UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007
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 o

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

Large accelerated filer x   Accelerated filer o  Non-accelerated filer o

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

As of August 3, 2007 there were 151,269,422 Common Shares, $0.0125 par value per share, of the registrant outstanding.

AXIS CAPITAL HOLDINGS LIMITED

INDEX TO FORM 10-Q

			Page No
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
Item 4.	Controls and Procedures		36
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 4.	Submissions of Matters to a Vote of Security Holders		39
Item 6.	Exhibits		40
Signatures			41

 

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Cautionary Statement Regarding Forward-looking Statements

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 include information regarding our estimates of losses related to hurricanes and other catastrophes, our expectations regarding pricing and other market conditions, our growth prospects, the amount of our acquisition costs, the amount of our net losses and loss reserves, the projected amount of our capital expenditures, managing interest rate and foreign currency risks, valuations of potential interest rate shifts and foreign currency rate changes and measurements of potential losses in fair market values of our investment portfolio. Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause actual events or results to be materially different from our expectations include (1) our limited operating history, (2) the occurrence of natural and man-made disasters, (3) actual claims exceeding our loss reserves, (4) the failure of any of the loss limitation methods we employ, (5) the effects of emerging claims and coverage issues, (6) the failure of our cedants to adequately evaluate risks, (7) the loss of one or more key executives, (8) a decline in our ratings with rating agencies, (9) loss of business provided to us by our major brokers, (10) changes in governmental regulations, (11) increased competition, (12) general economic conditions, (13) changes in the political environment of certain countries in which we operate or underwrite business and (14) 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, 2006 filed with the SEC on March 1, 2007. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1.  FINANCIAL STATEMENTS

		Page
Consolidated Balance Sheets as at June 30, 2007 (Unaudited) and December 31, 2006		5
Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006 (Unaudited)		6
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2007 and 2006 (Unaudited)		7
Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2007 and 2006 (Unaudited)		8
Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (Unaudited)		9
Notes to the Consolidated Financial Statements (Unaudited)		10

 

4

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AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006

(in thousands)		2007			2006
Assets
Investments:
Fixed maturity investments available for sale, at fair value (Amortized cost 2007: $7,322,659; 2006: $6,574,249)		$	7,219,836		$	6,532,723
Other investments, at fair value		1,106,409			1,130,664
Total investments		8,326,245			7,663,387
Cash and cash equivalents		1,837,675			1,989,287
Accrued interest receivable		82,151			76,967
Insurance and reinsurance premium balances receivable		1,604,193			1,125,822
Reinsurance recoverable balances		1,217,807			1,293,660
Reinsurance recoverable balances on paid losses		119,904			65,494
Deferred acquisition costs		346,318			251,799
Prepaid reinsurance premiums		259,474			241,821
Securities lending collateral		916,388			794,149
Goodwill and intangible assets		62,511			29,041
Other assets		156,308			133,860
Total assets		$	14,928,974		$	13,665,287
Liabilities
Reserve for losses and loss expenses		$	5,360,064		$	5,015,113
Unearned premiums		2,548,743			2,015,556
Insurance and reinsurance balances payable		250,248			294,374
Securities lending payable		914,466			791,744
Senior notes		499,207			499,144
Liability under repurchase agreement		400,000			400,000
Net payable for investments purchased		120,505			62,185
Other liabilities		141,859			174,524
Total liabilities		10,235,092			9,252,640
Shareholders’ Equity
Preferred shares - Series A and B		$	500,000		$	500,000
Common shares (2007: 147,924; 2006:149,982 shares issued and outstanding)		1,849			1,875
Additional paid-in capital		1,850,047			1,929,406
Accumulated other comprehensive loss		(106,693		)	(44,638		)
Retained earnings		2,448,711			2,026,004
Treasury shares, at cost (2007: 1 ; 2006: nil shares)		(32		)	—
Total shareholders’ equity		4,693,882			4,412,647
Total liabilities and shareholders’ equity		$	14,928,974		$	13,665,287

 

See accompanying notes to consolidated financial statements

5

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

		Three months ended						Six months ended
		2007			2006			2007			2006
		(in thousands, except per share amounts)
Revenues
Net premiums earned		$	693,941		$	679,099		$	1,379,245		$	1,312,693
Net investment income		113,685			91,663			238,965			185,231
Net realized investment losses		(4,656		)	(9,777		)	(4,356		)	(20,706		)
Other insurance related income		693			438			2,633			1,062
Total revenues		803,663			761,423			1,616,487			1,478,280
Expenses
Net losses and loss expenses		358,723			371,982			751,521			730,640
Acquisition costs		95,745			101,832			193,884			191,536
General and administrative expenses		68,574			57,657			131,180			113,068
Foreign exchange gains		(6,883		)	(18,901		)	(9,274		)	(28,165		)
Interest expense and financing costs		14,169			8,315			29,312			16,400
Total expenses		530,328			520,885			1,096,623			1,023,479
Income before income taxes		273,335			240,538			519,864			454,801
Income tax expense		12,519			7,912			22,266			17,359
Net income		260,816			232,626			497,598			437,442
Preferred shares dividends		9,226			9,226			18,430			18,857
Net income available to common shareholders		$	251,590		$	223,400		$	479,168		$	418,585
Weighted average common shares and common share equivalents:
Basic		149,027			149,765			149,727			149,541
Diluted		166,320			163,325			166,175			163,442
Earnings per common share:
Basic		$	1.69		$	1.49		$	3.20		$	2.80
Diluted		$	1.51		$	1.37		$	2.88		$	2.56
Cash dividends declared per common share		$	0.165		$	0.15		$	0.33		$	0.30

