~~If we choose to purchase reinsurance, we may be unable to do so, and if we successfully purchase reinsurance, we may be unable to collect.~~

We purchase reinsurance for our insurance and reinsurance operations in order to mitigate the volatility of losses upon our financial results. A reinsurer’s insolvency, or inability or refusal to make payments under the terms of its reinsurance agreement with us, could have a material adverse effect on our business because we remain liable to the insured.

~~From time to time, market conditions have limited, and in some cases have prevented, insurers and~~ reinsurers, from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. For example, following the occurrence of recent hurricanes, terms and conditions in the reinsurance markets generally became less attractive to purchasers of reinsurance. Accordingly, we may not be able to obtain our desired amounts of reinsurance. In addition, even if we are able to obtain such reinsurance, we may not be able to negotiate terms that we deem appropriate or acceptable or obtain such reinsurance from entities with satisfactory creditworthiness.

~~Our investment performance may affect our financial results and ability to conduct business.~~

Our funds are invested by several professional investment advisory management firms under the direction of our management in accordance with investment guidelines set by us. Our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. In particular, the volatility of our claims may force us to liquidate securities, which may cause usprices to ~~incur capital losses. If we do not structure our investment portfolio so that it is appropriately matched with our insurance and reinsurance liabilities, we may be forced~~decrease. Any of these factors could lead to ~~liquidate investments prior to maturity at~~ a significant ~~loss to cover the liabilities. Investment losses could significantly decrease~~reduction in premium rates, less favorable policy terms and fewer submissions for our asset base, thereby affecting our ability to conduct business. During 2006, $381.4 million, or 12.4% of our total revenues, was derived from our invested assets. This represented 41.2% of our net income available to common shareholders.

~~We may be adversely affected by interest rate changes.~~

Our operating results are affected, in part, by the performance of our investment portfolio. Our investment portfolio contains interest rate sensitive-instruments, such as bonds, which may be adversely affected by changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we take measures to manage the risks of investing in a changing interest rate environment, we may not be able to mitigate interest rate sensitivity effectively. Despite our mitigation efforts, a significant increase in interest rates could have a material adverse effect on our shareholders’ equity and a significant decrease in interest rates could have a material adverse effect on our investment income and results of operations.

underwriting services. In addition our fixed investment portfolio includes mortgage-backed securities. As of December 31, 2006, mortgage-backed securities constituted approximately 29.9% of our cash and invested assets. As with other fixed income investments, the fair market value ofto these ~~securities fluctuates depending on market and other general economic conditions and the interest rate environment. Changes~~considerations, changes in interest rates can expose us to prepayment risks on these investments. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are prepaid more quickly, requiring us to reinvest the proceeds at the then current market rates. In periods of increasing interest rates, these investments are exposed to extension risk, which occurs when the holders of underlying mortgages reduce the frequency on which they prepay the outstanding principal before the maturity date and delay any refinancing of the outstanding principal.

~~We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.~~

~~Our future capital requirements depend on many factors, including our ability to write new business successfully,~~ the frequency and severity of ~~catastrophic events~~losses suffered by insureds and ~~our ability to establish premium rates~~insurers may affect the cycles of the insurance and reserves at levels sufficient to cover losses. We may need to raise additional funds through financings or curtail our growth and reduce our assets. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. Equity financings could be dilutive to our existing shareholders and could result in the issuance of securities that have rights, preferences and privileges that are senior to those of our other securities. If we cannot obtain adequate capital on favorable terms or at all, ourreinsurance business ~~operating results and financial condition could be adversely affected.~~significantly.

~~Our operating results may be adversely affected by currency fluctuations.~~

Our functional currency is the U.S. dollar. However, a portion of our gross premiums are written in currencies other than the U.S. dollar. A portion of our loss reserves and investments are also in non-U.S. currencies. We may, from time to time, experience losses resulting from fluctuations in the values of these non-U.S. currencies, which could adversely affect our operating results.

From time to time, we may purchase instruments to hedge our currency exposure and alleviate our potential exposure to volatility in foreign exchange losses. We currently are not aware of any material exposures to loss payments that will be paid in non-U.S. currencies. We intend to consider the use of additional hedges when we are advised of known or probable significant losses that will be paid in non-U.S. currencies. However, it is possible that we will not successfully structure those hedges so as to effectively manage these risks.

The regulatory system under which we operate, and potential changes thereto, could have a material adverse effect on our business.

~~General.~~Our insurance and reinsurance subsidiaries conduct business globally including in 50 states of the U.S. and the District of Columbia. Our businesses in each of these jurisdictions are subject to varying degrees of regulation and supervision. The laws and regulations of the jurisdictions in which our insurance and reinsurance subsidiaries are domiciled require, among other things, that these subsidiaries maintain minimum levels of statutory capital, surplus and liquidity, meet solvency standards, participate in guaranty funds and submit to periodic examinations of their financial condition. These laws and regulations also sometimes restrict payments of dividends and reductions of capital. These statutes, regulations and policies may also restrict the ability of these subsidiaries to write insurance and reinsurance policies, to make certain investments and to distribute funds. The purpose of insurance laws and regulations generally is to protect insureds and ceding insurance companies, not be able to obtain or maintain necessary licenses, permits, authorizations or accreditations in locales where we currently engage in business or in new locales, or may be able to do so only at significant cost. In addition, weour shareholders. We may not be able to comply fully with, or obtain appropriate exemptions from ~~the wide variety of laws~~these statutes and ~~regulations applicable to insurance or reinsurance companies or holding companies.~~regulations. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we ~~operate~~conduct business and could subject us to fines and other sanctions. In addition, changes in the laws or regulations to which our insurance and reinsurance subsidiaries are subject could have ~~a material~~an adverse effect on our business.

~~AXIS Specialty Bermuda.~~~~AXIS Specialty Bermuda is~~Potential government intervention in our industry as a ~~registered Class 4 Bermuda~~result of recent events and instability in the marketplace for insurance products could hinder our flexibility and negatively affect the business opportunities that may be available to us in the market.

Government intervention and the possibility of future government intervention have created uncertainty in the insurance and reinsurance ~~company. Bermuda statutes~~markets. Government regulators are generally concerned with the protection of policyholders to the exclusion of other constituencies, including shareholders of insurers and ~~regulations and policies~~reinsurers. An example of such intervention was the expansion of the ~~BMA require AXIS Specialty Bermuda~~Florida Hurricane Catastrophe Fund in 2007, which increased the capacity of the Fund to ~~maintain minimum levels~~compete against commercial providers of ~~statutory capital, surplus and liquidity, meet solvency standards, submit to periodic examinations~~catastrophe reinsurance. While we cannot predict the exact nature, timing or scope of ~~its financial condition and restrict payments of dividends and reductions of capital. These statutes, regulations and policies may,~~possible governmental initiatives, such proposals could adversely affect our business by, among other things:

Providing reinsurance capacity in ~~effect, restrict AXIS Specialty Bermuda’s ability to write insurance and reinsurance policies, to make some investments~~markets and to ~~distribute funds to AXIS Capital. In addition,~~consumers that we target;

Requiring our further participation in industry pools and guaranty associations;

Expanding the ~~offshore insurance and reinsurance regulatory environment has become subject to increased scrutiny in many jurisdictions, including~~scope of coverage under existing policies; e.g., following large disasters;

Further regulating the ~~United States and various states within the United States. Compliance with any new laws or regulations regulating offshore insurers or reinsurers could have a material adverse effect on our business.~~

~~AXIS U.S. Subsidiaries.~~~~AXIS Re U.S. is organized in New York and is licensed to write certain lines~~terms of insurance and reinsurance ~~in New York and elsewhere throughout~~policies; or

Disproportionately benefiting the ~~United States. AXIS Insurance~~companies of one country over those of another.

U.S. is organized in Illinois and is licensed to write certain lines of insurance and reinsurance in Illinois and elsewhere throughout the United States, except for California and New Hampshire. AXIS Specialty U.S. is organized and licensed to write certain lines of insurance in Connecticut and AXIS Surplus U.S. is organized and licensed to write certain lines of insurance in Illinois, and both are eligible to write certain lines of insurance in other U.S. jurisdictions on an excess or surplus lines basis (AXIS Re U.S., AXIS Specialty U.S., AXIS Surplus U.S. and AXIS Insurance U.S. are collectively referred to as the “AXIS U.S. Subsidiaries”). The AXIS U.S. Subsidiaries are subject to the laws and regulations of their respective states of domicile and other jurisdictions in which they are licensed or otherwise eligible to engage in business. These laws and regulations subject some affiliate transactions between such entities and other members of our holding company system to regulatory authority and require them to maintain minimum levels of capital, surplus and liquidity and comply with applicable risk-based capital requirements. In addition, they impose restrictions on the payment of dividends and distributions and in some cases require them to file insurance premium rates and policy forms. These rules and regulations may have the effect of restricting the ability of the AXIS U.S. Subsidiaries to write new business or distribute assets to AXIS Capital. The purpose of the state insurance laws and regulations is to protect U.S. insureds and U.S. ceding insurance companies, not shareholders. In recent years, the U.S. insurance regulatory framework has come under increased federal scrutiny, and some state legislators have considered or enacted laws that may alter or increase state regulation of insurance and reinsurance companies and holding companies. Moreover, the NAIC which is an association of the insurance commissioners of all 50 states and the District of Columbia, and state insurance regulators regularly reexamine existing laws and regulations. Changes in these laws and regulations or the interpretation of these laws and regulations could have a material adverse effect on our business.

