’s worldwide licenses and an extensive distribution network; and


•	the continued focus on lines of business with attractive rates.

In addition, during March 2014 we issued $250 million aggregate principal amount of 2.65% senior unsecured notes which will mature on April 1, 2019 and $250 million aggregate principal amount of 5.15% senior unsecured notes which will mature on April 1, 2045. Net proceeds from this offering are expected to be used towards the repayment of $500 million of AXIS Capital’s 5.75% senior unsecured notes which mature on December 1, 2014 (refer 'Liquidity and Capital Resources - Senior Notes' for more detail).

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Results of Operations



	Three months ended June 30,							Six months ended June 30,
	2014			% Change	2013			2014			% Change	2013

Underwriting income (loss):
Insurance	$	12,653		nm	$	(55,487	)	$	29,440		nm	$	(14,498	)
Reinsurance	113,928			74%	65,408			205,906			5%	195,219
Net investment income	114,867			38%	83,112			197,610			3%	192,019
Net realized investment gains	33,261			105%	16,235			43,882			(28%)	60,713
Other expenses, net	(72,450		)	184%	(25,543		)	(126,109		)	230%	(38,173		)
Net income	202,259			142%	83,725			350,729			(11%)	395,280
Net income attributable to noncontrolling interests	(1,573		)	nm	—			(2,795		)	nm	—
Preferred share dividends	(10,022		)	22%	(8,197		)	(20,044		)	18%	(16,938		)
Loss on repurchase of preferred shares	—			nm	(3,081		)	—			nm	(3,081		)
Net income available to common shareholders	$	190,664		163%	$	72,447		$	327,890		(13%)	$	375,261

Operating income	$	172,743		245%	$	50,045		$	309,811		12%	$	277,536

nm – not meaningful

Underwriting Results

Total underwriting income for the three months ended June 30, 2014 was $127 million, an increase of $117 million compared to $10 million for the three months ended June 30, 2013. The increase in underwriting income was primarily driven by a decrease in the current accident year loss ratio, driven by a decrease in natural catastrophe and weather-related net losses (after reinstatement premiums) of $104 million and a $43 million increase in net favorable prior year reserve development. The decrease was partially offset by an increase in the current accident year loss ratios, after adjusting for the impact of the natural catastrophe and weather-related events, driven by the insurance property and professional lines.

The insurance segment underwriting income increased by $68 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in underwriting income was primarily due to a lower current accident year loss ratio, reflecting a decrease in the natural catastrophe and weather-related losses incurred which was partially offset by higher loss ratios primarily in the property and professional lines, and an increase in net favorable prior year reserve development of $26 million.

The reinsurance segment underwriting income increased by $49 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in underwriting income was primarily due to a lower current accident year loss ratio, reflecting a decrease in the natural catastrophe and weather-related losses incurred, and an increase in net favorable prior year reserve development of $17 million.

For the six months ended June 30, 2014 underwriting income increased by $54 million to $235 million, compared to $181 million for the six months ended June 30, 2013. The increase in underwriting income was primarily driven by the same factors discussed for the quarterly increase above.

Underwriting income for our insurance segment improved by $44 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, primarily driven by a $61 million decrease in natural catastrophe and weather-related losses. A $32 million increase in net favorable prior year reserve development also contributed to the improvement. This was partially offset by an increase in the current accident year loss ratio, after adjusting for natural catastrophe and weather-related losses, driven by the professional and property lines.

Our reinsurance segment underwriting improved by $11 million for the six months ended June 30, 2014 compared to the same period of 2013. The improvement was primarily due to a decrease in the level of natural catastrophe and weather-related losses which was partially offset by an increase in the current accident year loss ratio due to a change in the business mix and an increase in the segment's acquisition costs.

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Net Investment Income

Net investment income was $115 million in the three months ended June 30, 2014, an increase of $32 million from $83 million in the three months ended June 30, 2013. The increase was primarily driven by our other investments; these investments generated $32 million of income this quarter, compared to $12 million in the second quarter of 2013. Net investment income for the six months ended June 30, 2014 was $198 million, an increase of $6 million compared to the same period in 2013. The increase was mainly attributable to income from fixed maturities and equities as a result of the growth in our fixed maturities and equity portfolios.

Net Realized Investment Gains

During each period presented, we realized investment gains on sales related to minor fixed maturity reallocations. In addition, during the six months ended June 30, 2014, we realized gains of $47 million on the sale of equities, this was higher than the $29 million of net realized gains from the same period of 2013. The increase reflected gains taken as a result of the strong performance of the global equity markets during the second half of 2013 and the first half of 2014. Net losses of $7 million and $13 million for the change in fair value of our investment derivatives during the three and six month periods of 2014 reflected net losses relating to interest rate swaps which were introduced during September 2013 to hedge interest rate risk for certain parts of our fixed maturity portfolio. These losses were more than offset by an increase in unrealized gains on our fixed maturity portfolio.

Other Expenses, Net

Foreign exchange losses for the three months and six months ended June 30, 2014 were $10 million and $14 million respectively, compared to foreign exchange gains of $10 million and $45 million for the three and six months ended June 30, 2013, respectively, and reflected the re-measurement of our foreign denominated net insurance related liabilities. Excluding the movements in foreign exchange, other expenses increased by $27 million and $29 million in the three and six months ended June 30, 2014 respectively. The increase was primarily due to a higher income tax expense which is impacted by the geographical distribution of our net income, an increase in corporate expenses which increased driven by personnel expenses and related costs as we continue the build-out of our global operations, and an increase in interest expense and financing costs driven by new debt issued during the three months ended March 31, 2014.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests relates to income for the three month and six months ended June 30, 2014 attributable to the third party investors in Ventures Re. Refer Item 1, Note 10 to our Consolidated Financial Statements for additional information.

Preferred Share Dividends

The increase in preferred share dividends for the three months and six months ended June 30, 2014 was driven by the increase in our preferred equity capital, following the preferred equity transactions executed during the second quarter of 2013, when we issued $225 million of 5.50% Series D preferred shares.

Outlook

In the insurance markets, ample capacity and competition combined with low frequency of large market losses in recent years has led to increasing competitive pressures. Price improvements noted in recent periods have leveled off overall, with modest decreases across certain lines. However, despite this slowdown in pricing, there remain good fundamentals and opportunities for profitable growth in many of the insurance lines of business. We continue to observe better market opportunities in the U.S. markets, where rate changes have generally been stronger, than those observed in international markets.

In reinsurance, abundant supply of capacity driven by record reinsurer capital levels and continually building interest from alternative capital investors, exacerbated by increased retentions from traditional cedants, is placing significant pressure on reinsurance rates with some softening of contract terms and conditions also noted. While the outlook is for a continuing competitive global reinsurance market, we continue to adapt to the challenging conditions by focusing on delivering meaningful value to our clients while writing and renewing business with acceptable profitability.

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Financial Measures

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



	Three months ended and at June 30,						Six months ended and at June 30,
	2014			2013			2014			2013

ROACE (annualized)⁽¹⁾	14.5		%	5.6		%	12.5		%	14.7		%
Operating ROACE (annualized)⁽²⁾	13.1		%	3.9		%	11.8		%	10.9		%
DBV per common share⁽³⁾	$	49.69		$	42.67		$	49.69		$	42.67
Cash dividends declared per common share	$	0.27		$	0.25		$	0.54		$	0.50
Increase in diluted book value per common share adjusted for dividends	$	2.83		$	(1.75	)	$	4.43		$	0.20


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

(2)

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


(3)	Diluted book value (“DBV”) per common share represents total common shareholders’ equity divided by the number of common shares and diluted common share equivalents outstanding, determined using the treasury stock method. Cash settled awards are excluded from the denominator.

Return on Equity

The increase in ROACE for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 is driven by the increase in underwriting income and the increase in net investment income. The decrease in ROACE for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 reflects a decrease in foreign exchange gains, net realized investment gains and higher corporate expenses which were partially offset by increases in underwriting income and net investment income. As operating ROACE excludes the impact of net realized investment gains and foreign exchange gains (losses), operating ROACE for the six months ended June 30, 2014 improved compared to the six months ended June 30, 2013.

Diluted Book Value per Common Share

Our DBV per common share increase of 16% from $42.67 at June 30, 2013 to $49.69 at June 30, 2014 primarily reflected the generation of $637 million in net income available to common shareholders over the past twelve months and the increase in unrealized gains on investments included in accumulated other comprehensive income due to the general decline in U.S. interest rates and the tightening of credit spreads. This increase was partially offset by common dividends.

Diluted Book Value per Common Share Adjusted for Dividends

Taken together, we believe that growth in diluted book value per common share and common share dividends declared represent the total value created for our common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe that the investors use the DBV per common share adjusted for dividends metric to measure comparable performance across the industry.

During the three months ended June 30, 2014, the diluted book value per common share adjusted for dividends grew by $2.83, or 6%, driven primarily by our diluted net income per share of $1.79, unrealized gains on investments included in other comprehensive income and dividends declared. During the six months ended June 30, 2014, the diluted book value per common share adjusted for dividends grew by $4.43, or 10%, driven primarily by our diluted net income per share of $3.03, unrealized gains on investments included in other comprehensive income and dividends declared.