 

See accompanying notes to the consolidated financial statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

		Three months ended						Six months ended
		2007			2006			2007			2006
		(in thousands)
Net income		$	260,816		$	232,626		$	497,598		$	437,442
Other comprehensive income, net of tax
Change in unrecognized prior period service cost on the supplemental executive retirement plan		562			(384		)	1,125			(384		)
Unrealized losses arising during the period		(90,202		)	(40,625		)	(67,694		)	(106,098		)
Adjustment for re-classification of investment losses realized in net income		5,072			8,668			4,514			17,701
Comprehensive income		$	176,248		$	200,285		$	435,543		$	348,661

 

See accompanying notes to consolidated financial statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2007 AND 2006

		2007			2006
		(in thousands)
Preferred shares - Series A and B
Balance at beginning and end of period		$	500,000		$	500,000
Common shares
Balance at beginning of period		1,875			1,861
Shares issued		8			12
Shares repurchased		(34		)	—
Balance at end of period		1,849			1,873
Additional paid-in capital
Balance at beginning of period		1,929,406			1,886,356
Shares issued		1,282			153
Shares repurchased		(103,431		)	—
Stock options exercised		6,333			14,321
Share-based compensation expense		16,457			12,736
Balance at end of period		1,850,047			1,913,566
Accumulated other comprehensive loss
Balance at beginning of period		(44,638		)	(77,798		)
Change in unrealized losses on fixed maturity investments		(63,153		)	(89,896		)
Change in unrecognized prior period service cost on the SERP		1,125			(384		)
Change in deferred taxes		(27		)	1,498
Balance at end of period		(106,693		)	(166,580		)
Retained earnings
Balance at beginning of period		2,026,004			1,201,932
Net income		497,598			437,442
Series A and B preferred share dividends		(18,430		)	(18,857		)
Common share dividends		(56,461		)	(50,653		)
Balance at end of period		2,448,711			1,569,864
Treasury shares, at cost
Balance at beginning of period		—			—
Shares repurchased		(32		)	—
Balance at end of period		(32		)	—
Total shareholders’ equity		$	4,693,882		$	3,818,723

 

See accompanying notes to consolidated financial statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2007 AND 2006

		2007			2006
		(in thousands)
Cash flows from operating activities:
Net income		$	497,598		$	437,442
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment losses		4,356			20,706
Net change in fair value of other investments		(24,474		)	(12,442		)
Amortization/accretion of fixed maturity investments		4,423			15,315
Other amortization and depreciation		4,866			4,659
Share-based compensation expense		16,457			12,736
Changes in:
Accrued interest receivable		(5,184		)	(8,597		)
Reinsurance recoverable balances		21,443			125,567
Deferred acquisition costs		(94,519		)	(94,239		)
Prepaid reinsurance premiums		(17,653		)	(28,302		)
Reserve for loss and loss expenses		344,951			91,823
Unearned premiums		533,187			528,673
Insurance and reinsurance balances, net		(522,497		)	(363,698		)
Other items		(47,634		)	(70,125		)
Net cash provided by operating activities		715,320			659,518
Cash flows from investing activities:
Purchase of available-for-sale securities		(3,715,332		)	(2,606,910		)
Sales and maturities of available-for-sale securities		3,016,094			2,531,902
Purchases of other investments		(40,250		)	(210,750		)
Sales of other investments		87,479			—
Purchase of assets		(33,725		)	—
Other		(22,118		)	—
Net cash used in investing activities		(707,852		)	(285,758		)
Cash flows from financing activities:
Dividends paid - common shares		(56,414		)	(45,574		)
Dividends paid - preferred shares		(18,430		)	(19,353		)
Repurchase of shares		(103,497		)	—
Issuance of common shares, net		7,623			14,486
Net cash used in financing activities		(170,718		)	(50,441		)
Effect of exchange rate changes on foreign currency cash		11,638			11,139
(Decrease)/increase in cash and cash equivalents		(151,612		)	334,458
Cash and cash equivalents - beginning of period		1,989,287			1,280,990
Cash and cash equivalents - end of period		$	1,837,675		$	1,615,448

 

See accompanying notes to the 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

Our consolidated balance sheet at June 30, 2007 and the consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for the periods ended June 30, 2007 and 2006 have not been audited. The balance sheet at December 31, 2006 is derived from the audited financial statements.

These statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position and results of operations as at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or the “Company” refer to AXIS Capital Holdings Limited and its direct and indirect subsidiaries.

The following information is unaudited and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006. Tabular dollars are in thousands, except per share amounts.   Certain reclassifications have been made to prior period amounts to conform to the current period presentation. In particular, we reclassified the additional capital above par value on our Series A and B preferred shares from additional paid-in capital to the preferred shares caption in our Consolidated Balance Sheets and Statements of Changes in Shareholders’ Equity.

Adoption of New Accounting Standards

The terms “FAS” and “FASB” used in these notes refer to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board.