~~AXIS Specialty Ireland.~~AXIS Specialty Ireland is a non-life insurance company incorporated under the laws of Ireland and as such is subject to the regulation and supervision of the Irish Financial Regulator and Regulations. Without the consent of the Irish Financial Regulator, AXIS Specialty Ireland is not permitted to reduce the level of its capital, may not make any dividend payments, may not make intercompany loans and must maintain a minimum solvency margin. Additionally, AXIS Specialty Ireland has agreed with the Irish Financial Regulator to limit the level of reinsurance business that it writes. These rules and regulations may have the effect of restricting the ability of AXIS Specialty Ireland to write new business or distribute assets to AXIS Capital.

~~AXIS Re Ireland.~~ AXIS Re Ireland is a reinsurance company incorporated under the laws of Ireland. The European Communities (Reinsurance) Regulations 2006 (the “Regulations”) came into effect on July 15, 2006 and Ireland thereby became the first EU member state to implement the European Reinsurance Directive. The Regulations introduce a comprehensive framework for the authorization and supervision of reinsurers in Ireland for the first time. The Regulations provide that all Irish reinsurers established before December 10, 2005 (including AXIS Re Ireland) are deemed to be authorized under the Regulations, subject to complying with certain requirements not later than December 10, 2007. These requirements include an obligation to maintain assets covering technical reserves and a solvency margin of assets free from any foreseeable liabilities calculated in accordance with the Regulations. If AXIS Re Ireland is unable to comply with any of the requirements of this new regulatory regime, it would not be lawful for it to continue to carry on the business of reinsurance in Ireland and this could have a material adverse effect on our business.

~~Our inability to obtain the necessary credit could affect our ability to offer reinsurance in certain markets.~~

~~Neither AXIS Specialty Bermuda nor AXIS Re Ireland is licensed or admitted as an insurer or reinsurer in any jurisdiction other than Bermuda and Ireland, respectively. Because the U.S. and some otherjurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements unless appropriate security~~

mechanisms are in place, our reinsurance clients typically require AXIS Specialty Bermuda and AXIS Re Ireland to provide letters of credit or other collateral. Our credit facility is used to post letters of credit. However, if our credit facility is not sufficient or if we are unable to renew the credit facility or are unable to arrange for other types of security on commercially reasonable terms, AXIS Specialty Bermuda and AXIS Re Ireland could be limited in its ability to write business for some of our clients.

Our ability to pay dividends and to make payments on indebtedness may be constrained by our holding company ~~structure and regulatory constraints.~~structure.

AXIS Capital is a holding company and has no direct operations of its own. AXIS Capital has no significant operations or assets other than its ownership of the shares of its operating insurance and reinsurance subsidiaries, AXIS Specialty Bermuda, AXIS Re ~~Ireland,~~Ltd., AXIS Specialty ~~Ireland,~~Europe, AXIS Re U.S., AXIS Specialty U.S., AXIS Surplus ~~U.S.~~ and AXIS Insurance ~~U.S.~~Co. (collectively, our “Insurance Subsidiaries”). Dividends and other permitted distributions from our Insurance Subsidiaries are our primary source of funds to meet ongoing cash requirements, including debt service payments and other expenses, and to pay dividends to our shareholders. Our Insurance Subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends and make distributions. The inability of our Insurance Subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have a material adverse effect on our business and our ability to pay dividends and make payments on our indebtedness.

AXIS Capital is subject to Bermuda regulatory constraints that affect its ability to declare and pay dividends on its common shares and make other payments. Under the Companies Act, AXIS Capital may declare or pay a dividend or make a distribution out of contributed surplus only if it has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due or that the realizable value of its assets would thereby be less than the aggregate of its liabilities and issued share capital and share premium accounts.

~~Our participation in a securities lending program subjects us to risk of default by the borrowers.~~

We participate in a securities lending program whereby our securities are loaned to third parties through a lending agent. The loaned securities are collateralized by cash, government securities and letters of credit in excess of the fair market value of the securities held by the lending agent. However, sharp changes in market values of substantial amounts of securities and the failure of the borrowers to honor their commitments, or default by the lending agent in remitting the collateral to us, could have a material adverse effect on our fixed maturity investments or our results of operations.

AXIS Capital is a Bermuda company and it may be difficult for you to enforce judgments against it or its directors and executive officers.

AXIS Capital is incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, some of our directors and officers reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. As a result, it may be difficult or impossible to effect service of process within the United States upon those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws. Further, it may not be possible to bring a claim in Bermuda against us or our directors and officers for violation of U.S. federal securities laws because these laws may have no extraterritorial application under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.

We have been advised by Conyers Dill & Pearman, our Bermuda counsel, that there is doubt as to whether the courts of Bermuda would enforce judgments of U.S. courts obtained in actions against us or our directors and officers, as well as any experts named herein, or in any registration statement we file predicated upon the civil liability provisions of the U.S. federal securities laws or whether proceedings could be commenced in the courts of Bermuda against us or such persons predicated solely upon U.S. federal securities laws. Further, we have been advised by Conyers Dill & Pearman that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts, and there may be grounds upon which Bermuda courts will not enforce judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda courts as contrary to that jurisdiction’s public policy.

There are provisions in our charter documents that may reduce or increase the voting rights of our shares.

Our bye-laws generally provide that shareholders have one vote for each common share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, the voting rights exercisable by a shareholder may be limited so that certain persons or groups are not deemed to hold 9.5% or more of the voting power conferred by our shares. Under these provisions, some shareholders may have the right to exercise their voting rights limited to less than one vote per share. Moreover, these provisions could have the effect of reducing the voting power of some shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership. In addition, our board of directors may limit a shareholder’s exercise of voting rights where it deems it necessary to do so to avoid adverse tax, legal or regulatory consequences.

We also have the authority under our bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be limited pursuant to the bye-laws. If a shareholder fails to respond to our request for information or submits incomplete or inaccurate information in response to a request by us, we may, in our sole discretion, eliminate the shareholder’s voting rights.

There are provisions in our bye-laws that may restrict the ability to transfer common shares and which may require shareholders to sell their common shares.

Our board of directors may decline to register a transfer of any common shares under some circumstances, including if they have reason to believe that any non-de minimis adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders may occur as a result of such transfer. Our bye-laws also provide that if our board of directors determines that share ownership by a person may result in non-de minimis adverse tax, legal or regulatory consequences to us, any of our subsidiaries or any of our shareholders, then we have the option, but not the obligation, to require that shareholder to sell to us or to third parties to whom we assign the repurchase right for fair market value the minimum number of common shares held by such person which is necessary to eliminate the non-de minimis adverse tax, legal or regulatory consequences.

Applicable insurance laws may make it difficult to effect a change of control of our company.

Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the financial strength of the ~~applicant,~~acquiror, the integrity and management of the ~~applicant’s board of directors and executive officers, the~~ acquiror’s ~~plans for the management of the applicant’s~~ board of directors and executive officers, the acquiror’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation

of the acquisition of control. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Because a person acquiring 10% or more of our common shares would indirectly control the same percentage of the stock of the AXIS U.S. Subsidiaries, the insurance change of control laws of Connecticut, Illinois and New York would likely apply to such a transaction.

In addition, the Insurance Acts and Regulations in Ireland require that anyone acquiring or disposing of a direct or indirect holding in an Irish authorized insurance company (such as AXIS Specialty Europe) that represents 10% or more of the capital or of the voting rights of such company or that makes it possible to exercise a significant influence over the management of such company, or anyone who proposes to decrease or increase that holding to specified levels, must first notify the Irish Regulatory Authority of their intention to do so. They also require any Irish authorized insurance company that becomes aware of any acquisitions or disposals of its capital involving the specified levels to notify the Irish Regulatory Authority. The specified levels are 20%, 33% and 50% or such other level of ownership that results in the company becoming the acquiror’s subsidiary within the meaning of article 20 of the European Communities (non-Life Insurance) Framework Regulations 1994.

The Irish Regulatory Authority has three months from the date of submission of a notification within which to oppose the proposed transaction if the Irish Regulatory Authority is not satisfied as to the suitability of the acquiror in view of the necessity “to ensure prudent and sound management of the insurance undertaking concerned.” Any person owning 10% or more of the capital or voting rights or an amount that makes it possible to exercise a significant influence over the management of AXIS Capital would be considered to have a “qualifying holding” in AXIS Specialty Europe.

While our bye-laws limit the voting power of any shareholder to less than 9.5%, there can be no assurance that the applicable regulatory body would agree that a shareholder who owned 10% or more of our shares did not, because of the limitation on the voting power of such shares, control the applicable Insurance Subsidiary.

These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of the Company, including transactions that some or all of our shareholders might consider to be desirable.

~~U.S. persons who own our shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.~~

The Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. These differences include the manner in which directors must disclose transactions in which they have an interest, the rights of shareholders to bring class action and derivative lawsuits and the scope of indemnification available to directors and officers.

Anti-takeover provisions in our bye-laws could impede an attempt to replace our directors or to effect a change in control, which could diminish the value of our common shares.

Our bye-laws contain provisions that may make it more difficult for shareholders to replace directors and could delay or prevent a change of control that a shareholder might consider favorable. These provisions include a staggered board of directors, limitations on the ability of shareholders to remove directors other than for cause, limitations on voting rights and restrictions on transfer of our common shares. These provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts in the future.

~~Risks Related to Our Industry~~

~~We operate in a highly competitive environment.~~

The insurance and reinsurance industry is highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European and other international insurers and reinsurers and with Lloyds’ underwriting syndicates, some of which have greater financial, marketing and management resources than we do. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets. In addition, capital market participants have recently created alternative products that are intended to compete with reinsurance products. Increased competition could result in fewer submissions, lower premium rates and less favorable policy terms and conditions, which could have a material adverse effect on our growth and profitability.

~~The insurance and reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates.~~

The insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. An increase in premium levels is often offset by an increasing supply of insurance and reinsurance capacity, either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer submissions for our underwriting services. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance business significantly.