During the three months ended June 30, 2013, an upward shift in sovereign yield curves and widening of credit spreads drove a significant reduction in the fair value of our fixed maturity portfolio; substantially all of this change was recognized in other comprehensive income. This drove a $2.00 reduction in our diluted book value per share during the quarter which was partially offset by the common dividends. For the six months ended June 30, 2013, our diluted net income per common share of $3.19, in addition to dividends declared, more than offset the impact of this yield curve shift and created value for our shareholders.

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UNDERWRITING RESULTS – GROUP

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



	Three months ended June 30,							Six months ended June 30,
	2014			% Change	2013			2014			% Change	2013

Revenues:
Gross premiums written	$	1,231,279		1%	$	1,219,805		$	3,052,678		3%	$	2,966,287
Net premiums written	1,000,162			1%	993,407			2,664,746			4%	2,563,846
Net premiums earned	1,000,400			6%	945,873			1,946,349			7%	1,819,911
Other insurance related income	1,683			287%	435			4,766			363%	1,030

Expenses:
Current year net losses and loss expenses	(651,183		)		(685,014		)	(1,238,883		)		(1,177,926		)
Prior year reserve development	85,354				42,115			128,847				96,613
Acquisition costs	(191,862		)		(169,719		)	(363,899		)		(315,209		)
Underwriting-related general and administrative
expenses⁽¹⁾	(117,811		)		(123,769		)	(241,834		)		(243,698		)

Underwriting income⁽²⁾	$	126,581		nm	$	9,921		$	235,346		30%	$	180,721




General and administrative expenses⁽¹⁾	$	151,081			$	149,034		$	303,810			$	290,508
Income before income taxes⁽²⁾	$	211,759			$	79,063		$	364,354			$	400,749

(1)

Underwriting-related general and administrative expenses is a non-GAAP measure as defined in SEC Regulation G. Our total general and administrative expenses also included corporate expenses of $33,270 and $25,265 for the three months ended June 30, 2014 and 2013; refer to 'Other Expenses' for additional information related to these corporate expenses. Also, refer to 'Non-GAAP Financial Measures' for further information.

(2)

Group (or consolidated) underwriting income is a non-GAAP financial measure as defined in SEC Regulation G. Refer to Item 1, Note 2 to the Consolidated Financial Statements for a reconciliation of consolidated underwriting income to the nearest GAAP financial measure (income before income taxes) for the periods indicated above. Refer to 'Non-GAAP Financial Measures' for additional information related to the presentation of consolidated underwriting income.

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UNDERWRITING REVENUES

Premiums Written:

Gross and net premiums written, by segment, were as follows:



	Gross Premiums Written
	Three months ended June 30,					Six months ended June 30,
	2014		% Change	2013		2014		% Change	2013

Insurance	$	754,110	(3%)	$	781,055	$	1,355,831	(2%)	$	1,377,769
Reinsurance	477,169		9%	438,750		1,696,847		7%	1,588,518
Total	$	1,231,279	1%	$	1,219,805	$	3,052,678	3%	$	2,966,287

% ceded
Insurance	28%		—	28%		26%		(2) pts	28%
Reinsurance	4%		3 pts	1%		2%		1 pts	1%
Total	19%		—	19%		13%		(1) pts	14%

	Net Premiums Written
	Three months ended June 30,					Six months ended June 30,
	2014		% Change	2013		2014		% Change	2013

Insurance	$	541,097	(3%)	$	559,584	$	997,789	1%	$	992,264
Reinsurance	459,065		6%	433,823		1,666,957		6%	1,571,582
Total	$	1,000,162	1%	$	993,407	$	2,664,746	4%	$	2,563,846

Gross premiums written for the three months ended June 30, 2014 increased by $11 million or 1% compared to the three months ended June 30, 2013, and the increase was driven by growth in our reinsurance segment which was partially offset by decreases in our insurance segment.

The increase in our reinsurance segment of $38 million in the three months ended June 30, 2014 compared to the same period of 2013 was primarily driven by professional and agriculture lines which were partially offset by decreases in the catastrophe and motor lines. Professional lines growth reflected premium increases due to an extension to a large proportional treaty. The growth in the agriculture lines reflected differences in the timing of certain renewals and our continuing initiatives to grow this line of business. Gross premiums written during the second quarter were also impacted by an increased level of contracts written on a multi-year basis, primarily in the liability and property lines. This growth was partially offset by decreases in our catastrophe business primarily due to differences in timing of certain renewals as well as the increasingly competitive market conditions and the resulting underwriting actions. Decreases in motor were driven by non-renewal of certain treaties and favorable premium adjustments which impacted the second quarter of 2013.

Our insurance segment's gross written premiums decreased by $27 million in the three months ended June 30, 2014 compared to the same period of 2013. The decrease was driven by the property lines, impacted by timing differences in renewals of certain contracts and increasingly competitive market conditions, professional lines driven by the reshaping of our U.S. D&O portfolio and credit and political risk lines where the decrease reflected a lower volume of new business written during the quarter compared to the same quarter in the prior year. These decreases were partially offset by our accident and health lines, which benefitted primarily from higher renewal premiums and continued strong new business production, and increases in the liability lines reflecting growth in the U.S. casualty markets.

Gross premiums written for the six months ended June 30, 2014 increased by $86 million or 3% compared to the six months ended June 30, 2013, and the increase was driven by growth in our reinsurance segment which was partially offset by decreases in our insurance segment.

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The increase in our reinsurance segment of $108 million in the six months ended June 30, 2014 compared to the same period of 2013 was significantly impacted by a number of treaties written on a multi-year basis, especially in the property, motor and catastrophe lines, and included written premium that related to future underwriting years of $90 million. After adjusting for the impact of the multi-year contracts the increase in gross written premiums of 2% was primarily driven by agriculture and reflected growth initiatives for this line of business.

The insurance segment decrease of $22 million in the six months ended June 30, 2014 compared to the same period of 2013, was driven by property, due to timing differences for renewals of certain contracts and increasingly competitive market conditions and a decrease in professional lines, driven by the the reshaping of our U.S. D&O portfolio. These decreases were partially offset by growth in the liability lines which increased due to growth in the U.S. casualty markets with both new business and rate increases noted and increases in accident and health primarily reflecting higher insurance renewal premiums and continued strong new business production.

In the three months ended June 30, 2014 the ceded ratio has remained consistent with the quarter ended June 30, 2013 at 19% of gross written premiums. For the first six months of 2014, premiums ceded ratio was 13% of gross premiums written, compared with 14% of gross premiums written, in the same period of 2013. The reduction in premium ceded between the two periods related primarily to changes in our reinsurance purchasing program implemented during 2013, which included excess of loss treaty reductions driven by both retention and rate, and proportional changes related to reductions in the cession rates on our professional lines and liability reinsurance programs. As certain of these changes were already effective during the second quarter of 2013 the reduction had a lesser impact on the quarterly results compared to the year to date movement. In addition for the three months ended June 30, 2014, this reduction was offset by an increased level of retrocessional covers purchased by the reinsurance segment covering the catastrophe, agriculture and property lines.

Net Premiums Earned:

Net premiums earned by segment were as follows:



	Three months ended June 30,									Six months ended June 30,
	2014				2013				% Change	2014				2013				% Change

Insurance	$	457,670	46	%	$	422,345	45	%	8%	$	906,884	47	%	$	824,224	45	%	10%
Reinsurance	542,730		54	%	523,528		55	%	4%	1,039,465		53	%	995,687		55	%	4%
Total	$	1,000,400	100	%	$	945,873	100	%	6%	$	1,946,349	100	%	$	1,819,911	100	%	7%

Changes in net premiums earned reflect period to period changes in net premiums written and business mix, together with normal variability in premium earning patterns.

Growth in net premiums earned for our insurance segment was driven by the growth in the premiums written in the professional, accident and health and liability lines in recent periods as well as the impact of the reductions in the ceded reinsurance program. The reinsurance segment increase primarily reflected business written in recent periods in the professional lines, the continued expansion of our agriculture business, and increases in the motor proportional and liability books of business. This growth was partially offset by decreases in catastrophe lines.

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UNDERWRITING EXPENSES

The following table provides a breakdown of our combined ratio:



	Three months ended June 30,					Six months ended June 30,
	2014		% Point Change	2013		2014		% Point Change	2013

Current accident year loss ratio	65.1	%	(7.3)	72.4	%	63.7	%	(1.0)	64.7	%
Prior year reserve development	(8.5	%)	(4.1)	(4.4	%)	(6.7	%)	(1.4)	(5.3	%)
Acquisition cost ratio	19.2	%	1.3	17.9	%	18.7	%	1.4	17.3	%
General and administrative expense ratio⁽¹⁾	15.0	%	(0.8)	15.8	%	15.6	%	(0.4)	16.0	%
Combined ratio	90.8	%	(10.9)	101.7	%	91.3	%	(1.4)	92.7	%


(1)	The general and administrative expense ratio includes corporate expenses not allocated to reportable segments of 3.3% and 2.7% for the three months ended June 30, 2014 and 2013, respectively and 3.2% and 2.6% for the six months ended June 30, 2014 and 2013, respectively. These costs are further discussed in the ‘Other Expenses, Net’ section.