On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”).   This Interpretation prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.  Under FIN 48, the tax benefits of uncertain tax positions may only be recognized when the position is more-likely-than-not to be sustained upon audit by the relevant taxing authorities. The amount recognized represents the largest amount of tax benefit that is greater than fifty percent likely of being recognized. We adopted the provisions of FIN 48 on January 1, 2007.  There were no unrecognized tax benefits as of the date of adoption and there was no change in the liability for unrecognized tax benefits.  Our U.S. subsidiaries are not under examination but remain subject to examination in the U.S. for tax years 2003-2006.  Our various European operating subsidiaries and branch operations in Ireland, the United Kingdom, and Switzerland are not under examination in any of these tax jurisdictions, but generally remain subject to examination for tax years 2002-2006.

Accounting Standards Not Yet Adopted

In September 2006, the FASB issued FAS No. 157, Fair Value Measurement (“FAS 157”). This Statement provides guidance for using fair value to measure assets and liabilities. Under this standard, the definition of fair value focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). FAS 157 clarifies that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets and the lowest priority to unobservable data.  Further, FAS 157 requires tabular disclosures of the fair value measurements by level within the fair value hierarchy. FAS 157 was effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Although early adoption was permitted as of January 1, 2007, we have not yet adopted FAS 157 and are evaluating the potential impact of adoption on our financial condition and results of operations.

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1.                                      BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”).   This standard permits an entity to irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement attribute for many financial instruments and certain other items including insurance contracts.  An entity electing the fair value option would be required to recognize changes in fair value in earnings and provide disclosure that will assist investors and other users of financial information to more easily understand the effect of the company’s choice to use fair value on its earnings.  Further, the entity is required to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet.  This standard does not eliminate the disclosure requirements about fair value measurements included in FAS 157 and FAS No. 107, Disclosures about Fair Value of Financial Instruments.  FAS 159 was effective for fiscal years beginning after November 15, 2007. Although early adoption was permitted as of January 1, 2007, we have not yet adopted FAS 159.

2.                                      SEGMENT INFORMATION

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

Insurance

Our insurance segment provides insurance coverage on a worldwide basis.  In January 2007, we announced the reorganization of AXIS Insurance to further strengthen the global operations of the segment. This reorganization reflects the management of AXIS Insurance along global product lines rather than by geographical location. The new structure enables us to design insurance programs on a global basis in alignment with the global needs of many of our clients. Through December 31, 2006, we subdivided our insurance segment into two sub-segments: global insurance and U.S insurance. However, as a result of the reorganization such sub-segment information is no longer relevant.

The following are the lines of business in our insurance segment:

·       Property: provides physical damage and business interruption coverage for industrial and commercial properties and physical damage, business interruption and liability coverage for onshore energy properties and operations. The book consists of both primary and excess risks, some of which are catastrophe-exposed.

·       Marine: provides coverage for hull, liability, cargo and specie and recreational marine risks. These risks include property damage or physical loss to ships, pollution damage caused by vessels on a sudden and accidental basis, protection for general cargo and the contents of armored cars, vaults, exhibitions and museums, and specific war related risks. This line of business also provides physical damage, business interruption and liability coverage for offshore energy property and operations.

·       Terrorism: provides coverage for physical damage and business interruption of an insured following an act of terrorism.

·       Aviation: includes hull and liability and specific war coverage for passenger and cargo airlines and privately owned aircraft as well as select aviation product liability coverage.

·       Political risk: generally provides protection against sovereign default or sovereign actions resulting in impairment of cross-border investments for banks and major corporations. It also provides protection on structured credit based transactions where lenders seek to mitigate some of the non-payment risk of their borrowers, both public and private.

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2.                                      SEGMENT INFORMATION (continued)

·       Professional lines: primarily consists of coverage for directors’ and officers’ liability, errors and omissions liability and employment practices liability.

·       Liability: primarily targets general liability and umbrella and excess liability in the U.S. excess and surplus lines markets. Target classes include mercantile, manufacturing and building/premises, with particular emphasis on commercial and consumer products, commercial construction and miscellaneous general liability.

·  Accident & Health: primarily provides employee medical coverage for self-insured, small and medium sized employers for losses in excess of a retention.

Reinsurance

Our reinsurance segment provides property and casualty reinsurance to insurance companies on a worldwide basis.  The following are the lines of business we write on both a treaty and facultative basis in our reinsurance segment:

·       Catastrophe: provides protection for most catastrophic losses that are covered in the underlying insurance policies written by our ceding company clients. The exposure in the underlying policies is principally property exposure but also covers other exposures including workers compensation, personal accident and life. The principal perils in this portfolio are hurricane and windstorm, earthquake, flood, tornado, hail and fire. In some instances, terrorism may be a covered peril or the only peril.  We underwrite catastrophe reinsurance principally on an excess of loss basis, meaning that our exposure only arises when our customers’ claims exceed a certain retained amount.

·       Property: includes reinsurance written on both a pro rata and a per risk basis and covers underlying personal lines and commercial property exposures. Property pro rata treaty reinsurance covers a cedent’s aggregate losses from all events in the covered period on a proportional basis. Property per risk treaty reinsurance reinsures a portfolio of particular property risks of ceding companies on an excess of loss basis.

·       Professional Liability: covers directors’ and officers’ liability, employment practices liability, medical malpractice and miscellaneous errors and omissions insurance risks.

·       Credit and Bond: consists principally of reinsurance of trade credit insurance products and includes both proportional and excess-of loss structures. The underlying insurance indemnifies sellers of goods and services against a payment default by the buyer of those goods and services. Also included in this book is coverage for ceding insurers against losses arising from a broad array of surety bonds issued by bond insurers principally to satisfy regulatory demands in a variety of jurisdictions around the world, but predominantly in Europe.