The impact of the investigations into anti-competitive practices in the insurance industry and related lawsuits cannot be predicted and may have a material adverse effect on our business, results of operations and financial condition.

During 2005, our U.S. holding company received subpoenas from the Office of the Attorney General of the State of New York seeking information regarding incentive commission agreements, fictitious and inflated quotes and related matters and conditioning direct insurance on the placement of reinsurance. In addition, our U.S. insurance companies have received subpoenas and requests for information from various state insurance regulators regarding these same matters. These inquiries were part of industry-wide investigations in these jurisdictions and we understand that officials from other jurisdictions in which we do business have also initiated investigations into similar matters. Accordingly, we may in the future receive additional subpoenas and requests for information. We have cooperated fully with the Attorney General of the State of New York and the other state regulators in their investigations and intend to cooperate fully with any future investigations. Responding to subpoenas and requests for information and cooperating with investigations is very costly and diverts management’s time and efforts away from our operations. In addition, we could be subject to civil and criminal actions, sanctions and penalties as a result of these investigations.

~~Furthermore, AXIS Surplus U.S., AXIS Re U.S. and AXIS Insurance U.S. are defendants in a putative class action lawsuit captioned~~ ~~In re Insurance Brokerage Antitrust Litigation~~. The lawsuit is pending in the United States District Court for the District of New Jersey and includes as defendants numerous insurance brokers and insurance companies. 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. We believe that these lawsuits are completely without merit and we are vigorously defending the filed action.

~~However, additional similar lawsuits may be filed against us and if the plaintiffs were to prevail in any of these lawsuits we could be subject to substantial damages.~~

We are party to various legal proceedings generally arising in the ordinary course of our insurance and reinsurance businesses. We do not believe that the eventual outcome of any litigation or arbitration proceeding to which we are presently a party will have a material adverse effect on our business, results of operations or financial condition; however, every proceeding contains an element of uncertainty and if the plaintiffs were to prevail in some of these proceedings we could be subject to substantial damages.

~~Risks Related to Taxation~~

We may become subject to taxes in Bermuda after March 28, 2016, which may have a material adverse effect on our results of operations.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given each of AXIS Capital and AXIS Specialty Bermuda an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to AXIS Capital, AXIS Specialty Bermuda or any of their respective operations, shares, debentures or other obligations until March 28, 2016. Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016.

Our non-U.S. companies may be subject to U.S. tax that may have a material adverse effect on our results of operations.

AXIS Capital and AXIS Specialty Bermuda are Bermuda companies, AXIS Specialty Holdings Ireland ~~Holdings,~~Limited (“AXIS Ireland Holdings”), AXIS Re ~~Ireland~~Ltd., AXIS Specialty Europe, and AXIS Specialty ~~Ireland~~Global Holdings Limited are Irish companies and AXIS Specialty U.K. Holdings Limited (“AXIS U.K. Holdings”) is a U.K. company. We intend to manage our business so that each of these companies will operate in such a manner that none of these companies should be subject to U.S. tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks and U.S. withholding tax on some types of U.S. source investment income), because none of these companies should be treated as engaged in a trade or business within the United States. However, because there is considerable uncertainty as to the activities that constitute being engaged in a trade or business within the United States, we cannot be certain that the U.S. Internal Revenue Service (“IRS”) will not contend successfully that any of AXIS Capital or its non-U.S. subsidiaries is/are engaged in a trade or business in the United States. If AXIS Capital or any of its non-U.S. subsidiaries were considered to be engaged in a trade or business in the United States, it could be subject to U.S. corporate income and additional branch profits taxes on the portion of its earnings effectively connected to such U.S. business. If this were to be the case, our results of operations could be materially adversely affected.

Our non-U.K. companies may be subject to U.K. tax that may have a material adverse effect on our results of operations.

We intend to operate in such a manner so that none of our companies, other than AXIS U.K. Holdings, should be resident in the United Kingdom for tax purposes and that none of our companies, other than AXIS Ireland Holdings and AXIS Specialty ~~Ireland,~~Europe, should have a permanent establishment in the United Kingdom. Accordingly, we expect that none of our companies other than, AXIS U.K. Holdings, AXIS Ireland Holdings and AXIS Specialty ~~Ireland~~Europe should be subject to U.K. tax. Nevertheless, because neither case law nor U.K. statutes conclusively define the activities that constitute trading in the United Kingdom through a permanent establishment, the U.K. Inland Revenue might contend successfully that any of our companies, in addition to AXIS U.K. Holdings, AXIS Ireland Holdings and AXIS Specialty

~~Ireland,~~ Europe, is/are trading in the United Kingdom through a permanent establishment in the United Kingdom and therefore subject to U.K. tax. If this were the case, our results of operations could be materially adversely affected.

Our non-Irish companies may be subject to Irish tax that may have a material adverse effect on our results of operations.

We intend to operate in such a manner so that none of our companies, other than AXIS Ireland Holdings, AXIS Re ~~Ireland~~Ltd., AXIS Specialty Europe, and AXIS Specialty ~~Ireland,~~Global Holdings Limited should be resident in Ireland for tax purposes and that none of our companies, other than AXIS Ireland Holdings, AXIS Re ~~Ireland~~Ltd., AXIS Specialty Europe, and AXIS Specialty ~~Ireland,~~Global Holdings Limited should be treated as carrying on a trade through a branch or agency in Ireland.

Accordingly, we expect that none of our companies other than AXIS Ireland Holdings, AXIS Re ~~Ireland~~Ltd, AXIS Specialty Europe and AXIS Specialty ~~Ireland~~Global Holdings Limited should be subject to Irish corporation tax. Nevertheless, since the determination as to whether a company is resident in Ireland is a question of fact to be determined based on a number of different factors and since neither case law nor Irish legislation conclusively defines the activities that constitute trading in Ireland through a branch or agency, the Irish Revenue Commissioners might contend successfully that any of our companies, in addition to AXIS Ireland Holdings, AXIS Re ~~Ireland~~Ltd., AXIS Specialty Europe and AXIS Specialty ~~Ireland,~~Global Holdings Limited, is resident in or otherwise trading through a branch or agency in Ireland and therefore subject to Irish corporation tax. If this were the case, our results of operations could be materially adversely affected.

If corporate tax rates in Ireland increase, our results of operations could be materially adversely affected.

Trading income derived from the insurance and reinsurance businesses carried on in Ireland by AXIS Specialty ~~Ireland~~Europe and AXIS Re ~~Ireland~~Ltd. is generally taxed in Ireland at a rate of 12.5%. Over the past number of years, various EU member states have, from time to time, called for harmonization of corporate tax rates within the EU. Ireland, along with other member states, has consistently resisted any movement towards standardized corporate tax rates in the EU. The Government of Ireland has also made clear its commitment to retain the 12.5% rate of corporation tax until at least the year 2025. If, however, tax laws in Ireland change so as to increase the general corporation tax rate in Ireland, our results of operations could be materially adversely affected.

If investments held by AXIS Specialty ~~Ireland~~Europe or AXIS Re ~~Ireland~~Ltd. are determined not to be integral to the insurance and reinsurance businesses carried on by those companies, additional Irish tax could be imposed and our business and financial results could be materially adversely affected.

Based on administrative practice, taxable income derived from investments made by AXIS Specialty ~~Ireland~~Europe and AXIS Re ~~Ireland~~Ltd. is generally taxed in Ireland at the rate of 12.5% on the grounds that such investments either form part of the permanent capital required by regulatory authorities, or are otherwise integral to the insurance and reinsurance businesses carried on by those companies. AXIS Specialty ~~Ireland~~Europe and AXIS Re ~~Ireland~~Ltd. intend to operate in such a manner so that the level of investments held by such companies does not exceed the amount that is integral to the insurance and reinsurance businesses carried on by AXIS Specialty ~~Ireland~~Europe and AXIS Re ~~Ireland.~~Ltd. If, however, investment income earned by AXIS Specialty ~~Ireland~~Europe or AXIS Re ~~Ireland~~Ltd. exceeds these thresholds, or if the administrative practice of the Irish Revenue Commissioners changes, Irish corporation tax could apply to such investment income at a higher rate (currently 25%) instead of the general 12.5% rate, and our results of operations could be materially adversely affected.

The impact of Bermuda’s letter of commitment to the Organization for Economic Cooperation and Development to eliminate harmful tax practices is uncertain and could adversely affect our tax status in Bermuda.

The Organization for Economic Cooperation and Development (the “OECD”) has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD’s report dated April 18, 2002 and updated as of June 2004, ~~and~~ September 2006, and October 2007, Bermuda was not listed as an uncooperative tax haven jurisdiction because it had previously committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes.

Changes in USU.S. federal income tax law could materially adversely affect us.

Legislation has been introduced in the U.S. Congress intended to eliminate some perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. ~~While the Company believes there are no currently pending legislative proposals which, if enacted, would have a material adverse effect on us, it~~It is possible that similar legislation could be introduced and enacted by the current Congress or future Congresses that could have an adverse impact on us.

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have no outstanding, unresolved comments from the SEC staff at December 31, 2007.

~~Not applicable.~~

ITEM 2. PROPERTIES ~~PROPERTIES~~

We operate in the United States, Bermuda, Europe and Singapore. We own the property in which our offices are located in Dublin, Ireland, and we lease office space in the other countries. We renew and enter into new leases in the ordinary course of business as required. ~~During 2006, we leased new offices~~Our worldwide headquarters office is located at 92 Pitts Bay Road, ~~Bermuda, which have become our worldwide headquarters. See Item 8, Note 11 to the Consolidated Financial Statements for a discussion of our lease commitments for real property.~~Pembroke, Bermuda. We believe that our office space is sufficient for us to conduct our operations for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Except as set forth below, we are not ~~currently~~ 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 our insurance or reinsurance operations.