Current Accident Year Loss Ratio

The decrease in the current accident year loss ratio for the three months ended June 30, 2014 of 7.3 points compared to the same period in 2013, was primarily attributable to the decrease in natural catastrophe and weather-related losses. During the second quarter of 2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $36 million primarily related to weather losses in the United States. Comparatively during the second quarter of 2013, we recognized aggregate natural catastrophe and weather-related pre-tax net losses (net of related reinstatement premiums) of $140 million with tornadoes and hailstorms in the U.S. making the largest contribution to this amount, with flooding in Canada, Argentina and Europe also significant. The impact of the decrease in the natural catastrophe and weather-related losses was partially offset by a higher loss ratio due to a change in the business mix, which impacted both segments, an increase in the insurance property and professional lines' loss ratios reflecting a higher level of loss activity in recent periods, and the impact of lower rates. In addition, with the exception of our property lines, during the quarter ended June 30, 2014 we experienced lower mid-size and attritional losses across most lines of business which reduced the current accident year loss ratio.

The improvement in the year to date current accident year loss ratio of 1.0 point for the six months ended June 30, 2014, compared to the six months ended June 30, 2013 was primarily driven by the decrease in natural catastrophe and weather-related losses. During the six months ended June 30,2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $50 million primarily related to weather losses in the United States. Comparatively during the first half of 2013, we recognized aggregate pre-tax natural catastrophe and weather-related net losses (net of related reinstatement premiums) of $153 million, primarily driven by the second quarter 2013 events described above. The decrease in the current accident year loss ratio due to the decrease in the natural catastrophe and weather-related events was partially offset by the same factors as those discussed under the quarterly result above.

Prior Year Reserve Development

Our favorable prior year reserve development was the net result of several underlying reserve developments on prior accident years, identified during our quarterly reserve review process. The following table provides a breakdown of prior year reserve development by segment:



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013

Insurance	$	32,963	$	6,693	$	44,571	$	12,290
Reinsurance	52,391		35,422		84,276		84,323
Total	$	85,354	$	42,115	$	128,847	$	96,613

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Overview

We caution that conditions and trends that impacted the development of our liabilities in the past may not necessarily occur in the future.

Estimates of Natural Catastrophe and Weather Related-Losses

The frequency and severity of natural catastrophe and weather activity was high in recent years and our June 30, 2014 net reserve for losses and loss expenses continues to include estimated amounts for numerous events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular tropical storm Sandy, the 2011 Japanese earthquake and tsunami and 2010 and 2011 New Zealand earthquakes, inherently increases the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.

Our estimated net losses for natural catastrophe and weather events are derived from ground-up assessments of our in-force contracts and treaties providing coverage in the affected regions. These assessments take into account the latest information available from clients, brokers and loss adjusters. In addition, we consider industry insured loss estimates, market share analyses and catastrophe modeling analyses, when appropriate. Our estimates remain subject to change, as additional loss data becomes available.

The following sections provide further details on prior year reserve development by segment, reserving class and accident year.

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Insurance Segment:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014		2013

Property and other	$	28,016		$	8,611		$	29,476	$	13,966
Marine	1,943			10,741			4,644		23,870
Aviation	2,564			2,607			5,647		5,758
Credit and political risk	(6		)	(11		)	3,993		(19		)
Professional lines	574			(14,453		)	231		(16,109		)
Liability	(128		)	(802		)	580		(15,176		)
Total	$	32,963		$	6,693		$	44,571	$	12,290

In the three months ended June 30, 2014, we recognized $33 million of net favorable prior year reserve development, the principal components of which were:


•	$28 million of net favorable prior year reserve development on property and other business, largely related to the 2012 and 2013 accident years and driven by better than expected loss emergence.


•	$3 million of net favorable prior year reserve development on aviation business, spanning a number of accident years and driven by better than expected loss emergence.

In the three months ended June 30, 2013, we recognized $7 million of net favorable prior year reserve development, the principal components of which were:


•	$14 million of net adverse prior year reserve development on professional lines business, primarily emanating from the 2009 accident year and driven by recent developments on certain global financial crisis-related claims. The impact of these developments was partially muted by the recognition of favorable experience for business not impacted by the global financial crisis.


•	$11 million of net favorable prior year reserve development on marine business, spanning a number of accident years and driven by better than expected loss emergence.


•	$9 million of net favorable prior year reserve development on property and other business, largely related to the 2010 and 2011 accident years and driven by better than expected loss emergence.

In the six months ended June 30, 2014, we recognized $45 million of net favorable prior year reserve development, the principal components of which were:


•	$29 million of net favorable prior year reserve development on property and other business, the majority of which related to the 2010 through 2013 accident years and the 2008 accident year and was driven by better than expected loss emergence.


•	$6 million of net favorable prior year reserve development on aviation business, spanning a number of accident years and driven by better than expected loss emergence.


•	$5 million of net favorable prior year reserve development on marine business, driven by better than expected loss emergence on 2012 and prior accident years and partially offset by adverse development on the 2013 accident year due to updated information on one particular claim.


•	$4 million of net favorable prior year reserve development on credit and political risk business, primarily related to better than expected experience on the 2012 accident year.

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In the six months ended June 30, 2013, we recognized $12 million of net favorable prior year reserve development, the principal components of which were:


•	$24 million of net favorable prior year reserve development on marine business, spanning a number of accident years and driven by better than expected loss emergence. This included $13 million of net favorable development related to offshore energy business.


•	$16 million of net adverse prior year reserve development on professional lines, driven by the second quarter developments discussed above.


•	$15 million of net adverse prior year reserve development on liability business, related to developments on two particular circumstances and pertaining to the 2007 and 2011 accident years.


•	$14 million of net favorable prior year reserve development on property and other business, largely related to the 2010 and 2011 accident years and driven by better than expected loss emergence.

Reinsurance Segment:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013

Property and other	$	39,991		$	10,030		$	61,414		$	18,855
Credit and surety	(3		)	12,371			(793		)	21,965
Professional lines	6,186			1,831			11,865			9,759
Motor	114			(10,864		)	(330		)	(4,351		)
Liability	6,103			22,054			12,120			38,095
Total	$	52,391		$	35,422		$	84,276		$	84,323

In the three months ended June 30, 2014, we recognized $52 million of net favorable prior year reserve development, the principal components of which were:


•	$40 million of net favorable prior year reserve development on property and other business, spanning a number of accident years and driven by better than expected loss emergence. Included in this net development was $10 million of favorable reserve development relating to natural catastrophe and weather-related losses incurred during the second quarter of 2013.


•	$6 million of net favorable prior year reserve development on professional lines business, primarily related to the 2004 through 2006 accident years, for reasons discussed in the overview.


•	$6 million of net favorable prior year reserve development on liability business, largely related to accident years 2008 and prior, for reasons discussed in the overview. This favorable development was partially offset by strengthening of the reserves related to two specific cases in the 2009 and 2011 accident years.

In the three months ended June 30, 2013, we recognized $35 million of net favorable prior year reserve development, the principal components of which were:


•	$22 million of net favorable prior year reserve development on liability business for the reasons discussed in the overview.


•	$12 million of net favorable prior year reserve development on trade credit and surety reinsurance business, primarily related to the 2012 accident year and driven by better than expected loss emergence.


•	$10 million of net favorable prior year reserve development on property and other business, spanning a number of accident years and driven by better than expected loss emergence.

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In the six months ended June 30, 2014, we recognized $84 million of net favorable prior year reserve development, the principal components of which were:

•

$61 million of net favorable prior year reserve development on property and other business, spanning a number of accident years and driven by better than expected loss emergence. Included in this net development was $14 million of favorable reserve development relating to natural catastrophe and weather-related losses incurred during the second quarter of 2013. In addition, the net development included $13 million of adverse development on agriculture reserves relating to loss experience on events occurring late in the 2013 accident year.


•	$12 million of net favorable prior year reserve development on liability business largely related to accident years 2008 and prior, for reasons discussed in the overview. This favorable development was partially offset by strengthening of the reserves related to two specific cases in the 2009 and 2011 accident years.


•	$12 million of net favorable prior year reserve development on professional lines business, primarily related to the 2004 through 2008 accident years, for reasons discussed in the overview.

In the six months ended June 30, 2013, we recognized $84 million of net favorable prior year reserve development, the principal components of which were:


•	$38 million of net favorable prior year reserve development on liability reinsurance business for the reasons discussed in the overview.


•	$22 million of net favorable prior year reserve development on trade credit and surety reinsurance business, primarily related to the 2012 and, to a lesser extent 2009 through 2011, accident years and driven by better than expected loss emergence.


•	$19 million of net favorable prior year reserve development on property and other business, largely driven by better than expected loss emergence on the 2010 and 2012 accident years.


•	$10 million of net favorable prior year reserve development on professional lines reinsurance business, primarily related to the 2007 and 2008 accident years and driven by better than expected loss emergence.