·       Motor: provides coverage to insurers for motor liability losses arising out of any one occurrence. The occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence.

·       Liability: provides coverage to insurers of standard casualty lines, including auto liability, general liability, personal and commercial umbrella and workers’ compensation.

·       Other: includes aviation, engineering, marine, personal accident and crop reinsurance.

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2.                                      SEGMENT INFORMATION (continued)

The following tables summarize the underwriting results of our operating segments:

Three months ended June 30:

		2007										2006
		Insurance			Reinsurance			Total				Insurance			Reinsurance			Total
Gross premiums written		$	612,671		$	346,707		$	959,378			$	629,605		$	365,775		$	995,380
Net premiums written		406,885			348,457			755,342				455,026			365,706			820,732
Net premiums earned		298,245			395,696			693,941				323,571			355,528			679,099
Other insurance related income		360			333			693				438			—			438
Net losses and loss expenses		(133,568		)	(225,155		)	(358,723			)	(147,785		)	(224,197		)	(371,982		)
Acquisition costs		(27,442		)	(68,303		)	(95,745			)	(38,754		)	(63,078		)	(101,832		)
General and administrative expenses		(39,167		)	(15,223		)	(54,390			)	(34,873		)	(11,501		)	(46,374		)
Underwriting income		$	98,428		$	87,348		185,776				$	102,597		$	56,752		159,349
Corporate expenses								(14,184			)							(11,283		)
Net investment income								113,685										91,663
Net realized investment losses								(4,656			)							(9,777		)
Foreign exchange gains								6,883										18,901
Interest expense								(14,169			)							(8,315		)
Income before income taxes								$		273,335								$      240,538
Net loss and loss expense ratio		44.8		%	56.9		%	51.7			%	45.7		%	63.1		%	54.8		%
Acquisition cost ratio		9.2		%	17.3		%	13.8			%	12.0		%	17.7		%	15.0		%
General and administrative expense ratio		13.1		%	3.8		%	9.9			%	10.8		%	3.2		%	8.5		%
Combined ratio		67.1		%	78.0		%	75.4			%	68.5		%	84.0		%	78.3		%

 

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2.             SEGMENT INFORMATION (CONTINUED)

Six months ended June 30:

		2007										2006
		Insurance			Reinsurance			Total				Insurance			Reinsurance			Total
Gross premiums written		$	1,049,159		$	1,212,842		$	2,262,001			$	1,066,655		$	1,093,465		$	2,160,120
Net premiums written		688,931			1,205,769			1,894,700				730,176			1,082,884			1,813,060
Net premiums earned		613,177			766,068			1,379,245				646,284			666,409			1,312,693
Other insurance related income		1,127			1,506			2,633				1,062			—			1,062
Net losses and loss expenses		(319,520		)	(432,001		)	(751,521			)	(303,955		)	(426,685		)	(730,640			)
Acquisition costs		(62,791		)	(131,093		)	(193,884			)	(76,210		)	(115,326		)	(191,536			)
General and administrative expenses		(74,690		)	(29,966		)	(104,656			)	(67,928		)	(22,215		)	(90,143			)
Underwriting income		$	157,303		$	174,514		331,817				$	199,253		$	102,183		301,436
Corporate expenses								(26,524			)							(22,925			)
Net investment income								238,965										185,231
Net realized investment losses								(4,356			)							(20,706			)
Foreign exchange gains								9,274										28,165
Interest expense								(29,312			)							(16,400			)
Income before income taxes								$		519,864								$		454,801
Net loss and loss expense ratio		52.1		%	56.4		%	54.5			%	47.0		%	64.0		%	55.7			%
Acquisition cost ratio		10.2		%	17.1		%	14.1			%	11.8		%	17.3		%	14.6			%
General and administrative expense ratio		12.2		%	3.9		%	9.5			%	10.5		%	3.3		%	8.6			%
Combined ratio		74.5		%	77.4		%	78.1			%	69.3		%	84.6		%	78.9			%

 

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3.                                      INVESTMENTS

Gross unrealized losses

The following tables summarize fixed maturity investments 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:

		At June 30, 2007
		12 months or greater						Less than 12 months						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
Type of Investment		Value			Losses			Value			Losses			Value			Losses
U.S. government and agency securities		$	456,156		$	(13,428	)	$	651,387		$	(8,974	)	$	1,107,543		$	(22,402	)
Non-U.S. government securities		—			—			40,880			(1,076		)	40,880			(1,076		)
Corporate securities		320,932			(7,671		)	614,551			(12,158		)	935,483			(19,829		)
Mortgage-backed securities		1,314,446			(49,421		)	1,498,953			(27,249		)	2,813,399			(76,670		)
Asset-backed securities		106,477			(1,166		)	391,802			(1,433		)	498,279			(2,599		)
Municipals		112,068			(2,562		)	178,776			(2,153		)	290,844			(4,715		)
Total		$	2,310,079		$	(74,248	)	$	3,376,349		$	(53,043	)	$	5,686,428		$	(127,291	)

 