~~During~~In 2005, our U.S. holding company received subpoenas from the Office of the Attorney General of the State of New York seeking information regarding incentive commission agreements, fictitious and inflated quotes and related matters and conditioning direct insurance on the placement of reinsurance. In addition, our U.S. insurance companies have received subpoenas and requests for information from various state insurance regulators regarding these same matters. These inquiries were part of industry-wide investigations in these jurisdictions and we understand that officials from other jurisdictions in which we do business have also initiated investigations into similar matters. We have cooperated fully with the Attorney General of the State of New York and the other state regulators in their investigations. In 2006, we did not

~~receive any new or supplemental subpoenas from the Attorney General for the State of New York or any other state regulators on these matters.~~

In connection with these inquiries received in 2005, we conducted an internal investigation, led by outside counsel, to determine whether we engaged in any of the improper business practices that are the focus of the inquiries. This investigation was completed in August 2005 and uncovered no evidence indicating that we engaged in bid rigging, fictitious or inflated quotes or related matters or conditioning direct insurance on the placement of reinsurance. Consistent with long-standing and wide-spread industry practice, we have in the past entered into incentive commission arrangements with brokers. However, we have not entered into any of these arrangements with respect to business underwritten in 2005 or thereafter.

A purported shareholders class action lawsuit has been filed against us and some of our executive officers relating to the practices being investigated by the Attorney General of the State of New York and other state regulators. James Dolan v. AXIS Capital Holdings Limited, Michael A. Butt and John R. Charman was filed on October 28, 2004 in the United States District Court, Southern District of New York. Robert Schimpf v. AXIS Capital Holdings Limited, Michael A. Butt, Andrew Cook and John R. Charman was filed on November 5, 2004 in the United States District Court, Southern District of New York. On April 13, 2005, these lawsuits were consolidated and are now known as In re AXIS Capital Holdings Ltd. Securities Litigation. On May 13, 2005, the plaintiffs filed an amended, consolidated complaint and added as defendants the managing underwriters and one of the selling shareholders in our secondary offering completed in March 2004. The lawsuit alleged securities violations in connection with the failure to disclose payments made pursuant to incentive commission arrangements and sought damages in an unspecified amount. On October 17, 2006, the District Court dismissed the Amended Complaint without prejudice and granted plaintiffs 30 days to file a second amended, consolidated complaint consistent with the Court’s opinion. On December 18, 2006, plaintiffs advised the Court that it would not be filing an amended complaint and, as a consequence, the amended, consolidated action has been dismissed without prejudice.

A putative class action lawsuit ~~also has been~~was filed against our U.S. insurance ~~companies.~~subsidiaries. In re Insurance Brokerage Antitrust Litigation was filed on August 1,15, 2005 in the United States District Court for the District of New Jersey and includes as defendants numerous insurance brokers and insurance companies. The lawsuit alleges antitrust and ~~RICO~~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 ~~court~~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, which are pending before~~dismiss. On April 15, 2007, the ~~court.~~District Court dismissed without prejudice plaintiffs’ complaint, as amended, and granted plaintiffs 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. On September 28, 2007, the District Court dismissed with prejudice plaintiffs’ antitrust and RICO claims and declined to exercise supplemental jurisdiction over plaintiffs’ remaining state law claims. On October 10, 2007, plaintiffs filed a notice of appeal of all adverse orders and decisions to the United States Court of Appeals for the Third Circuit. We believe that the lawsuit is completely without merit and we continue to vigorously defend the filed action.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR ~~THE~~ REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common shares, $0.0125 par value, are listed on the New York Stock Exchange under the symbol “AXS”.

The following table sets forth the high and low sales prices per share of our common shares for each of the fiscal quarters in the last two fiscal years as reported on the New York Stock Exchange Composite Tape:

2006

2005

Dividends

Dividends

High

Low

Declared

High

Low

Declared

1st Quarter

$
32.21

$
28.95

$
0.15

$
29.32

$
26.21

$
0.15

2nd Quarter

$
30.92

$
25.82

$
0.15

$
28.42

$
25.23

$
0.15

3rd Quarter

$
35.21

$
27.73

$
0.15

$
31.00

$
25.49

$
0.15

4th Quarter

$
35.88

$
32.20

$
0.165

$
31.77

$
25.20

$
0.15


	2007						2006
	High		Low		Dividends Declared		High		Low		Dividends Declared
1st Quarter	$	35.25	$	31.86	$	0.165	$	32.21	$	28.95	$	0.15
2nd Quarter	$	41.17	$	33.28	$	0.165	$	30.92	$	25.82	$	0.15
3rd Quarter	$	41.44	$	34.18	$	0.165	$	35.21	$	27.73	$	0.15
4th Quarter	$	43.35	$	36.10	$	0.185	$	35.88	$	32.20	$	0.165

On February ~~23, 2007,~~20, 2008, the number of holders of record of our common shares was ~~80.~~60. This figure does not represent the actual number of beneficial owners of our common shares because shares are frequently held in “street name” by securities dealers and others for the benefit of beneficial owners who may vote the shares.

The declaration and payment of future dividends will be at the discretion of our ~~board~~Board of ~~directors~~Directors and will depend upon many factors, including our earnings, financial condition, business needs, capital and surplus requirements of our operating subsidiaries and regulatory and contractual restrictions, including those set forth in our credit facility.

As a holding company, our principal source of income is dividends or other statutorily permissible payments from our subsidiaries. The ability of our subsidiaries to pay dividends is limited by the applicable laws and regulations of the various countries in which we operate, including Bermuda, the United States and Ireland. See Item ~~7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item~~ 8, Note 17 to the Consolidated Financial Statements included in this report.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth information regarding the number of shares we repurchased in the quarter ended December 31, ~~2006.~~2007:


Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number Of Shares Purchased as Part Of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Announced Plans or Programs (a)
October	-	-	-	$219.9 million
November	3,239,545 (b)	$38.58	3,239,545	$ 94.9 million
December	854 (c)	$38.77	-	$494.9 million
Total	3,240,399	$38.58	3,239,545	$494.9 million

~~Period~~

(a)

~~Total~~
~~Number~~On December 7, 2006, our Board of
~~Shares~~
~~Purchased~~

~~Average~~
~~Price Paid~~
~~Per Share~~

~~Total Number~~
~~Of Shares~~
~~Purchased as Part~~
~~Of Publicly Announced~~
~~Plans~~ Directors authorized a renewal of our share repurchase plan with the authorization to repurchase up to $400 million of our common shares to be effected from time to time in open market or ~~Programs~~

~~Maximum Number~~
~~(or Approximate Dollar~~
~~Value)~~privately negotiated transactions. This repurchase plan will expire on December 31, 2008. On December 6, 2007, our Board of ~~Shares~~
~~that May Yet Be~~
~~Purchased Under~~Directors approved a new share repurchase plan with the
~~Announced~~
~~Plans or Programs~~

authorization to repurchase up to an additional $400 million of our common shares. This repurchase plan is authorized to continue until December 31, 2009.

~~October~~

(b)

On November 7, 2007, we repurchased from Trident II, L.P and affiliated entities, an aggregate of 2,563,445 shares of our common stock at $39.01 per share, for a total purchase price of $100 million. We also repurchased, from the open market, a further 676,100 shares at an average price of $36.95 per share, for a total cost of $25 million.

—

(c)

—

~~150.0 million(a)~~

~~November~~

—

~~150.0 million(a)~~

During December

—

~~400.0 million(b)~~

~~Total~~

—

~~400.0 million(b)~~

2007, we repurchased 854 common shares from our employees to satisfy withholding tax liabilities upon the vesting of restricted stock awards. These shares are not included in our repurchase program.

~~(a)~~ On March 14, 2005, our Board of Directors approved the repurchase of up to $150 million of our common shares to be effected from time to time in open market or privately negotiated transactions. The repurchase program was authorized to continue until December 2006.

~~(b)~~ On December 7, 2006, our Board of Directors authorized a renewal of our share repurchase plan with authorization to repurchase up to $400 million of our common shares. The repurchase program is authorized to continue until December 31, 2008.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth our selected historical consolidated financial information for the ~~years 2002 through 2006.~~last five years. Refer to Item 1, “Our Business Strategy” for a discussion of our business expansion over this period. This data should also be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented under Item 8 and with the Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7.

At and for Year ended December 31

2006

2005

2004

2003

2002

(in thousands, except per share amounts)

Selected Statement of Operations Data:

Gross premiums written

$
3,609,036

$
3,393,885

$
3,012,311

$
2,273,645

$
1,108,003

Net premiums earned

2,694,270

2,553,683

2,028,397

1,436,230

536,850

Net investment income

407,100

256,712

152,072

73,961

71,287

Net realized investment (losses) gains

(25,702
)
(16,912
)
13,634

22,567

26,070

Net losses and loss expenses

1,425,855

2,051,129

1,246,244

734,019

229,265

Acquisition costs

386,959

337,383

280,568

186,297

91,200

General and administrative expenses

268,396

212,842

187,305

136,526

57,610

Interest expense

32,954

32,447

5,285

1,478

1,414

Preferred share dividends

37,295

4,379

—

—

—

Net income available to common shareholders

$
925,765

$
90,061

$
494,998

$
532,350

$
265,119

Per Common Share Data:

Basic earnings per common share

$
6.18

$
0.63

$
3.24

$
3.69

$
1.96

Diluted earnings per common share

5.63

0.57

2.98

3.42

1.91

Cash dividends per common share

0.615

0.60

0.50

0.14

0.00

Basic weighted average common shares outstanding

149,745

143,226

152,554

144,263

135,442

Diluted weighted average common shares outstanding

164,394

157,524

165,876

155,691

138,481

Operating Ratios:

Net loss and loss expense ratio(1)

52.9
%
80.3
%
61.4
%
51.1
%
42.7
%
Acquisition cost ratio(2)