Acquisition Cost Ratio: The increase in the acquisition cost ratio for the three and six months ended June 30, 2014 to 19.2% and 18.7%, respectively, compared to 17.9% and 17.3% in the three and six months ended June 30, 2013 respectively, reflected increases in both segments. The increase in the reinsurance segment was primarily driven by higher acquisition costs paid on certain lines of business, while business mix changes and a reduction in commissions received following the reductions in our ceded reinsurance programs drove the increase in the insurance segment.

General and Administrative Expense Ratio: The general and administrative expense ratio for the three and six months ended June 30, 2014 has decreased to 15.0% and 15.6%, respectively, from 15.8% and 16.0% for the three and six months ended June 30, 2013, respectively. Although there was an increase in personnel costs associated with the continued build-out of the Company's global platforms, this increase was more than offset by the increases in net premiums earned.

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RESULTS BY SEGMENT

INSURANCE SEGMENT

Results from our insurance segment were as follows:



	Three months ended June 30,							Six months ended June 30,
	2014			% Change	2013			2014			% Change	2013

Revenues:
Gross premiums written	$	754,110		(3%)	$	781,055		$	1,355,831		(2%)	$	1,377,769
Net premiums written	541,097			(3%)	559,584			997,789			1%	992,264
Net premiums earned	457,670			8%	422,345			906,884			10%	824,224
Other insurance related income	—			nm	435			—			nm	1,030

Expenses:
Current year net losses and loss expenses	(323,429		)		(337,685		)	(614,460		)		(560,618		)
Prior year reserve development	32,963				6,693			44,571				12,290
Acquisition costs	(71,039		)		(58,749		)	(136,096		)		(116,009		)
General and administrative expenses	(83,512		)		(88,526		)	(171,459		)		(175,415		)

Underwriting income (loss)	$	12,653		nm	$	(55,487	)	$	29,440		nm	$	(14,498	)

Ratios:				% Point Change							% Point Change
Current year loss ratio	70.7		%	(9.3)	80.0		%	67.8		%	(0.2)	68.0		%
Prior year reserve development	(7.2		%)	(5.6)	(1.6		%)	(5.0		%)	(3.5)	(1.5		%)
Acquisition cost ratio	15.5		%	1.6	13.9		%	15.0		%	0.9	14.1		%
General and administrative expense ratio	18.2		%	(2.7)	20.9		%	19.0		%	(2.3)	21.3		%
Combined ratio	97.2		%	(16.0)	113.2		%	96.8		%	(5.1)	101.9		%

nm- not meaningful

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Gross Premiums Written:

The following table provides gross premiums written by line of business:



	Three months ended June 30,									Six months ended June 30,
	2014				2013				% Change	2014				2013				% Change

Property	$	207,788	29	%	$	228,741	29	%	(9%)	$	347,717	26	%	$	380,165	28	%	(9%)
Marine	84,833		11	%	88,047		11	%	(4%)	170,555		13	%	167,940		12	%	2%
Terrorism	9,478		1	%	9,478		1	%	—%	16,456		1	%	17,691		1	%	(7%)
Aviation	10,568		1	%	12,321		2	%	(14%)	13,285		1	%	15,697		1	%	(15%)
Credit and political risk	7,179		1	%	19,537		3	%	(63%)	25,486		2	%	29,540		2	%	(14%)
Professional lines	244,011		32	%	262,611		34	%	(7%)	398,259		29	%	422,373		31	%	(6%)
Liability	106,643		14	%	104,952		13	%	2%	181,009		13	%	162,762		12	%	11%
Accident and health	83,610		11	%	55,368		7	%	51%	203,064		15	%	181,601		13	%	12%
Total	$	754,110	100	%	$	781,055	100	%	(3%)	$	1,355,831	100	%	$	1,377,769	100	%	(2%)

Gross premiums written decreased by $27 million and $22 million for the three and six months ended June 30, 2014, respectively, compared to the same periods of 2013. Property lines decrease was primarily driven by timing differences for renewals of certain contracts and increasingly competitive market conditions. The professional lines decrease was driven by the reshaping of our D&O business written in the United States. Reduced level of new business impacted the credit and political lines. Partially offsetting these decreases was the continued expansion of our accident and health lines, primarily due to higher renewal insurance premiums and continued strong new business production, and increases in the liability lines reflecting growth in the U.S. casualty markets.

Premiums Ceded: Premiums ceded were $213 million for the three months ended June 30, 2014 compared to $221 million for the three months ended June 30, 2013. The ceded ratio has remained consistent between the comparative quarters at 28% of gross written premiums. For the first six months of 2014, premiums ceded were $358 million, or 26% of gross premiums written, compared with $386 million, or 28% of gross premiums written, in the same period of 2013. The reduction in premium ceded between the two periods related primarily to changes in our reinsurance purchasing program implemented during 2013, which included excess of loss treaty reductions driven by both retention and rate, and proportional changes related to reductions in the cession rates on our professional lines and liability reinsurance programs. As certain of these changes were already effective during the second quarter of 2013, the reduction had a lesser impact on the quarterly results compared to the year to date movement.

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Net Premiums Earned:

The following table provides net premiums earned by line of business:



	Three months ended June 30,									Six months ended June 30,
	2014				2013				% Change	2014				2013				% Change

Property	$	108,195	23	%	$	111,957	26	%	(3%)	$	223,581	24	%	$	220,070	26	%	2%
Marine	43,536		10	%	44,179		10	%	(1%)	88,529		10	%	87,698		11	%	1%
Terrorism	8,128		2	%	11,115		3	%	(27%)	16,919		2	%	21,395		3	%	(21%)
Aviation	10,118		2	%	12,443		3	%	(19%)	20,024		2	%	25,752		3	%	(22%)
Credit and political risk	16,759		4	%	17,458		4	%	(4%)	32,694		4	%	35,427		4	%	(8%)
Professional lines	160,287		35	%	141,891		34	%	13%	316,267		35	%	280,021		34	%	13%
Liability	36,073		8	%	25,171		6	%	43%	71,129		8	%	47,360		6	%	50%
Accident and health	74,574		16	%	58,131		14	%	28%	137,741		15	%	106,501		13	%	29%
Total	$	457,670	100	%	$	422,345	100	%	8%	$	906,884	100	%	$	824,224	100	%	10%

Net premiums earned increased by $35 million to $458 million for the three months ended June 30, 2014 compared to $422 million for the three months ended June 30, 2013 was driven by the growth in the premiums written in prior periods in the professional lines, the continued expansion of the accident and health business and increases in liability lines, as well as the positive impact of the reductions in the ceded reinsurance program. The year to date increase of $83 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was driven by the same factors as the quarterly result.

Loss Ratio:

The table below shows the components of our loss ratio:



	Three months ended June 30,					Six months ended June 30,
	2014		% Point Change	2013		2014		% Point Change	2013

Current accident year	70.7	%	(9.3)	80.0	%	67.8	%	(0.2)	68.0	%
Prior year reserve development	(7.2	%)	(5.6)	(1.6	%)	(5.0	%)	(3.5)	(1.5	%)
Loss ratio	63.5	%	(14.9)	78.4	%	62.8	%	(3.7)	66.5	%

Current Accident Year Loss Ratio:

The current accident year loss ratio decreased to 70.7% for the three months ended June 30, 2014 from 80.0% for the three months ended June 30, 2013. The decreases in the insurance segment's current accident year loss ratios for both the quarter and year to date were primarily attributable to natural catastrophe and weather-related losses.

During the second quarter of 2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $30 million, primarily emanating from U.S. weather events. Comparatively, during the second quarter of 2013, we recognized aggregate natural catastrophe and weather-related pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) of $90 million, primarily emanating from tornadoes and hailstorms in the U.S. and flooding in Argentina and Canada.

After adjusting for the impact of the natural catastrophe and weather-related losses the current accident year loss ratio increased by 5.1 points primarily due to:


•	an increase in the current accident year loss ratio in the property lines, which were impacted by an increased level of mid-size and attritional losses in recent periods;

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•	an increase in the professional lines loss ratio, relating to certain parts of our D&O business written in the United States, established during the fourth quarter of 2013, following recent loss experience. The increase primarily relates to business written during 2013 which continues to be earned during 2014;


•	a change in the business mix; partially offset by


•	a reduction in the level of mid-size and attritional losses incurred during the quarter in most of the other classes of business, most notably in the liability lines.

For the six-months ended June 30, 2014, natural catastrophe and weather-related pre-tax net losses aggregated to $36 million, primarily driven by the second quarter events noted above. For the comparative six-month period of 2013, natural catastrophe and weather-related pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) aggregated to $97 million. After adjusting for the natural catastrophe and weather-related losses the current accident year loss ratio increased by 7.4 points primarily due to the increases in the professional and property lines discussed above, and a change in the business mix.

Refer to the ‘Prior Year Reserve Development’ section for further details.

Acquisition Cost Ratio: The insurance segment's acquisition cost ratio increased in both the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to a change in the business mix and reductions in commissions earned due to lower ceded premiums following changes in our reinsurance purchasing program .