		At December 31, 2006
		12 months or greater						Less than 12 months						Total
		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
Type of Investment		Value			Losses			Value			Losses			Value			Losses
U.S. government and agency securities		$	536,403		$	(13,909	)	$	364,668		$	(2,519	)	$	901,071		$	(16,428	)
Non-U.S. government securities		4,957			(151		)	131,457			(2,620		)	136,414			(2,771		)
Corporate securities		421,943			(7,556		)	449,679			(2,507		)	871,622			(10,063		)
Mortgage-backed securities		1,420,196			(33,607		)	536,721			(3,935		)	1,956,917			(37,542		)
Asset-backed securities		149,673			(1,961		)	166,200			(356		)	315,873			(2,317		)
Municipals		105,832			(1,803		)	130,511			(457		)	236,343			(2,260		)
Total		$	2,639,004		$	(58,987	)	$	1,779,236		$	(12,394	)	$	4,418,240		$	(71,381	)

 

At June 30, 2007, 2,336 securities (2006: 1,945) were in an unrealized loss position with a fair value of $5,686 million (2006: $4,418 million) of which 1,473 securities (2006: 1,497) have been in an unrealized loss position for 12 months or greater and have a fair value of $2,310 million (2006: $2,639 million).  The unrealized losses from these securities were not a result of credit, collateral or structural issues.  In the first six months of 2007, we recorded an impairment charge of $1.8 million (2006: $0.6 million) relating to 8 securities (2006: 13) that we determined to be other than temporarily impaired which were included in net realized investment losses in the Consolidated Statements of Operations.

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4.                                      RESERVE FOR LOSSES AND LOSS EXPENSES

The following table represents an analysis of paid and unpaid losses and loss expenses and a reconciliation of the beginning and ending unpaid losses and loss expenses for the six months ended June 30:

		2007			2006
Gross unpaid losses and loss expenses at beginning of period		$	5,015,113		$	4,743,338
Less reinsurance recoverable balances		(1,293,660		)	(1,455,248		)
Less reinsurance recoverable balances on paid losses		(65,494		)	(62,862		)
Net balance at beginning of period		3,655,959			3,225,228
Net incurred losses related to:
Current year		914,305			856,180
Prior years		(162,784		)	(125,540		)
		751,521			730,640
Net paid losses related to:
Current year		(36,771		)	(33,906		)
Prior years		(359,890		)	(489,008		)
		(396,661		)	(522,914		)
Foreign exchange loss		11,534			9,664
Net unpaid losses and loss expenses at end of period		4,022,353			3,442,618
Reinsurance recoverable balances		1,217,807			1,271,452
Reinsurance recoverable balances on paid losses		119,904			121,091
Gross unpaid losses and loss expenses at end of period		$	5,360,064		$	4,835,161

 

Net incurred losses include net favorable prior period reserve development of $163 million, and $126 million during the six months ended June 30, 2007 and 2006, respectively.  Prior period development arises from changes to loss estimates recognized in the current period that relate to loss reserves first reported in previous calendar years. These reserve changes were made as part of our regular quarterly reserving process and primarily arose from better than expected emergence of actual claims relative to expectations. The net favorable development in 2007 was predominately related to our property lines from accident year 2006. For these lines, accident year 2006 has largely proven to be a benign loss year with limited late reported loss activity and minimal deterioration of previously reported claims. The net favorable development in 2006 was related to our short tail lines of business and was primarily generated from accident years 2004 and 2005.

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5.                                      STOCK-BASED COMPENSATION

In May 2007, our shareholders approved the AXIS Capital Holdings Limited 2007 Long-Term Equity Compensation Plan (“2007 Plan”).  The 2007 Plan provides for, among other things, the grant of restricted stock awards and units, non-qualified and incentive stock options, and other equity based awards to our employees, directors and consultants.  The maximum number of our common shares that may be delivered under our 2007 Plan is 5,000,000.  As a result of this 2007 Plan, the 2003 Long-Term Equity Compensation and 2003 Directors Long-Term Equity Compensation Plan were terminated, except that all related outstanding awards will remain in effect.

During the three months ended June 30, 2007 and 2006, we incurred compensation costs of $9.1 million and $6.6 million, respectively, for all stock compensation plans, and recorded tax benefits thereon of $1.7 million and $1.2 million, respectively.  For the first six months of 2007 and 2006, we incurred compensation costs of $16.5 million and $12.7 million, respectively, for all stock compensation plans, and recorded tax benefits thereon of $3.6 million and $2.6 million, respectively.

The following is a summary of activity under our existing stock compensation plans for the first six months in 2007 and 2006:

Restricted Stock

		2007					2006
		Number of Restricted Stock		Weighted Average Grant Date Fair Value			Number of Restricted Stock		Weighted Average Grant Date Fair Value
Unvested - beginning of year		2,229		$	29.95		1,176		$	28.40
Granted		1,572		32.93			1,279		31.01
Vested		(432	)	29.61			(86	)	27.75
Forfeited		(41	)	31.29			(77	)	25.42
Unvested - end of period		3,328		$	31.39		2,292		$	29.98

 

At June 30, 2007, there was $63.1 million of unrecognized compensation cost related to restricted stock awards which is expected to be recognized over the weighted average period of 1.5 years. The total fair value of shares vested during the first six months of 2007 was $12.8 million.

Stock Options

		2007					2006
		Number of Stock Options		Weighted Average Exercise Price			Number of Stock Options		Weighted Average Exercise Price
Outstanding - beginning of year		5,147		$	18.75		6,174		$	19.11
Granted		—		—			45		26.90
Exercised		(287	)	22.09			(763	)	18.79
Forfeited		(5	)	28.02			(58	)	27.32
Outstanding - end of period		4,855		$	18.54		5,398		$	19.13

 

At June 30, 2007, there was $0.5 million of unrecognized compensation cost related to the stock option awards which will be fully recognized during the remainder of 2007. The total intrinsic value of options exercised during the first six months of 2007 was $4.2 million, and we received proceeds of $6.3 million.