14.4
%
13.2
%
13.8
%
13.0
%
17.0
%
General and administrative expense ratio(3)

10.0
%
8.3
%
9.2
%
9.5
%
10.7
%
Combined ratio(4)

77.3
%
101.8
%
84.4
%
73.6
%
70.4
%
Selected Balance Sheet Data:

Investments at fair value

$
7,663,387

$
6,421,929

$
5,399,689

$
3,385,576

$
1,702,990

Cash and cash equivalents

1,989,287

1,280,990

632,329

605,175

729,296

Reinsurance recoverable balances

1,359,154

1,518,110

596,299

124,899

1,703

Total assets

13,665,287

11,925,976

9,038,285

5,172,273

2,948,321

Reserve for losses and loss expenses

5,015,113

4,743,338

2,404,560

992,846

215,934

Unearned premium

2,015,556

1,760,467

1,644,771

1,143,447

555,962

Debt

499,144

499,046

498,938

—

—

Total shareholders’ equity

4,412,647

3,512,351

3,238,064

2,817,148

1,961,033

Book value per common share(5)

$
26.09

$
20.23

$
21.20

$
18.48

$
14.19

~~(1)The net loss and loss expense ratio is calculated by dividing net losses and loss expenses by net premiums earned.~~


	As of and for Year ended December 31
(in thousands, except per share amounts)	2007		2006		2005		2004		2003

Selected Statement of Operations Data:
Gross premiums written	$	3,590,090	$	3,609,036	$	3,393,885	$	3,012,311	$	2,273,645
Net premiums earned		2,734,410		2,694,270		2,553,683		2,028,397		1,436,230
Net investment income		482,873		407,100		256,712		152,072		73,961
Net realized investment gains (losses)		5,230		(25,702)		(16,912)		13,634		22,567
Net losses and loss expenses		1,370,260		1,425,855		2,051,129		1,246,244		734,019
Acquisition costs		384,497		386,959		337,383		280,568		186,297
General and administrative expenses		303,831		268,396		212,842		187,305		136,526
Interest expense and financing costs		51,153		32,954		32,447		5,285		1,478
Preferred share dividends		36,775		37,295		4,379		-		-
Net income available to common shareholders	$	1,055,243	$	925,765	$	90,061	$	494,998	$	532,350

Per Common Share Data:
Basic earnings per common share	$	7.15	$	6.18	$	0.63	$	3.24	$	3.69
Diluted earnings per common share		6.41		5.63		0.57		2.98		3.42
Cash dividends per common share		0.68		0.615		0.60		0.50		0.14
Basic weighted average common shares outstanding		147,524		149,745		143,226		152,554		144,263
Diluted weighted average common shares outstanding		164,515		164,394		157,524		165,876		155,691

Operating Ratios:⁽¹⁾
Net loss and loss expense ratio		50.1%		52.9%		80.3%		61.4%		51.1%
Acquisition cost ratio		14.1%		14.4%		13.2%		13.8%		13.0%
General and administrative expense ratio		11.1%		10.0%		8.3%		9.2%		9.5%

Combined ratio		75.3%		77.3%		101.8%		84.4%		73.6%

Selected Balance Sheet Data:
Investments	$	8,977,653	$	7,663,387	$	6,421,929	$	5,399,689	$	3,385,576
Cash and cash equivalents		1,332,921		1,989,287		1,280,990		632,329		605,175
Reinsurance recoverable balances		1,356,893		1,359,154		1,518,110		596,299		124,899
Total assets		14,675,309		13,665,287		11,925,976		9,038,285		5,172,273
Reserve for losses and loss expenses		5,587,311		5,015,113		4,743,338		2,404,560		992,846
Unearned premium		2,146,087		2,015,556		1,760,467		1,644,771		1,143,447
Senior Notes		499,261		499,144		499,046		498,938		-
Total shareholders’ equity		5,158,622		4,412,647		3,512,351		3,238,064		2,817,148
Common shares outstanding		142,520		149,982		148,831		152,737		152,474
Book value per common share⁽²⁾	$	32.69	$	26.09	$	20.23	$	21.20	$	18.48

~~(2)The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned.~~

(1)	Operating ratios are calculated by dividing the respective operating expenses by net premiums earned.

(2)	Book value per common share is based on total common shareholders’ equity divided by common shares outstanding.

~~(3)The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned.~~

~~(4)The combined ratio is the sum of the net loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.~~

~~(5)~~Book value per common share is based on total common shareholders’ equity divided by common shares outstanding of 149,982,139 at December 31, 2006, 148,830,691 at December 31, 2005, 152,737,209 at December 31, 2004, 152,474,011 at December 31, 2003 and 138,168,520 at December 31, 2002.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


		Page
Financial Measures		29

Consolidated Results of Operations: Years ended December 31, 2007, 2006 and 2005

i) Overview		29

ii) Underwriting Revenues		30

iii) Underwriting Expenses		31

iv) Investment Income and Net Realized Investment Gains/Losses		33

v) Other Revenues and Expenses		35

Results by Segment: Years ended December 31, 2007, 2006 and 2005

i) Insurance Segment		36

ii) Reinsurance Segment		40

Cash and Investments		43

Liquidity and Capital Resources		46

Commitments and Contingencies		49

Critical Accounting Estimates

i) Reserves for Losses and Loss Expenses		50

ii) Reinsurance Recoverable Balances		55

iii) Premiums		55

Recent Accounting Pronouncements		56

Off-Balance Sheet and Special Purpose Entity Arrangements		56

The following is a discussion and analysis of our results of operations for the years ended December 31, 2007, 2006 and 2005 and our financial condition at December 31, 2007 and ~~results of operations.~~2006. This ~~discussion and analysis~~ should be read in conjunction with the ~~audited consolidated financial statements~~Consolidated Financial Statements and related notes included in Item 8 of this report. ~~For an overview of our business including information on segments and individual lines of business refer~~Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to ~~Item 1 of this report.~~rounding differences.

~~Results of Operations: Years ended December 31, 2006, 2005 and 2004~~FINANCIAL MEASURES

~~Overview~~

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

2006

2005

2004

Return on average common equity

26.7
%
2.9
%
16.3
%
Diluted book value per common share

$
24.02

$
19.19

$
19.85

Cash dividends per common share

$
0.615

$
0.60

$
0.50

Return on average common equity ~~(‘ROACE’~~(“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 common shareholders for the risks ~~assumed by the Company~~we assume and to grow revenue only when we deem the returns meet or exceed our requirements. ROACE was 24.6% for 2007 compared to 26.7% and 2.9% for 2006 and 2005, respectively.

Diluted book value per common share:Diluted book value per common share ~~is a non-GAAP financial measure; for further information refer to ‘Non-GAAP Financial Measures” at~~represents total common shareholders’ equity divided by the ~~end~~number of ~~Item 7.~~common shares and diluted common share equivalents outstanding, using the treasury stock method. 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 was $28.79, $23.45 and $18.34 at December 31, 2007, 2006 and 2005, respectively. The increase in each of the last two years reflects the generation of earnings from operations, which substantially increased our common shareholders’ equity base.

Cash dividends per common share:Our dividend policy is an integral part of the value we create for our shareholders. ~~The board~~Our cash dividends declared in 2007 were $0.68 per common share compared to $0.615 and $0.60 per common share in 2006 and 2005, respectively. Our Board of ~~directors~~Directors reviews our dividend policy on a regular basis and ~~has increased the annual dividend~~ in ~~each of the last three years.~~

~~The changes in ROACE and diluted book value per common share~~December 2007, they authorized a 12% increase in the ~~last three years have correlated with movements in our net income available to common shareholders.~~ quarterly dividend.

CONSOLIDATED RESULTS OF OPERATIONS

OVERVIEW

The following table breaks out net income into three components; underwriting ~~income/loss,~~income, investment income and net realized gains/losses, and other revenues and expenses. Underwriting income on a segment basis is a measure of underwriting profitability that takes into account net premiums earned and other insurance related income as revenue and net losses and loss expenses, acquisition costs and underwriting related general and administrative costs as expenses. Underwriting income is the difference between these revenue and expense items. Because our investment portfolio is managed on a total return basis, we have reviewed investment income and net realized gains/losses together. Other revenues and expenses represent corporate expenses, foreign exchange gains/losses, interest expense and income tax ~~expense; these have been condensed~~expense.



Year ended December 31,	2007		Percentage Change	2006		Percentage Change	2005

Underwriting income:
Insurance	$	373,803	3%	$	362,916	372%	$	76,954
Reinsurance		364,230	17%		311,859	476%		(82,981)
Investment income and net realized gains/losses		488,103	28%		381,398	59%		239,800
Other revenues and expenses		(134,118)	44%		(93,113)	(33%)		(139,333)

Net income		1,092,018	13%		963,060	920%		94,440
Preferred share dividends		(36,775)	(1%)		(37,295)	752%		(4,379)

Net income available to common shareholders	$	1,055,243	14%	$	925,765	928%	$	90,061

2007 versus 2006:Net income available to common shareholders for 2007 increased 14% over 2006, reflecting higher investment income and additional underwriting income from our insurance and reinsurance segments. The increase in ~~the table below but are reviewed individually~~investment income was primarily driven by a 21% increase in ~~the discussion following~~our average cash and investment balances together with an increase in our effective yield. Our insurance and reinsurance segments both benefited from additional prior period reserve development in 2007 compared with 2006, in what were years of limited major loss activity..