General and Administrative Expense Ratio: The insurance segment's general and administrative expense ratio decreased in both the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to a reduction in allocation of certain corporate expenses and the growth in net premiums earned partially offset by growth in personnel expenses as we build out our global platform and costs associated with new initiatives.

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REINSURANCE SEGMENT

Results from our reinsurance segment were as follows:



	Three months ended June 30,							Six months ended June 30,
	2014			% Change	2013			2014			% Change	2013

Revenues:
Gross premiums written	$	477,169		9%	$	438,750		$	1,696,847		7%	$	1,588,518
Net premiums written	459,065			6%	433,823			1,666,957			6%	1,571,582
Net premiums earned	542,730			4%	523,528			1,039,465			4%	995,687
Other insurance related income	1,683			nm	—			4,766			nm	—

Expenses:
Current year net losses and loss expenses	(327,754		)		(347,329		)	(624,423		)		(617,308		)
Prior year reserve development	52,391				35,422			84,276				84,323
Acquisition costs	(120,823		)		(110,970		)	(227,803		)		(199,200		)
General and administrative expenses	(34,299		)		(35,243		)	(70,375		)		(68,283		)

Underwriting income	$	113,928		74%	$	65,408		$	205,906		5%	$	195,219
Ratios:				% Point Change							% Point Change
Current year loss ratio	60.4		%	(5.9)	66.3		%	60.1		%	(1.9)	62.0		%
Prior year reserve development	(9.7		%)	(3.0)	(6.7		%)	(8.1		%)	0.4	(8.5		%)
Acquisition cost ratio	22.3		%	1.1	21.2		%	21.9		%	1.9	20.0		%
General and administrative expense ratio	6.3		%	(0.4)	6.7		%	6.7		%	(0.2)	6.9		%
Combined ratio	79.3		%	(8.2)	87.5		%	80.6		%	0.2	80.4		%

nm – not meaningful

Gross Premiums Written:

The following table provides gross premiums written by line of business for the periods indicated:



	Three months ended June 30,									Six months ended June 30,
	2014				2013				% Change	2014				2013				% Change

Catastrophe	$	117,245	24	%	$	138,461	31	%	(15%)	$	288,505	17	%	$	306,264	20	%	(6%)
Property	61,027		13	%	63,457		14	%	(4%)	300,646		18	%	285,333		18	%	5%
Professional lines	104,801		22	%	57,406		13	%	83%	173,021		10	%	147,961		9	%	17%
Credit and surety	20,359		4	%	20,327		5	%	—%	228,827		13	%	228,635		14	%	—%
Motor	2,676		1	%	16,557		4	%	(84%)	276,696		16	%	241,548		15	%	15%
Liability	82,566		17	%	78,868		18	%	5%	185,210		11	%	178,456		11	%	4%
Agriculture	76,665		16	%	55,319		13	%	39%	179,830		11	%	135,336		9	%	33%
Engineering	8,772		2	%	5,741		1	%	53%	45,282		3	%	46,653		3	%	(3%)
Other	3,058		1	%	2,614		1	%	17%	18,830		1	%	18,332		1	%	3%
Total	$	477,169	100	%	$	438,750	100	%	9%	$	1,696,847	100	%	$	1,588,518	100	%	7%

Gross premiums written increased by $38 million and $108 million in the three and six months ended June 30, 2014, respectively, compared to the same periods of 2013. The increase in the gross premiums written for the three months ended was primarily driven by increases in our professional and agriculture lines, which were partially offset by decreases in catastrophe and motor lines.

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Professional lines growth reflected premium increases due to an extension to a large proportional treaty. The growth in the agriculture lines reflected differences in the timing of certain renewals and our continuing initiatives to grow this line of business. Gross premiums written during the quarter were also impacted by an increased level of contracts written on a multi-year basis, primarily in the liability and property lines. This growth was partially offset by decreases in our catastrophe business due to differences in timing of certain renewals and competitive market conditions and the resulting underwriting actions. Decreases in motor were driven by non-renewal of certain treaties and favorable premium adjustments which impacted the second quarter of 2013.

The increase in the gross premiums written of $108 million in the six months ended June 30, 2014 compared to the same period of 2013 was significantly impacted by a number of treaties written on a multi-year basis, especially in the property, motor and catastrophe lines, and included written premium that relate to future underwriting years of $90 million (in 2013 the comparative total was $12 million). After adjusting for the impact of the multi-year contracts, the increase in gross written premiums of 2% was primarily driven by the agriculture lines reflecting growth initiatives for this line of business.

Net Premiums Earned:

The following table provides net premiums earned by line of business:



	Three months ended June 30,									Six months ended June 30,
	2014				2013				% Change	2014				2013				% Change

Catastrophe	$	79,182	15	%	$	97,663	18	%	(19%)	$	163,898	16	%	$	191,755	19	%	(15%)
Property	81,380		15	%	88,364		17	%	(8%)	163,920		16	%	173,211		17	%	(5%)
Professional lines	88,342		16	%	75,567		14	%	17%	173,120		17	%	146,046		15	%	19%
Credit and surety	69,920		13	%	71,485		14	%	(2%)	129,283		12	%	138,144		14	%	(6%)
Motor	65,470		12	%	62,070		12	%	5%	136,033		13	%	118,667		12	%	15%
Liability	72,417		13	%	60,338		12	%	20%	138,463		13	%	118,749		12	%	17%
Agriculture	62,436		12	%	46,376		9	%	35%	93,075		9	%	68,769		7	%	35%
Engineering	17,767		3	%	16,687		3	%	6%	31,119		3	%	31,133		3	%	—%
Other	5,816		1	%	4,978		1	%	17%	10,554		1	%	9,213		1	%	15%
Total	$	542,730	100	%	$	523,528	100	%	4%	$	1,039,465	100	%	$	995,687	100	%	4%

Net premiums earned increased by $19 million and $44 million for the three and six months ended June 30, 2014, respectively, compared to the same periods of 2013. The increases reflected growth in the business written in recent periods in the professional, agriculture, liability and motor lines. This growth was partially offset by decreases in catastrophe lines.

Loss Ratio:

The table below shows the components of our loss ratio:



	Three months ended June 30,					Six months ended June 30,
	2014		% Point Change	2013		2014		% Point Change	2013

Current accident year	60.4	%	(5.9)	66.3	%	60.1	%	(1.9)	62.0	%
Prior year reserve development	(9.7	%)	(3.0)	(6.7	%)	(8.1	%)	0.4	(8.5	%)
Loss ratio	50.7	%	(8.9)	59.6	%	52.0	%	(1.5)	53.5	%

Current Accident Year Loss Ratio

The current accident year loss ratio decreased to 60.4% and 60.1% in the three and six months ended June 30, 2014, respectively, from 66.3% and 62.0% in the three and six months ended June 30, 2013, respectively. The decreases for both periods were driven by a reduced level of natural catastrophe and weather-related losses.

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For the three and six months ended June 30, 2014, natural catastrophe and weather-related pre-tax net losses aggregated to $6 million and $14 million respectively, and primarily related to weather events in the United States. For the comparative three and six months ended June 30, 2013, natural catastrophe and weather-related pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) aggregated to $50 million and $56 million, respectively.

After adjusting for the impact of natural catastrophe and weather-related losses the current accident year loss ratio increased in both the three and six months ended June 30, 2014, primarily due to changes in the business mix and lower rates partially offset by a lower level of attritional losses.

Refer ‘Prior Year Reserve Development’ for further details.

Acquisition Cost Ratio: The reinsurance segment's acquisition cost ratio increased in both the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to higher acquisition costs paid on certain lines of business. The increase for the six months ended June 30, 2014 was also impacted by variances in accruals for loss-sensitive features in underlying contracts. Accruals related to loss-sensitive features decreased the segment's acquisition cost ratio in the first half of 2013; however, these features had a lesser impact on the first half of 2014.

OTHER EXPENSES, NET

The following table provides a breakdown of our other expenses, net:



	Three months ended June 30,						Six months ended June 30,
	2014		% Change	2013			2014		% Change	2013

Corporate expenses	$	33,270	32%	$	25,265		$	61,976	32%	$	46,810
Foreign exchange losses (gains)	9,705		nm	(10,320		)	13,939		nm	(45,201		)
Interest expense and financing costs	19,975		31%	15,260			36,569		18%	31,095
Income tax expense (benefit)	9,500		nm	(4,662		)	13,625		149%	5,469
Total	$	72,450	184%	$	25,543		$	126,109	230%	$	38,173

nm – not meaningful

Corporate Expenses: Our corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 3.3% and 3.2%, respectively, for the three and six months ended June 30, 2014, compared to 2.7% and 2.6% respectfully, for the same periods in 2013. The increase in corporate expenses primarily related to increased personnel costs and a reduction in certain allocated costs to the segments.