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6.                                      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
		2007			2006			2007			2006
Basic earnings per common share
Net income available to common shareholders		$	251,590		$	223,400		$	479,168		$	418,585
Weighted average common shares outstanding		149,027			149,765			149,727			149,541
Basic earnings per common share		$	1.69		$	1.49		$	3.20		$	2.80
Diluted earnings per common share
Net income available to common shareholders		$	251,590		$	223,400		$	479,168		$	418,585
Weighted average common shares outstanding		149,027			149,765			149,727			149,541
Share equivalents:
Warrants		13,305			11,006			12,844			11,320
Options		2,483			1,780			2,339			1,906
Restricted stock		1,505			774			1,265			675
Weighted average common shares outstanding - diluted		166,320			163,325			166,175			163,442
Diluted earnings per common share		$	1.51		$	1.37		$	2.88		$	2.56

 

For the three and six months ended June 30, 2006, there were 1,620,168 and 1,763,959 restricted shares and options, respectively, which would have resulted in the issuance of common shares that were excluded in the computation of diluted earnings per share because the effect would be anti-dilutive. There were no such anti-dilutive restricted shares or options for the three or six months ended June 30, 2007.

7.                                      SHAREHOLDERS’ EQUITY

On May 10, 2007, we repurchased from Trident II, L.P and affiliated entities, an aggregate of 2,700,000 shares of our common stock at $37.25 per share, for a total purchase price of $100,575,000. These shares were subsequently cancelled.

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8.                                      COMMITMENTS AND CONTINGENCIES

(i)     Legal Proceedings

Except as noted below, we are not a party to any material 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. In our opinion, the eventual outcome of these legal proceedings is not expected to have a material adverse effect on our financial condition or results of operations.

In 2005, a putative class action lawsuit was filed against our U.S. insurance subsidiaries. In re Insurance Brokerage Antitrust Litigation was filed on August 15, 2005 in the United States District Court for the District of New Jersey and includes as defendants numerous insurance brokers and insurance companies, including our U.S. insurance subsidiaries. The lawsuit alleges antitrust and Racketeer Influenced and Corrupt Organizations Act (“RICO”) violations in connection with the payment of contingent commissions and manipulation of insurance bids and seeks damages in an unspecified amount.  On October 3, 2006, the District Court granted, in part, motions to dismiss filed by the defendants, and ordered plaintiffs to file supplemental pleadings setting forth sufficient facts to allege their antitrust and RICO claims. After plaintiffs filed their supplemental pleadings, defendants renewed their motions to dismiss.  On April 15, 2007, the District Court dismissed without prejudice plaintiffs’ complaint, as amended, and granted plaintiff thirty (30) days to file another amended complaint and/or revised RICO Statement and Statements of Particularity.   In May 2007, plaintiffs filed (i) a Second Consolidated Amended Commercial Class Action complaint, (ii) a Revised Particularized Statement Describing the Horizontal Conspiracies Alleged in the Second Consolidated Amended Commercial Class Action Complaint, and (iii) a Third Amended Commercial Insurance Plaintiffs’ RICO Case Statement Pursuant to Local Rule 16.1(B)(4).  On June 21, 2007, the defendants filed renewed motions to dismiss, which are pending before the court.  We believe that the lawsuit is completely without merit and we continue to vigorously defend the filed action.

(ii)                              Dividends for Common Shares and Preferred Shares

On May 11, 2007 the Board of Directors declared a dividend of $0.165 per common share to shareholders of record at June 29, 2007 and payable on July 16, 2007. Additionally, the Board of Directors declared a dividend of $0.453125 per Series A 7.25% Preferred share and a dividend of $1.875 per Series B 7.5% Preferred share. The Series A Preferred share is payable on July 16, 2007, to shareholders of record at June 29, 2007 and the Series B Preferred share is payable on September 3, 2007 to shareholders of record at August 15, 2007.

(iii)                            Reinsurance Purchase Commitment

During the second quarter of 2007, we purchased reinsurance coverage for our insurance lines of business. The minimum reinsurance premiums are contractually due on a quarterly basis in advance. Accordingly at June 30, 2007, we have an outstanding reinsurance purchase commitment of $139 million (2006: $47 million).

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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, 2006. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to small rounding differences.

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:

Annualized return on average common equity (‘ROACE’): ROACE represents the level of net income available to common shareholders generated from the average of the opening and closing common shareholders’ equity during the period.  Our objective is to generate superior returns on capital that appropriately reward our shareholders for the risks we assume and to grow revenue only when we deem the returns meet or exceed our requirements. ROACE was 24.1% and 23.6% for the three and six months ended June 30, 2007, respectively, compared to 27.6% and 26.4% for the same periods of 2006.

Diluted book value per common share: This is a non-GAAP financial measure; for further information refer to “Non-GAAP Financial Measures” at the end of Item 2. We consider diluted book value per common share an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis ultimately translates into growth of our stock price. Diluted book value per share increased from $24.02 at December 31, 2006 to $25.76 at June 30, 2007. The increase was substantially due to earnings generated in the first six months of 2007.

Cash dividends per common share: Our dividend policy is an integral part of the value we create for our shareholders. Our quarterly cash dividend was $0.165 per common share in the first two quarters of 2007 compared to $0.15 per common share in the first two quarters of 2006. In December 2006, our Board of Directors authorized a 10% increase in the quarterly dividend.