Year ended December 31

2006

2005

2004

(in thousands)

Underwriting income (loss):

Global insurance

$
262,884

$
114,781

$
195,101

U.S. insurance

100,032

(37,827
)
32,280

Reinsurance

311,859

(82,981
)
137,261

Investment income and net realized gains/losses

381,398

239,800

165,706

Other revenues and expenses

(93,113
)
(139,333
)
(35,350
)
Net income

963,060

94,440

494,998

Preferred share dividends

(37,295
)
(4,379
)
—

Net income available to common shareholders

$
925,765

$
90,061

$
494,998

~~Our~~2006 versus 2005:Net income available to common shareholders for 2006 increased 928% from 2005, primarily reflecting additional underwriting ~~results have significantly impacted the level~~income from our segments, higher investment income and positive changes in foreign exchanges gains/losses. The increase in segmental underwriting income was attributable to an absence of ~~net income~~major loss activity in ~~the last three years following~~2006 compared to 2005 when we incurred significant losses ~~incurred~~ from Hurricanes Katrina, Rita and Wilma (“KRW”). The increase in ~~2005, and Hurricanes Charley, Frances, Ivan and Jeanne in 2004. In 2006, there was an absence of significant catastrophes and therefore our underwriting~~investment income was ~~substantially higher. Investment income has grown over the last three years due to~~driven by a ~~combination of a larger~~28% increase in our average cash and investment ~~base and higher yields~~balances, an increase in our effective yield and increased income from ~~our allocation to~~ other investments.

~~Underwriting Results~~UNDERWRITING REVENUES

Gross Premiums Written:Gross premiums written by segment were as follows:


Year ended December 31,	2007		Percentage Change	2006		Percentage Change	2005

Insurance	$	2,039,214	(2%)		2,070,467	10%	$	1,875,017
Reinsurance		1,550,876	1%		1,538,569	1%		1,518,868

Total	$	3,590,090	(1%)	$	3,609,036	6%	$	3,393,885

2007 versus 2006:Gross premiums written in 2007 were largely flat relative to 2006. In our insurance segment, increases in political risk, professional lines and U.S. exposed catastrophe property premium were offset by the impact of competitive market conditions and rate pressures in our other lines. In our reinsurance segment, favorable foreign exchange rates in 2007 relative to 2006 offset an otherwise slight reduction in gross premiums written this year. This reduction was primarily due to a large 16-month property proportional treaty written in the fourth quarter of 2006 which did not come up for renewal in 2007 and also the impact of increased client retentions in our professional lines book. These reductions were mostly offset by our increased participation in business in the U.S. and European reinsurance markets this year.

~~Premiums:~~2006 versus 2005:Gross premiums written in 2006 increased 6% over 2005, primarily reflecting growth in our insurance segment. This was largely generated by additional underwriting resource and the targeting of new opportunities in our political risk book as well as significant rate increases within parts of our property book. In our reinsurance segment, growth in our liability and professional lines business was offset by lower reinstatement premiums on our catastrophe line. In 2005, we recorded significant reinstatement premiums following KRW. Excluding these reinstatement premiums, gross premiums written in our reinsurance segment increased 8% in 2006.

Net Premiums Written:Net premiums written by segment were as follows:



Year ended December 31,	2007		Percentage Change	2006		Percentage Change	2005

Insurance	$	1,326,647	(9%)	$	1,460,399	25%	$	1,167,767
Reinsurance		1,537,110	1%		1,528,780	3%		1,491,222

Total	$	2,863,757	(4%)	$	2,989,179	12%	$	2,658,989


Ceded premium %			Point Change			Point Change
Insurance		35%	6%		29%	(9%)		38%
Reinsurance		1%	-		1%	(1%)		2%

Total		20%	3%		17%	(5%)		22%

2007 versus 2006:The 4% reduction in net premiums written in 2007 was primarily due to an increase in premiums ceded in our insurance segment. This increase was partially due to a change in business mix towards lines with higher levels of ceded premium. We also purchased additional quota share reinsurance on our professional lines business and expanded our worldwide property program during the year.

2006 versus 2005:The growth in net premiums written in 2006 was impacted by significant inward and outward reinstatement premiums in 2005, associated with KRW. Excluding these amounts, net premiums written in our insurance and reinsurance segments increased by 15% and 8%, respectively, primarily reflecting growth in gross premiums written.

Net Premium Earned:Net premiums earned by segment were as follows:


										Percentage Change
Year ended December 31,	2007			2006			2005			06 to 07	05 to 06

Insurance	$	1,208,440	44%	$	1,305,760	48%	$	1,201,549	47%	(7%)	9%
Reinsurance		1,525,970	56%		1,388,510	52%		1,352,134	53%	10%	3%

Total	$	2,734,410	100%	$	2,694,270	100%	$	2,553,683	100%	1%	6%

2007 versus 2006:Although net premiums earned in 2007 were largely flat with 2006, we experienced a shift in mix from insurance to reinsurance business. Our reinsurance segment benefited from growth of its underwriting operations in recent years, while changes in business mix and an expansion of our reinsurance coverage had the effect of reducing net premiums earned in our insurance segment.

2006 versus 2005:The growth in net premiums earned in 2006 was impacted by significant reinstatement premiums earned and amortized in 2005, following KRW. Excluding these amounts, net premiums earned in our insurance and reinsurance segments ~~in the years ended December 31 were as follows:~~

Gross

2006

2005

2004

Written

Earned

%

Written

Earned

%

Written

Earned

%

(in thousands)

Global Insurance

$
958,251

$
885,348

26.4
%
$
861,098

$
971,548

29.6
%
$
1,095,328

$
913,382

36.4
%
U.S. Insurance

1,112,216

1,070,619

31.9
%
1,013,919

918,271

28.0
%
824,235

689,037

27.4
%
Insurance total

2,070,467

1,955,967

58.3
%
1,875,017

1,889,819

57.6
%
1,919,563

1,602,419

63.8
%
Reinsuance

1,538,569

1,397,917

41.7
%
1,518,868

1,388,447

42.4
%
1,092,748

908,428

36.2
%
Total

$
3,609,036

$
3,353,884

100.0
%
$
3,393,885

$
3,278,266

100.0
%
$
3,012,311

$
2,510,847

100.0
%

Net

2006

2005

2004

Written

Earned

%

Written

Earned

%

Written

Earned

%

(in thousands)

Global Insurance

$
850,533

$
746,393

27.7
%
$
649,703

$
748,015

29.3
%
$
933,198

$
796,566

39.3
%
U.S. Insurance

609,866

559,367

20.8
%
518,064

453,534

17.8
%
430,087

349,287

17.2
%
Insurance total

1,460,399

1,305,760

48.5
%
1,167,767

1,201,549

47.1
%
1,363,285

1,145,853

56.5
%
Reinsuance

1,528,780

1,388,510

51.5
%
1,491,222

1,352,134

52.9
%
1,060,388

882,544

43.5
%
Total

$
2,989,179

$
2,694,270

100.0
%
$
2,658,989

$
2,553,683

100.0
%
$
2,423,673

$
2,028,397

100.0
%

~~Changes in net premiums earned reflect period to period changes in net premiums written~~increased by 1% and ~~business mix, together with normal variability in earning patterns. The increase~~9%, respectively, primarily reflecting growth in net premiums written in ~~each~~the year. The rate of ~~the last two years reflects the continued~~ growth in our insurance segment was reduced by changes in business mix.

UNDERWRITING EXPENSES

The following table provides a break down of our ~~global~~combined ratio:


Year ended December 31,	2007	Point Change	2006	Point Change	2005

Loss ratio	50.1%	(2.8%)	52.9%	(27.4%)	80.3%
Acquisition cost ratio	14.1%	(0.3%)	14.4%	1.2%	13.2%
General and administrative expense ratio⁽¹⁾	11.1%	1.1%	10.0%	1.7%	8.3%

Combined ratio	75.3%	(2.0%)	77.3%	(24.5%)	101.8%

(1) Our general and administration expense ratio includes corporate expenses not allocated to our underwriting ~~platform since our inception five years ago. Our underwriting objective is to achieve both profitability~~segments of 2.1%, 2.2% and ~~diversity~~1.8%, for 2007, 2006 and 2005, respectively. These costs are discussed further in ~~our portfolio, not simply total premium growth,~~“Other Revenue and in the last three years we have balanced our organic growth and expansions with disciplined underwriting in the face of competitive pricing pressures. Refer to Item 1, “Our Business Strategy” for further discussion. For a detailed account of the movements above refer to the segments discussionExpenses” below.

Loss ratio:The table below shows the components of our net loss and loss expense ratio (“loss ratio”):

Year ended December 31

2006

2005

2004

Current year, before hurricane losses

60.9
%
55.4
%
57.3
%
Hurricane losses

—

39.9
%
13.1
%
Net favorable prior period development

(8.0
)%
(15.0
)%
(9.0
)%
Loss ratio

52.9
%
80.3
%
61.4
%


Year ended December 31,	2007	Point Change	2006	Point Change	2005

Current year	62.4%	1.5%	60.9%	(34.4%)	95.3%
Prior period development	(12.3%)	(4.3%)	(8.0%)	7.0%	(15.0%)

Loss ratio	50.1%	(2.8%)	52.9%	(27.4%)	80.3%

~~Although major~~

Current Year Loss Ratios:

The movements in our current year loss ratios primarily reflect changes in business mix and the level of loss activity each year, rather than from any significant changes in our underlying actuarial assumptions. We experienced below average catastrophe and attritional loss activity during 2007 and 2006, compared to 2005 when we incurred significant losses ~~are an inevitable part~~on KRW.

Our insurance and reinsurance segments have both experienced a shift in business mix towards longer tail lines in recent years. Because our long tail lines typically have a higher initial expected loss ratio relative to our short tail lines, this resulted in a slight increase in our current year loss ratios in the last two years, when isolated from all other variables.