Foreign Exchange Losses (Gains): Some of our business is written in currencies other than the U.S. dollar. The foreign exchange gains and losses for the periods presented were largely driven by the re-measurement of net insurance related liabilities. The foreign exchange losses for the three months ended June 30, 2014 were primarily driven by appreciation of the sterling against the U.S. Dollar. Comparatively, for the three months ended June 30, 2013, depreciation of the Australian dollar was the primary driver of the gain, partially offset by appreciation of the euro. The loss for the six months ended June 30, 2014 was primarily driven by appreciation of the sterling and Australian dollar. Comparatively, the gain for the six months ended June 30, 2013 was driven by depreciation in the sterling and Australian dollar.

Interest Expense and Financing Costs: Interest expense and financing costs primarily relate to interest due on our senior notes and has increased following the issuance in the first quarter of 2014 of $250 million of 2.65% senior unsecured notes due in 2019, and $250 million of 5.15% senior unsecured notes which are due in 2045. See 'Liquidity and Capital Resources - Senior Notes' for further details.

Income Tax Expense (Benefit): Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the United States and Europe. Our effective tax rate, which is calculated as income tax expense (benefit) divided by

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income before tax, was 4.5% and 3.7% for the three and six months ended June 30, 2014, respectively, compared to (5.9%) and 1.4% in the three and six months ended June 30, 2013, respectfully. This effective rate can vary between periods depending on the distribution of net income amongst tax jurisdictions, as well as other factors.

We generated consolidated pre-tax net income for the three months ended June 30, 2013; however, the magnitude of natural catastrophe and weather-related losses borne by our U.S and European operations drove the recognition of an income tax benefit for the period.

NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS

Net Investment Income

The following table provides a breakdown of income earned from our cash and investment portfolio by major asset class:



	Three months ended June 30,							Six months ended June 30,
	2014			% Change	2013			2014			% Change	2013

Fixed maturities	$	78,523		5%	$	74,503		$	151,480		5%	$	144,185
Other investments	32,492			174%	11,848			49,252			(11%)	55,279
Equities	5,301			69%	3,134			7,587			67%	4,548
Cash and cash equivalents	6,183			389%	1,265			7,046			178%	2,533
Short-term investments	246			(38%)	397			459			(51%)	929
Gross investment income	122,745			35%	91,147			215,824			4%	207,474
Investment expense	(7,878		)	(2%)	(8,035		)	(18,214		)	18%	(15,455		)
Net investment income	$	114,867		38%	$	83,112		$	197,610		3%	$	192,019

Pre-tax yield:⁽¹⁾
Fixed maturities	2.6		%		2.5		%	2.5		%		2.5		%


(1)	Pre-tax yield is annualized and calculated as net investment income divided by the average month-end amortized cost balances for the periods indicated.

Fixed Maturities

Larger average investment balances and a small increase in pre-tax yields contributed to the increase in investment income from fixed maturities for both periods presented.

Equities

The increase in dividend income (net of withholding taxes) in the current quarter and year-to-date is mainly due to higher dividend yields and larger average holdings on our equity exchange traded funds ("ETFs").

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Other Investments

The following table provides a breakdown of total net investment income from other investments:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013

Hedge funds	$	27,311		$	6,776		$	37,921		$	40,254
CLO - Equities	5,181			5,072			11,331			15,025
Total net investment income from other investments	$	32,492		$	11,848		$	49,252		$	55,279

Pre-tax return on other investments⁽¹⁾	3.2		%	1.2		%	4.8		%	5.9		%


(1)	The pre-tax return on other investments is non-annualized and calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated.

The total net investment income from other investments increased this quarter over the comparable period of 2013 primarily due to the strong performance of the global equity markets which translated into higher valuations on our hedge funds. The year-to-date decrease over the comparable period of 2013 was due in part to the stronger performance of our hedge funds in the first quarter of 2013 and also the reduction in CLO Equity income.

Net Realized Investment Gains

The following table provides a breakdown of net realized investment gains:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013

On sale of investments:
Fixed maturities and short-term investments	$	12,258		$	4,817		$	12,324		$	20,174
Equity securities	30,063			6,417			46,892			29,272
	42,321			11,234			59,216			49,446
OTTI charges recognized in earnings	(1,905		)	(5,127		)	(2,690		)	(6,025		)
Change in fair value of investment derivatives	(7,155		)	10,128			(12,644		)	17,292
Net realized investment gains	$	33,261		$	16,235		$	43,882		$	60,713

On sale of investments

Generally, sales of individual securities occur when there are changes in the relative value, credit quality or duration of a particular issue. We may also sell to rebalance our investment portfolio in order to change exposure to particular asset classes or sectors. Higher net gains during the current quarter are reflective of the improvement in pricing for our fixed maturities versus the comparative quarter.

Improvements in global equity markets during 2013 and 2014 enabled us to realize net gains on sales of our equity securities (primarily common stock) during the quarter and year-to-date.

Change in fair value of investment derivatives

From time to time, we may economically hedge the foreign exchange exposure of non-U.S. denominated securities by entering into foreign exchange forward contracts. During the current quarter, our foreign exchange hedges resulted in $2 million of net losses which related primarily to securities denominated in Australian dollar.

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During 2013, we introduced the use of interest rate swaps to reduce duration risk of our fixed income portfolio. During the current

quarter, we recorded $5 million of net losses relating to our interest rate swaps.

Total Return

The following table provides a breakdown of the total return on cash and investments for the period indicated:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013

Net investment income	$	114,867		$	83,112		$	197,610		$	192,019
Net realized investments gains	33,261			16,235			43,882			60,713
Change in net unrealized gains/losses	93,317			(294,725		)	157,807			(350,580		)
Total	$	241,445		$	(195,378	)	$	399,299		$	(97,848	)

Average cash and investments⁽¹⁾	$	15,497,729		$	14,630,809		$	15,226,403		$	14,567,669

Total return on average cash and investments, pre-tax⁽²⁾	1.6		%	(1.3		%)	2.6		%	(0.7		%)


(1)	The average cash and investments balance is calculated by taking the average of the month-end fair value balances held for the periods indicated.


(2)	Excluding the impact of foreign currencies due to matching with foreign denominated insurance liabilities, the total return for the three and six months ended June 30, 2014 would be 1.5% and 2.5%, respectively (2013: (1.2%) and (0.2%), respectively).

CASH AND INVESTMENTS

The table below provides a breakdown of our cash and investments:



	June 30, 2014				December 31, 2013
	Amortized Cost or Cost		Fair Value		Amortized Cost or Cost		Fair Value

Fixed maturities	$	12,428,133	$	12,598,897	$	11,987,146	$	11,986,327
Equities	614,174		744,760		566,219		701,987
Other investments	809,226		1,044,492		839,177		1,045,810
Short-term investments	100,166		100,166		46,212		46,212
Total investments	$	13,951,699	$	14,488,315	$	13,438,754	$	13,780,336

Cash and cash equivalents⁽¹⁾	$	1,189,403	$	1,189,403	$	987,876	$	987,876


(1)	Includes restricted cash and cash equivalents of $145 million and $65 million for 2014 and 2013, respectively.

The amortized cost/cost of our total investments increased by $513 million from December 31, 2013, primarily due to the investing of a portion of our financing cash flows, driven by our new senior notes issuance (refer to 'Liquidity and Capital Resources - Senior Notes' for additional information) and operating cash flows generated during the year. The $708 million increase in the fair value of our total investments was also driven by the investment of the financing and operating cash flows along with improved valuations on our fixed maturities and equities.

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The following provides a further analysis on our investment portfolio by asset classes:

Fixed Maturities

The following provides a breakdown of our investment in fixed maturities:



	June 30, 2014				December 31, 2013
	Fair Value		% of Total		Fair Value		% of Total

Fixed maturities:
U.S. government and agency	$	1,598,320	13	%	$	1,388,698	11	%
Non-U.S. government	1,247,667		10	%	1,176,382		10	%
Corporate debt	4,263,974		34	%	3,608,238		30	%
Agency RMBS	2,105,579		17	%	2,448,827		20	%
CMBS	939,694		7	%	797,414		7	%
Non-Agency RMBS	84,946		1	%	67,567		1	%
ABS	1,306,925		10	%	953,451		8	%
Municipals⁽¹⁾	1,051,792		8	%	1,545,750		13	%
Total	$	12,598,897	100	%	$	11,986,327	100	%

Credit ratings:
U.S. government and agency	$	1,598,320	13	%	$	1,388,698	11	%
AAA⁽²⁾	4,304,136		33	%	4,160,744		35	%
AA	1,583,807		13	%	1,795,291		15	%
A	2,487,191		20	%	2,220,263		19	%
BBB	1,617,381		13	%	1,468,669		12	%
Below BBB⁽³⁾	1,008,062		8	%	952,662		8	%
Total	$	12,598,897	100	%	$	11,986,327	100	%


(1)	Includes bonds issued by states, municipalities, and political subdivisions.


(2)	Includes U.S. government-sponsored agency RMBS.


(3)	Non-investment grade securities.

During the first half of 2014, we reduced our allocation to municipals after spreads tightened and their after-tax valuations became less attractive. We increased our allocation to CLO Debt securities which form part of our ABS category. Other sector changes reflect relative value decisions.