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RESULTS OF OPERATIONS: THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

Overview

The following tables break out our net income to common shareholders:

		Three months ended								Six months ended
		June 30								June 30
		2007			2006			Change		2007			2006			Change
Underwriting income:
Insurance		$	98,428		$	102,597		(4	)%	$	157,303		$	199,253		(21	)%
Reinsurance		87,348			56,752			54	%	174,514			102,183			71	%
Net investment income and net realized gains/losses		109,029			81,886			33	%	234,609			164,525			43	%
Other revenues and expenses		(33,989		)	(8,609		)	295	%	(68,828		)	(28,519		)	141	%
Net income		260,816			232,626			12	%	497,598			437,442			14	%
Preferred share dividends		(9,226		)	(9,226		)	—		(18,430		)	(18,857		)	(2	)%
Net income available to common shareholders		$	251,590		$	223,400		13	%	$	479,168		$	418,585		14	%
Ratios:
Loss ratio		51.7		%	54.8		%	(3.1	)%	54.5		%	55.7		%	(1.2	)%
Acquisition cost ratio		13.8		%	15.0		%	(1.2	)%	14.1		%	14.6		%	(0.5	)%
General and administrative expense ratio		9.9		%	8.5		%	1.4	%	9.5		%	8.6		%	0.9	%
Combined ratio		75.4		%	78.3		%	(2.9	)%	78.1		%	78.9		%	(0.8	)%

 

The increases in net income available to common shareholders in the three and six months ended June 30, 2007 over the corresponding periods of 2006 were largely driven by the same factors. These were as follows:

·      Additional underwriting income in our reinsurance segment, primarily due to increased net favorable prior period reserve development.

·      An increase in net investment income driven by a combination of a larger investment base and higher investment yields.

These increases were partially offset by:

·      Reduced underwriting income in our insurance segment. This was largely in relation to the year-to-date results, for which there was a lower level of favorable prior period reserve development.

·      Higher interest expenses and lower foreign exchange gains (included in other revenues and expenses).

The above factors, including changes in the individual components of our combined ratio, are discussed further below.

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Underwriting Results

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

		Gross Premiums Written
		Three months ended								Six months ended
		2007			2006			Change		2007			2006			Change
Insurance		$	612,671		$	629,605		(3	)%	$	1,049,159		$	1,066,655		(2	)%
Reinsurance		346,707			365,775			(5	)%	1,212,842			1,093,465			11	%
Total		$	959,378		$	995,380		(4	)%	$	2,262,001		$	2,160,120		5	%
% ceded
Insurance		34		%	28		%	6	%	34		%	32		%	2	%
Reinsurance		(1		)%	0		%	(1	)%	1		%	1		%	0	%
Total		21		%	18		%	3	%	16		%	16		%	0	%

 

		Net Premiums Written
		Three months ended								Six months ended
		2007			2006			Change		2007			2006			Change
Insurance		$	406,885		$	455,026		(11	)%	$	688,931		$	730,176		(6	)%
Reinsurance		348,457			365,706			(5	)%	1,205,769			1,082,884			11	%
Total		$	755,342		$	820,732		(8	)%	$	1,894,700		$	1,813,060		5	%

 

Gross premiums written decreased in the second quarter of 2007 compared to the same quarter in 2006 as we reduced insurance business under competitive pricing pressure and as reinsurance clients increased their retentions. Also, with respect to our reinsurance segment, the second quarter of 2006 included significant upward adjustments to prior year premium estimates on our property pro rata book. The year-to-date increase in gross premiums written is driven by growth of our property and casualty reinsurance business in the U.S and Europe. Approximately 4 percentage points of the increase in reinsurance for the six months related to the impact of exchange rate movements.

The increase in premiums ceded in our insurance segment in the three and six months ended June 30, 2007 compared to the same periods of 2006 relate to additional cover purchased in our professional lines, terrorism and property lines of business. In late 2006, we created an integrated Ceded Reinsurance Unit within our insurance segment that coordinates our reinsurance purchasing to improve efficiency of reinsurance purchasing activities and take advantage of any new opportunities in the marketplace.  As a result, we were able to expand our reinsurance coverage during 2007 at cost effective levels.

The table below breaks out net premiums earned by segment:

		Net premiums earned
		Three months ended June 30										Six months ended June 30
		2007			%		2006			%		2007			%		2006			%
Insurance		$	298,245		43	%	$	323,571		48	%	$	613,177		44	%	$	646,284		49	%
Reinsurance		395,696			57	%	355,528			52	%	766,068			56	%	666,409			51	%
Total		$	693,941		100	%	$	679,099		100	%	$	1,379,245		100	%	$	1,312,693		100	%

 

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. Net premiums earned increased 2% and 5% in the three and six months ended June 30, 2007, respectively, from the same periods in 2006. The increases reflect the continued growth of our reinsurance business in the U.S and Europe, including significantly greater premiums written on January 1, 2007 compared to 2006, a major renewal date for our reinsurance business. The reductions in net premiums earned in our insurance segment primarily reflect changes in business mix.