During 2007, a number of large financial institutions incurred significant financial losses relating to delinquencies in the U.S. sub-prime residential mortgage market. Many other companies were also negatively impacted by the write down of investments exposed to the credit market deterioration. These events triggered claims against directors and officers of these institutions as well as providers of professional services. We have reviewed our portfolio for any potential losses relating to these events, including a contract by contract analysis of our exposure to all known suits filed. As a result, we identified potential exposure on some directors and officers and errors and omissions contracts within our insurance segment. While this resulted in a slight increase to the initial expected loss ratios on these related line classes, overall, the current accident year loss ratio on our professional lines book was consistent with 2006 due to the offsetting impact of business mix changes within this book. With regard to the ~~hurricane losses~~professional lines within our reinsurance business, given the emergence of bankruptcies and other business failures, and the uncertainty in ~~2004 and 2005 had such~~this area, we increased our initial expected loss ratio on those potentially impacted classes. However, this did not have a significant impact ~~that we have highlighted them separately above.~~on our overall reinsurance current year loss ratio in 2007 as compared with 2006.

~~The prior~~Prior period reserve development:

Prior period development was the net favorable result of several underlying ~~favorable~~reserve developments on prior accident years, identified during our quarterly reserving process. The following table provides a break down of prior period development by segment:



Year ended December 31,	2007		2006		2005

Insurance	$	214,018	$	167,533	$	268,743
Reinsurance		122,959		49,003		114,253

Total	$	336,977	$	216,536	$	382,996

The amounts above were almost entirely generated from our short-tail lines of business. For our long tail lines, our loss experience from older accident years is generally considered insufficiently developed as yet to recognize deviations from our initial expectations. We have also experienced some adverse reserve development in the last three years, most notably in 2006, when we strengthened our KRW reserves by $105 million, or 3.9 ratio points. The size and ~~adverse developments, primarily~~complexity of KRW resulted in some claims that increased over previously reported damage estimates.

Favorable development on our short tail lines has primarily been due to there being significantly fewer late reported claims than we anticipated in our reserving process. The deviation between expected and actual claims experience is often greater for a company like ours that has a limited operating history and therefore relies more heavily upon industry based loss development profiles. Given the inherent limitations of this, our estimate of ultimate losses in prior years have included a provision for reporting delays and other uncertainties specific to our business. ~~In 2006~~These include the inherent delays we expect to arise from obtaining loss information on excess layers of business across our diverse worldwide exposures. As it ~~included 3.9 percentage points of reserve strengthening~~has transpired, our actual claims experience in ~~relation to Hurricane Katrina, Rita and Wilma. While~~the last three years has been better than we ~~believe that our loss reserves at December 31, 2006 are adequate, new information may lead to future developments in ultimate loss and loss expenses significantly greater or~~projected, with late reporting being less prevalent than ~~the reserves currently provided.~~ we anticipated.

In addition ~~conditions~~to this broader claims experience, favorable reserve development has also occurred as a result of us being able to take down provisions for specific catastrophe events. On contracts that respond to highly visible, major events, we establish IBNR where potential exposure has been identified. However, in a number of instances, mainly within our excess of loss catastrophe reinsurance business, it transpired that claims did not develop to a sufficient level to reach our attachment points.

For further detail on the prior period development refer to the segment discussions below. 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 ~~and~~or deficiencies based on historical experience.

Our loss ratio also fluctuates from year to year depending on a number of other variables that include the level of estimated attritional losses, changes in our mix of business and changes in pricing and other assumptions used to establish our loss ratios. In 2005, the Company began to incorporate its own specific loss information in establishing initial loss ratios on certain short-tail lines of business.

Acquisition Cost ~~Ratio:~~ratio: ~~Our acquisition costs ratio was 14.4%, 13.2% and 13.8% in 2006, 2005 and 2004, respectively.~~

Acquisition costs relate to the commissions, taxes and other fees paid to obtain business offset by commissions received on ceded premiums. Typically, our acquisition costs are based on a percentage of the premium written and ~~will~~ vary by each line of business that we underwrite. ~~Historically,~~

2007 versus 2006: Our acquisition cost ratio in 2007 of 14.1% was comparable with 2006. While we experienced a shift in business mix towards reinsurance business, which typically has higher acquisition costs compared to our insurance segment, costs in our insurance segment were lower this year. This was due to an increase in ceding commissions received as a result of our expanded reinsurance program. Our gross acquisition cost ratio in 2007 of 15.3% was consistent with the prior year.

2006 versus 2005:Our acquisition cost ratio in 2006 of 14.4%, increased by 1.2 ratio points over 2006, primarily reflecting changes in business mix in our insurance segment.

General and Administrative ratio:

2007 versus 2006: Our general and administrative ratio in 2007 of 11.1%, increased by 1.1 ratio points over 2006, primarily reflecting the costs associated with growing the infrastructure 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 to our acquisition ~~costs have included incentive commission costs however we discontinued such arrangements with brokers at~~of the ~~end~~Media Pro business in the second quarter.

2006 versus 2005: Our general and administrative ratio in 2006 of ~~2004. Incentive commissions represented 2.1 percentage~~10.0%, increased by 1.7 ratio points ~~of our 2004 acquisition cost ratio. Our ratio otherwise increased in~~over 2005, ~~compared to 2004~~primarily reflecting an increase in ~~the relative share of net premiums earned generated by~~incentive compensation costs which are tied to our ~~reinsurance segment (see above)~~

where acquisition costs are higher than our insurance segment. The share of reinsurance business stabilized during 2006 and the increase in the ratio in 2006 as compared to 2005 was largely due to business mix changes in our U.S insurance sub-segment.operating results.

~~Investment Income and Net Realized Investment Gains/Losses~~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 and net realized investment gains/~~losses~~losses:


At December 31,	2007		Percentage Change		2006		Percentage Change		2005

Fixed maturities	$	369,825	27	%	$	291,996	33	%	$	218,881
Cash and cash equivalents		90,700	18	%		76,735	180	%		27,413
Other investments		34,351	(26	%)		46,252	173	%		16,957
��
Gross investment income		494,876	19	%		414,983	58	%		263,251
Investment expense		(12,003)	52	%		(7,883)	21	%		(6,539)

Net investment income		482,873	19	%		407,100	59	%		256,712
Net realized investment gains (losses)		5,230	120	%		(25,702)	(52	%)		(16,912)

Net investment income and net realized investment gains (losses)	$	488,103	28	%	$	381,398	59	%	$	239,800


Average investment balances⁽¹⁾:
Cash and fixed maturity investments		9,284,021	18	%		7,835,061	26	%		6,202,944
Other investments		933,499	47	%		634,890	52	%		416,635

Total cash and investments		10,217,520	21	%		8,469,951	28	%		6,619,579

(1)	The average investment balances are calculated by taking the average of the month-end balances during the year.

Net investment income:

2007 versus 2006: Net investment income in 2007 increased 19% versus 2006 reflecting larger investment balances and ~~also~~higher effective yields. The 21% increase in average cash and investment balances primarily reflects positive operating cash flows during the ~~associated yields and returns:~~

Year ended December 31

2006

2005

2004

(in thousands)

Interest income on fixed maturity investments

$
291,996

$
218,881

$
141,929

Interest income on cash and cash equivalents

76,735

27,413

14,684

Changes in fair values of other investments

46,252

16,957

2,482

414,983

263,251

159,095

Investment expense

(7,883
)
(6,539
)
(7,023
)
Net investment income

407,100

256,712

152,072

Net realized (losses) gains on fixed maturity investments

(24,646
)
(24,248
)
16,432

Changes in fair values of investment derivatives

(1,056
)
7,336

(2,798
)
Net realized investment (losses) gains

(25,702
)
(16,912
)
13,634

Net investment income and net realized investment (losses) gains

$
381,398

$
239,800

$
165,706

Annualized effective yield of invested assets(1)

4.6
%
3.9
%
3.4
%
Total return of invested assets(1)

4.6
%
2.3
%
3.4
%
Total return of cash and investments

4.9
%
2.5
%
3.4
%

~~(1)~~ ~~Invested~~year. Our annualized effective yield on invested assets ~~represent assets managed~~(assets under management by external investment ~~managers.~~managers) was 4.9% in 2007 compared to 4.6% in 2006. The increase was principally due to higher U.S. interest rates at the short and intermediate parts of the yield curve. Partially offsetting this increase was a reduction in investment income from our other investments. This mainly resulted from the net sale of $138 million of CLO’s during the year which reduced interest income thereon, coupled with unrealized losses from our credit related funds which was associated with the broad widening of credit spreads in the fixed income markets during the second half of 2007. Refer to the Cash and Investments section below for further discussion.

~~Net investment income:~~2006 versus 2005:Net investment income ~~increased 58.6%~~ in 2006 ~~over~~increased 59% versus 2005 ~~and 68.8% in 2005 over 2004. The growth from period to period is a result of a combination of a~~reflecting larger investment ~~base,~~balances, higher ~~investment~~effective yields and increased income from our ~~allocation to~~ other investments. ~~Our~~The 28% increase in average cash and investment ~~base increased substantially to $8.4 billion in 2006 from $6.4 billion in 2005 and from $4.9 billion in 2004 due to~~balances primarily reflects positive operating cash ~~flow~~flows during 2006 and capital raising activity in late 2005. ~~The growth in the~~Our annualized effective yield on invested assets was ~~primarily~~4.6% in 2006 compared to 3.9% in 2005. The increase was principally due to higher U.S. interest rates at the short end of the yield curve. ~~As an example, the yield on the 3 year U.S. Treasury increased from a 3.22% yield at December 31, 2004 to 4.36% at December 31, 2005 and 4.73% at December 31, 2006.~~ The ~~yield on our portfolio may vary significantly from period to period due primarily to the timing of cash flows, changes~~increase in ~~interest rates and changes in asset allocation. Increased~~investment income from our other ~~investment portfolio is a~~investments was principally the result of ~~larger~~higher allocations combined with better ~~total~~ returns in 2006 from those investments.