At June 30, 2014, our fixed maturities had a weighted average credit rating of AA- (2013: AA-) and an average duration of 3.0 years (2013: 3.3 years). An interest rate swap further reduced our duration to 2.9 years (2013: 3.2 years). When incorporating short-term investments and cash and cash equivalents into the calculation (bringing the total to $13.9 billion), the average credit rating would be AA- (2013: AA-) and duration (including interest rate swaps) would be 2.6 years (2013: 2.9 years).

During the year, net unrealized gains/losses on fixed maturities moved from a net unrealized loss of $1 million at December 31, 2013 to a net unrealized gain of $171 million June 30, 2014.

Equities

During the year, net unrealized gains on equities decreased from $136 million at December 31, 2013 to $131 million at June 30, 2014. The decline was due to sales resulting in net realized gains of $47 million during the year, offset by improved valuations reflective of markets.

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Other Investments

The composition of our other investments portfolio is summarized as follows:




	June 30, 2014				December 31, 2013

Hedge funds
Long/short equity funds	$	373,539	36	%	$	425,444	41	%
Multi-strategy funds	306,215		29	%	285,155		27	%
Event-driven funds	191,735		18	%	190,458		18	%
Leveraged bank loan funds	48,430		5	%	48,753		5	%
Total hedge funds	919,919		88	%	949,810		91	%

Direct lending funds	33,467		3	%	22,134		2	%

Total hedge and direct lending funds	953,386		91	%	971,944		93	%

CLO - Equities	91,106		9	%	73,866		7	%
Total other investments	$	1,044,492	100	%	$	1,045,810	100	%

The $30 million decrease in the fair value of our total hedge funds in 2014 was driven by $68 million of net redemptions offset by $38 million of price appreciation as our hedge funds benefited from the strong performance of the global equity and credit markets.

We have made total commitments of $110 million to managers of direct lending funds. To date, $33 million of our total commitment has been called.

We made total commitments of $60 million to a CLO fund. To date, $53 million of our total commitment has been called.

LIQUIDITY AND CAPITAL RESOURCES

Refer to the ‘Liquidity and Capital Resources’ section included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013 for a general discussion of our liquidity and capital resources. During the six months ended June 30, 2014, we:


•	issued $250 million of 2.65% senior unsecured notes due in 2019, and $250 million of 5.15% senior unsecured notes which are due in 2045;


•	terminated the $170 million secured letter of credit facility used to support the underwriting capacity of the Company's Lloyd's syndicate, AXIS Syndicate 1686 (the "Lloyd's LOC Facility") and replaced it with capital pledged in the form of fixed income securities deposited directly with Lloyd's;


•	continued the execution of common share repurchases under the program authorized by our Board of Directors.

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The following table summarizes our consolidated capital for the periods indicated:



	June 30, 2014			December 31, 2013

Senior notes	$	1,490,427		$	995,855

Preferred shares	627,843			627,843
Common equity	5,327,867			5,190,119
Shareholders’ equity attributable to AXIS Capital	5,955,710			5,817,962
Total capital	$	7,446,137		$	6,813,817

Ratio of debt to total capital	20.0		%	14.6		%

Ratio of debt and preferred equity to total capital	28.4		%	23.8		%

We finance our operations with a combination of debt and equity capital. Our debt to total capital and debt and preferred equity to total capital ratios provide an indication of our capital structure, along with some insight into our financial strength. A company with higher ratios in comparison to industry average may show weak financial strength because the cost of its debts may adversely affect results of operations and/or increase its default risk.

Our Consolidated Balance Sheet at June 30, 2014 reflected the issuance of $250 million of 2.65% senior unsecured notes due in 2019, and $250 million of 5.15% senior unsecured notes which are due in 2045 (discussed further below). The net proceeds from these offerings are expected to be used towards the repayment of $500 million of AXIS Capital’s 5.75% senior unsecured notes which mature on December 1, 2014. As such, the increases in our debt to total capital and debt and preferred equity to total capital ratios are expected to be temporary. We believe that our financial flexibility remains strong.

Senior Notes

On March 13, 2014, AXIS Specialty Finance PLC, a 100% owned finance subsidiary, issued $250 million aggregate principal amount of 2.65% senior unsecured notes (the "2.65% Senior Notes") at an issue price of 99.896% and $250 million aggregate principal amount of 5.15% senior unsecured notes (the "5.15% Senior Notes") at an issue price of 99.474%. The net proceeds of the issuance, after consideration of the offering discount and underwriting expenses and commissions, totaled approximately $248 million and $246 million for the 2.65% Senior Notes and the 5.15% Senior Notes, respectively. Interest on the 2.65% Senior Notes and the 5.15% Senior Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. Unless previously redeemed, the 2.65% Senior Notes and the 5.15% Senior Notes will mature on April 1, 2019 and April 1, 2045, respectively. The 2.65% Senior Notes and the 5.15% Senior Notes are ranked as unsecured senior obligations of AXIS Specialty Finance PLC. AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance PLC under the 2.65% Senior Notes and the 5.15% Senior Notes. AXIS Capital's obligations under this guarantee are unsecured and senior and rank equally with all other senior obligations of AXIS Capital. Net proceeds from this offering are expected to be used towards the repayment of AXIS Capital’s 5.75% senior unsecured notes which mature on December 1, 2014.

Secured Letter of Credit Facilities

On March 31, 2014, AXIS Capital's subsidiary, AXIS Specialty Limited, terminated our Lloyd's LOC Facility with ING Bank N.V., London Branch. The Funds at Lloyd's requirements for the Company's subsidiary, AXIS Corporate Capital UK Limited, to support the underwriting capacity of the Company's Lloyd's syndicate, AXIS Syndicate 1686, are now being met by capital pledged in the form of fixed income securities deposited directly with Lloyd's.

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Credit Facility

Effective February 10, 2014, AXIS Specialty Finance PLC was added as a guarantor to our $250 million credit facility.

Common Equity

During the six months ended June 30, 2014, our common equity increased by $138 million. The following table reconciles our opening and closing common equity positions:



Six months ended June 30,	2014

Common equity - opening	$	5,190,119
Net income attributable to AXIS Capital	347,934
Shares repurchased for treasury	(318,082		)
Change in unrealized appreciation on available for sale investments, net of tax	148,390
Common share dividends	(59,397		)
Preferred share dividends	(20,044		)
Share-based compensation expense recognized in equity	27,800
Foreign currency translation adjustment	6,449
Shares issued and stock options exercised	4,698
Common equity - closing	$	5,327,867

During the six months ended June 30, 2014, we repurchased 7 million common shares for a total of $318 million (including $300 million pursuant to our Board-authorized share repurchase program and $18 million relating to shares purchased in connection with the vesting of restricted stock awards granted under our 2007 Long-Term Equity Compensation Plan). At July 30, 2014, the remaining authorization under the common share repurchase program approved by our Board of Directors was $450 million (refer to Part II, Item 2 'Unregistered Sales of Equity Securities and Use of Proceeds' for additional information).

We continue to expect that cash flows generated from our operations, combined with the liquidity provided by our investment portfolio, will be sufficient to cover our required cash outflows and other contractual commitments through the foreseeable future.

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CRITICAL ACCOUNTING ESTIMATES

Our Consolidated Financial Statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates in order to determine the reported values. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.

As disclosed in our 2013 Annual Report on Form 10-K, we believe that the material items requiring such subjective and complex estimates are our:


•	reserves for losses and loss expenses;


•	reinsurance recoverable balances;


•	premiums;


•	fair value measurements for our financial assets and liabilities; and


•	assessments of other-than-temporary impairments.

With the exception of the update outlined in the section below, we believe that the critical accounting estimates discussion in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013 continues to describe the significant estimates and judgments included in the preparation of our Consolidated Financial Statements.

RESERVE FOR LOSSES AND LOSS EXPENSES

Selection of Reported Reserves (Management’s Best Estimate)

Our quarterly reserving process involves the collaboration of our underwriting, claims, actuarial, legal and finance departments, includes various segmental committee meetings and culminates with the approval of a single point best estimate by our Group Reserving Committee, which comprises senior management. In selecting this best estimate, management considers actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to: the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, potential severity of individual claims and the extent of internal historical loss data versus industry information. While these qualitative factors are considered in arriving at the point estimate, no specific provisions for qualitative factors are established.

During 2013, the Company significantly enhanced the capabilities and resources dedicated to the actuarial reserving function. During the first quarter of 2014, management has relied upon its internal actuarial reserving function for the quarterly reserve evaluation process and did not utilize the services of an independent actuarial firm. The Company will continue to rely on its internal actuarial function for future quarterly reserving process. On an annual basis, the Company will use an independent actuarial firm to provide an actuarial opinion on the reasonableness of our loss reserves for each of our operating subsidiaries; such actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm discusses its conclusions from the annual review with management and presents its findings to our Board of Directors.

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NEW ACCOUNTING STANDARDS

At July 30, 2014, there were no recently issued accounting pronouncements where our adoption of such guidance was pending.

OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS

At June 30, 2014, we have not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.

NON-GAAP FINANCIAL MEASURES

In this report, we present operating income, consolidated underwriting income and underwriting-related general and administrative expenses, which are “non-GAAP financial measures” as defined in Regulation G.