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Loss ratio: The tables below show the components of our net loss and loss expense ratio (“loss ratio”) for the periods indicated:

		Three months ended				Six months ended
		June 30				June 30
		2007		2006		2007		2006
Current year		65.7	%	64.3	%	66.3	%	65.3	%
Prior period development		(14.0	)%	(9.5	)%	(11.8	)%	(9.6	)%
Loss ratio		51.7	%	54.8	%	54.5	%	55.7	%

 

Our current year loss ratio can vary from period to period depending on a number of variables that include the level of estimated losses, changes in our mix of business and changes in the benchmark assumptions used to establish our loss ratios. These benchmarks are developed by our independent actuaries primarily using broader market data that is adjusted for changes in underlying rates, terms and conditions.

Prior period development was the net favorable result of several underlying reserve developments from prior accident years, identified during our quarterly reserving process. The following tables break out our prior period development by segment for the periods indicated:

		Three months ended						Six months ended
		June 30						June 30
		2007			2006			2007			2006
Insurance		$	55,814		$	58,186		$	84,541		$	124,132
Reinsurance		41,006			6,285			78,243			1,408
Total		$	96,820		$	64,471		$	162,784		$	125,540

 

For further detail on the prior period development refer to the segment discussions below. While we believe that our loss reserves at June 30, 2007 are adequate, new information may lead to future developments in ultimate loss and loss expenses significantly greater or less than the reserves currently provided. In addition, conditions and trends that affected the development of liabilities in the past may not necessarily occur in the future. Accordingly, it is inappropriate to anticipate future redundancies or deficiencies based on historical experience.

Acquisition cost ratio: The decreases in our acquisition cost ratio were primarily due to an increase in commissions received on ceded premiums associated with the additional reinsurance coverage purchased in our insurance segment during 2007.

General and Administrative ratio: The increases in our general and administrative ratio reflect the costs associated with supporting the growth of our business. In particular, we incurred higher staffing costs in 2007 relating to the expansion of our insurance operations in the U.S., including those related with our acquisition of the Media Pro business during the second quarter. For further information on Media Pro refer to the insurance segment discussion below.

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Net Investment Income and Net Realized Investment Gains/Losses

Our investment portfolio is structured to preserve capital and provide us with a high level of liquidity. Additionally we invest our portfolio with a focus on total return rather than establishing yield or income targets.

The following table provides a breakdown of net investment income, net realized investment gains/losses and also the associated yields and returns, for the periods indicated:

		Three months ended June 30								Six months ended June 30
		2007			2006			Change		2007			2006			Change
Interest income on fixed maturity investments		$	90,082		$	70,832		27	%	$	170,003		$	138,776		23	%
Interest income on cash and cash equivalents		23,443			17,089			37	%	46,226			30,980			49	%
Investment income on other investments		3,358			5,465			(39	)%	28,670			18,870			52	%
		116,883			93,386			25	%	244,899			188,626			30	%
Investment expense		(3,198		)	(1,723		)	86	%	(5,934		)	(3,395		)	75	%
Net investment income		113,685			91,663			24	%	238,965			185,231			29	%
Net realized losses on fixed maturity investments		(5,491		)	(9,598		)	(43	)%	(5,073		)	(19,574		)	(74	)%
Changes in fair values of investment derivatives		835			(179		)	(566	)%	717			(1,132		)	(163	)%
Net realized investment losses		(4,656		)	(9,777		)	(52	)%	(4,356		)	(20,706		)	(79	)%
Net investment income and net realized investment losses		$	109,029		$	81,886		33	%	$	234,609		$	164,525		43	%
Average investment base:
Cash and fixed maturity investments (1)		$	8,987,978		$	7,533,940		19	%	$	8,834,392		$	7,465,097		18	%
Other investments		$	1,094,251		$	585,597		104	%	$	1,114,261		$	536,597		108	%
Annualized effective yield of invested assets (2)		5.0		%	4.7		%			5.0		%	4.6		%
Total return of invested assets (3)		0.0		%	0.4		%			1.5		%	0.4		%
Total return of cash and investments (3)		0.1		%	0.5		%			1.6		%	0.8		%

 

(1) Includes accrued interest receivable and is net of unsettled trades.

(2) Calculated by dividing the net investment income generated from invested assets by the average balance of the assets managed by our external investment managers.

(3) In calculating total return, we include net investment income, net realized investment gains and losses and the change in unrealized gains and losses generated by our average invested assets (and accrued interest thereon) / cash and investments. Refer to the “Balance Sheet” section for a breakdown of “invested assets” and “cash and investments”.

Net investment income:  Net investment income in the three and six months ended June 30, 2007 increased 24% and 29%, respectively, over the same periods in 2006.  The increases were driven by larger investment bases and higher investment yields (see table above).  The growth in our annualized effective yield was primarily due to higher U.S. interest rates at the short end of the yield curve. The yield on our portfolio may vary significantly from period to period due primarily to the timing of cash flows, changes in interest rates and changes in asset allocation. The reduction in investment income on other investments in the second quarter of 2007 was primarily due to the loss on our life settlements investment of $17 million ($20 million loss in the first six months of 2007). This was related to the negative mark-to-market impact of rising interest rates on the fair value of this investment. All other significant assumptions in calculating the fair value of our life settlement investments have not changed. Investment income on the remaining other investment portfolio, which consists of collateralized loan obligations, hedge funds, and credit funds increased during 2007 due to larger allocations and higher total returns from those investments.

Net realized investment losses/gains: The majority of our portfolio is invested in the fixed income market and as a result the level of realized gains and losses on these investments are highly correlated to fluctuations in interest rates. The effect of increasing interest rates up to and throughout the first six months of 2007 and 2006 negatively impacted the price of fixed income securities resulting in realized losses.

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