Operating income represents after-tax operational results without consideration of after-tax net realized investment gains (losses) and foreign exchange losses (gains). We also present diluted operating income per common share and operating return on average common equity (“operating ROACE”), which are derived from the non-GAAP operating income measure.

Consolidated underwriting income is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses. Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our individual underwriting operations. While these measures are presented in Item 1, Note 2 to our Consolidated Financial Statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis.

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Operating income, diluted operating income per common share and operating ROACE can be reconciled to the nearest GAAP financial measures as follows:



	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013

Net income available to common shareholders	$	190,664		$	72,447		$	327,890		$	375,261
Net realized investment gains, net of tax⁽¹⁾	(27,112		)	(14,604		)	(31,412		)	(55,674		)
Foreign exchange losses (gains), net of tax⁽²⁾	9,191			(10,879		)	13,333			(45,132		)
Loss on repurchase of preferred shares, net of tax⁽³⁾	—			3,081			—			3,081
Operating income	$	172,743		$	50,045		$	309,811		$	277,536

Earnings per common share - diluted	$	1.79		$	0.62		$	3.03		$	3.19
Net realized investment gains, net of tax	(0.25		)	(0.13		)	(0.29		)	(0.48		)
Foreign exchange losses (gains), net of tax	0.09			(0.09		)	0.12			(0.38		)
Loss on repurchase of preferred shares, net of tax	—			0.03			—			0.03
Operating income per common share - diluted	$	1.63		$	0.43		$	2.86		$	2.36

Weighted average common shares and common share equivalents - diluted⁽³⁾	106,289			116,671			108,329			117,660

Average common shareholders’ equity	$	5,263,537		$	5,160,346		$	5,258,993		$	5,105,511

ROACE (annualized)	14.5		%	5.6		%	12.5		%	14.7		%

Operating ROACE (annualized)	13.1		%	3.9		%	11.8		%	10.9		%


(1)	Tax cost of $6,149 and $1,631 for the three months ended June 30, 2014 and 2013, respectively, and $12,470 and $5,039 for the six months ended June 30, 2014 and 2013, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.


(2)	Tax benefit (cost) of $514 and ($559) for the three months ended June 30, 2014 and 2013, respectively, and $606 and ($69) for the six months ended June 30, 2014 and 2013, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.


(3)	Tax impact in nil.


(4)	Refer to Item 1, Note 8 to our Consolidated Financial Statements for further details on the dilution calculation.

A reconciliation of consolidated underwriting income to income before income taxes (the nearest GAAP financial measure) can be found in Item 1, Note 2 to the Consolidated Financial Statements. Underwriting-related general and administrative expenses are reconciled to general and administrative expenses (the nearest GAAP financial measure) within 'Underwriting Results - Group'.

We present our results of operations in the way we believe will be most meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. This includes the presentation of “operating income”, (in total and on a per share basis), “annualized operating ROACE” (which is based on the “operating income” measure) and "consolidated underwriting income", which incorporates "underwriting-related general and administrative expenses".

Operating Income

Although the investment of premiums to generate income and realized investment gains (or losses) is an integral part of our operations, the determination to realize investment gains (or losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (or losses) is somewhat opportunistic for many companies.

Foreign exchange losses (gains) in our Consolidated Statements of Operations are primarily driven by the impact of foreign exchange rate movements on net insurance related-liabilities. However, this movement is only one element of the overall impact of foreign exchange rate fluctuations on our financial position. In addition, we recognize unrealized foreign exchange losses (gains) on our available-for-sale investments in other comprehensive income and foreign exchange losses (gains) realized upon the sale of these investments in net realized investments gain (losses). These unrealized and realized foreign exchange rate movements generally offset

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a large portion of the foreign exchange losses (gains) reported separately in earnings, thereby minimizing the impact of foreign exchange rate movements on total shareholders' equity. As such, the Statement of Operations foreign exchange losses (gains) in isolation are not a fair representation of the performance of our business.

In this regard, certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (losses) and foreign exchange losses (gains) to understand the profitability of recurring sources of income.

We believe that showing net income available to common shareholders exclusive of net realized gains (losses) and foreign exchange losses (gains) reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons.

Consolidated Underwriting Income/Underwriting-Related General and Administrative Expenses

Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our individual underwriting operations, we exclude them from underwriting-related general and administrative expenses and, therefore, consolidated underwriting income. Interest expense and financing costs primarily relate to interest payable on our senior notes and are excluded from consolidated underwriting income for the same reason.

We evaluate our underwriting results separately from the performance of our investment portfolio. As such, we believe it appropriate to exclude net investment income and net realized investment gains (losses) from our underwriting profitability measure.

As noted above, foreign exchange losses (gains) in our Consolidated Statement of Operations primarily relate to our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange rate gains (losses) on our investment portfolio generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) are not a meaningful contributor to our underwriting performance and, therefore, exclude them from consolidated underwriting income.

We believe that presentation of underwriting-related general and administrative expenses and consolidated underwriting income provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Item 7A included in our 2013 Form 10-K. With the exception of the changes in exposure to foreign currency risk presented below, there have been no material changes to this item since December 31, 2013.

Foreign Currency Risk

The table below provides a sensitivity analysis of our total net foreign currency exposures.




	AUD			NZD			CAD			EUR			GBP			JPY			Other			Total

At June 30, 2014
Net managed assets (liabilities), excluding derivatives	$	43,941		$	(183,694	)	$	86,533		$	7,659		$	(85,640	)	$	76,494		$	17,630		$	(37,077	)
Foreign currency derivatives, net	(37,693		)	186,368			(80,630		)	34,223			124,850			(52,819		)	(4,011		)	170,288
Net managed foreign currency exposure	6,248			2,674			5,903			41,882			39,210			23,675			13,619			133,211
Other net foreign currency exposure	6,922			—			899			30,824			14,636			12,751			333,648			399,680
Total net foreign currency exposure	$	13,170		$	2,674		$	6,802		$	72,706		$	53,846		$	36,426		$	347,267		$	532,891
Net foreign currency exposure as a percentage of total shareholders’ equity	0.2		%	—		%	0.1		%	1.2		%	0.9		%	0.6		%	5.8		%	8.9		%
Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement⁽¹⁾	$	1,317		$	267		$	680		$	7,271		$	5,385		$	3,643		$	34,727		$	53,290


(1)	Assumes 10% change in underlying currencies relative to the U.S. dollar.

Total Net Foreign Currency Exposure

At June 30 2014, our total managed foreign currency exposure was $533 million net long, driven by increases in our exposures to the the sterling and the euro, primarily due to new business written during the first half of 2014.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management has performed an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2014. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management has performed an evaluation, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2014. Based upon that evaluation, there were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against us in the ordinary course of insurance or reinsurance operations; estimated amounts payable under such proceedings are included in the reserve for losses and loss expenses in our Consolidated Balance Sheets.

We are not a party to any material legal proceedings arising outside the ordinary course of business.

ITEM 1A. RISK FACTORS

There were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding the number of shares we repurchased during the three months ended June 30, 2014:

ISSUER PURCHASES OF EQUITY SECURITIES

Common Shares



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾	Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Announced Plans or Programs⁽²⁾

April 1-30, 2014	805,990		$45.95	770,275		$550.0	million
May 1-31, 2014	1,798,986		$45.23	1,752,512		$470.7	million
June 1-30, 2014	452,566		$46.34	447,309		$450.0	million
Total	3,057,542			2,970,096		$450.0	million


(1)	From time to time, we purchase shares in connection with the vesting of restricted stock awards granted to our employees under our 2007 Long-Term Equity Compensation Plan. The purchase of these shares is separately authorized and is not part of our Board-authorized share repurchase program, described below.


(2)	On December 9, 2013, our Board of Directors authorized a share repurchase plan to repurchase up to $750 million of our common shares through to December 31, 2015. The share repurchase authorization became effective on January 1, 2014. Share repurchases may be effected from time to time in open market or privately negotiated transactions, depending on market conditions.

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ITEM 6. EXHIBITS



3.1		Certificate of Incorporation and Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1(Amendment No. 1) (No. 333-103620) filed on April 16, 2003).
3.2		Amended and Restated Bye-Laws (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed on May 15, 2009).
4.1		Specimen Common Share Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 3) (No. 333-103620) filed on June 10, 2003).
4.2		Certificate of Designations establishing the specific rights, preferences, limitations and other terms of the Series B Preferred Shares (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 23, 2005).
4.3		Certificate of Designations establishing the specific rights, preferences, limitations and other terms of the Series C Preferred Shares (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on March 19, 2012).
4.4		Certificate of Designations establishing the specific rights, preferences, limitations and other terms of the Series D Preferred Shares (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 20, 2013).
†31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†101		The following financial information from AXIS Capital Holdings Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013; (iv) Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2014 and 2013; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.


†	Filed herewith.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

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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.

Dated: July 30, 2014



AXIS CAPITAL HOLDINGS LIMITED
By:	/S/ ALBERT BENCHIMOL
	Albert Benchimol
	President and Chief Executive Officer

	/S/ JOSEPH HENRY
	Joseph Henry
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)