Net realized investment ~~losses/gains:~~gains/ losses:

Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return (see below) within specific guidelines, designed to minimize risk. Our fixed maturities portfolio is considered available for sale and reported at fair value. The effect of market movements on our available for sale investment portfolio impacts net income (through net realized gains/losses) when securities are sold or when “other than temporary” impairments are recorded on invested assets. Additionally, net income is impacted (through net realized gains/losses) by changes in the fair value of investment derivatives, mainly forward contracts. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity. The following table provides a breakdown of our net realized investment gains/losses:


Year ended December 31,	2007		2006		2005

On sale of fixed maturities	$	13,874	$	(20,050)	$	(24,248)
Other than temporary impairments		(8,562)		(4,596)		-
Change in fair value of investment derivatives		(82)		(1,056)		7,336

Net realized investment gains (losses)	$	5,230	$	(25,702)	$	(16,912)

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.~~yields. The effect of increasing ~~interest rates~~yields throughout 2005 and 2006 negatively impacted the price of fixed ~~income~~maturity securities resulting in ~~larger unrealized loss positions and consequently, portfolio turnover caused increased~~ realized losses. ~~Additionally, we recognized~~In 2007, our non U.S. dollar portfolios were positively impacted by strengthening exchange rates, when coupled with a rally in the U.S. fixed income market in the second half of the year generated realized ~~losses of $4.6 million (2005 and 2004: nil) from securities that were considered to be~~gains. The other than ~~temporarily impaired.~~temporary impairment charge in 2007 was related to the write down of 67 fixed income securities. These securities were not concentrated to any particular type of investment or sector.

Total Return:

The following table provides a breakdown of our total return:



Year ended December 31,	2007		2006		2005

Net investment income	$	482,873	$	407,100	$	256,712
Net realized investments gains/(losses)		5,230		(25,702)		(16,912)
Change in unrealized gains/(losses)		67,238		38,326		(92,409)

Total		555,341		419,724		147,391


Average cash and investments	$	10,217,520	$	8,469,951	$	6,619,579

Total return on average cash and investments		5.44%		4.96%		2.23%

Our portfolio is managed to maximize total return within certain ~~guidelines.~~guidelines and constraints. In assessing returns under this approach, we include net investment income, net realized investment gains and losses and the change in unrealized gains and losses generated by our investment portfolio.

2007 versus 2006:The increase in our total return was primarily due to higher average yields in 2007 versus 2006, coupled with positive market value movements in US Treasury securities. This was partially offset by broad re-pricing of risk that increased spreads in the corporate, mortgage and asset-backed sectors, which negatively impacted the pricing of these securities.

2006 versus 2005:The increase in our total return between ~~2004~~2005 and 2006 was due to a growing allocation to ~~the~~our higher returning other investments and more significantly an increase in short and intermediate U.S. interest rates which stemmed from the increases in the Federal Funds rate which began in the mid part of 2004 and continued in 2005 and 2006. Despite the steady increase in yield over this period, the magnitude of the rate increases in 2005 had such a negative impact on the fair value of the fixed ~~income~~maturity portfolio that the realized losses and unrealized losses more than offset the increase in yield in that year.

~~Other Revenues and Expense items~~OTHER REVENUES AND EXPENSES

The following table ~~sets forth~~provides a breakdown of our other revenues and expenses:

Year ended December 31

2006

2005

2004

(in thousands)

Corporate expenses

$
(58,822
)
$
(46,729
)
$
(39,109
)
Foreign exchange gains (losses)

32,505

(54,090
)
14,484

Interest expense

(32,954
)
(32,447
)
(5,285
)
Income tax expense

(33,842
)
(6,067
)
(5,440
)

$
(93,113
)
$
(139,333
)
$
(35,350
)


Year ended December 31,	2007		Percentage Change	2006		Percentage Change	2005

Corporate expenses	$	58,300	(1%)	$	58,822	26%	$	46,729
Foreign exchange (gains) losses		(16,826)	(48%)		(32,505)	nm		54,090
Interest expense		51,153	55%		32,954	2%		32,447
Income tax expense		41,491	23%		33,842	458%		6,067

Total	$	134,118	44%	$	93,113	(33%)	$	139,333

nm-not meaningful

Corporate ~~expenses:~~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~~.company. As a percentage of net premiums earned, corporate expenses were ~~2.2%~~2.1%, 2.2% and 1.8% for 2007, 2006 and ~~1.9% for 2006,~~ 2005, ~~and 2004~~ respectively. ~~The movement largely reflects changes in our incentive compensation costs which are tied to our operating results.~~

Foreign exchange ~~gains (losses)~~gains/losses: ~~Our reporting currency is the U.S. dollar; however, some~~Some of our business is written in currencies other ~~currencies.~~than U.S. dollars. The gains in ~~2006 and 2004~~2007 were principally made on the ~~revaluation~~remeasurement of net asset balances denominated in Euro, the Australian dollar and the Canadian dollar, following an appreciation of these currencies against the U.S. dollar of 11.4%, 11.7% and 16.8%, respectively. The gains in 2006 were principally made on the remeasurement of net asset balances denominated in Sterling and Euro, following an appreciation of ~~Sterling and the Euro~~these currencies against the U.S. dollar, ~~whereas~~while in 2005, the depreciation of these same currencies ~~depreciated~~ against the ~~U.S~~U.S. dollar, ~~in 2005 resulting in an~~drove the foreign exchange ~~loss.~~losses that year.

Interest ~~expense:~~expense: Interest expense primarily ~~consists of~~includes interest due on ~~our~~the senior notes ~~that~~ we issued in ~~November 2004, which bear~~2004. In 2007, it also included interest ~~at 5.75%. In December, 2006,~~costs of $19 million incurred on a $400 million repurchase agreement we entered into ~~a $400.0 million repurchase~~in December 2006 to finance our life settlement investment. We terminated this agreement that we anticipate renewing throughout 2007. The repurchase agreement bears interest at a rate of 3 month LIBOR plus 0.9% per annum and therefore we anticipate interest costs to increase significantly duringin September, 2007. For further ~~detail~~information refer to ~~“liability under repurchase agreement” in~~Item 8, Note 5 (b) of the ~~commitments and contingencies~~ ~~section, below.~~Consolidated Financial Statements.

Income tax expense:Income tax expense is generated primarily through our foreign operations in the United States and Europe. ~~Income tax expense increased over the three year period as the foreign operations contribution to income before tax increased.~~ Our effective tax rate on net income, which we calculate as income tax expense divided by income before income tax, was ~~3.4%~~3.7% for ~~2006~~2007 compared with 3.4% in 2006 and 6.0% in ~~2005 and 1.1%~~2005. Changes in ~~2004. The Company’s~~our effective tax rate ~~was higher in 2005 than 2006 or 2004 due to the substantial reduction~~ in the ~~Company’s~~last two years primarily reflect variances in the distribution of net income ~~before tax due to hurricane losses. Changes in~~among our ~~geographic mix of earnings also impact income tax expense and effective tax rate.~~

~~Underwriting Results by Segment: Years ended December 31, 2006, 2005 and 2004~~various taxable jurisdictions.

~~Our business consists of two underwriting segments: insurance and reinsurance. Our insurance segment is further divided into two sub-segments: global insurance and U.S. insurance.~~

~~Insurance Segment Overview~~RESULTS BY SEGMENT

INSURANCE SEGMENT

Overview

Results offrom our insurance segment were as follows:

Year ended December 31

2006

2005

2004

(in thousands)

Revenues:

Gross premiums written

$
2,070,467

$
1,875,017

$
1,919,563

Net premiums written

1,460,399

1,167,767

1,363,285

Net premiums earned

1,305,760

1,201,549

1,145,853

Other insurance related income (loss)

1,758

(5,085
)
10,264

Expenses:

Net losses and loss expenses

(636,684
)
(882,807
)
(686,470
)
Acquisition costs

(152,002
)
(119,000
)
(135,732
)
General and administrative expenses

(155,916
)
(117,703
)
(106,534
)
Underwriting income

$
362,916

$
76,954

$
227,381

Ratios:

Loss ratio

48.8
%
73.5
%
59.9
%
Acquisition cost ratio

11.6
%
9.9
%
11.8
%
General and administrative ratio

11.9
%
9.8
%
9.3
%
Combined ratio

72.3
%
93.2
%
81.0
%


Year ended December 31,	2007		Percentage Change	2006		Percentage Change	2005

Revenues:
Gross premiums written	$	2,039,214	(2%)	$	2,070,467	10%	$	1,875,017
Net premiums written		1,326,647	(9%)		1,460,399	25%		1,167,767
Net premiums earned		1,208,440	(7%)		1,305,760	9%		1,201,549
Other insurance related income (loss)		1,860			1,758			(5,085)
Expenses:
Current year net losses and loss expenses		(748,282)			(804,217)			(1,151,550)
Prior period reserve development		214,018			167,533			268,743
Acquisition costs		(126,423)			(152,002)			(119,000)
General and administrative expenses		(175,810)			(155,916)			(117,703)

Underwriting income	$	373,803	3%	$	362,916	372%	$	76,954


			Point Change			Point Change
Ratios:
Current year loss ratio		61.9%	0.3%		61.6%	(34.3%)		95.9%
Prior period reserve development		(17.7%)	(4.9%)		(12.8%)	9.6%		(22.4%)
Acquisition cost ratio		10.5%	(1.1%)		11.6%	1.7%		9.9%
General and administrative ratio		14.5%	2.6%		11.9%	2.1%		9.8%

Combined ratio		69.2%	(3.1%)		72.3%	(20.9%)		93.2%

~~The mix of business~~2007 versus 2006:In 2007, underwriting income in our insurance segment ~~has evolved~~increased 3% over the ~~last three years in response to market conditions and opportunities. We have significantly reduced our participation on aviation and aviation war business since 2004~~prior year, primarily due to ~~pricing pressures; however, growth~~higher levels of prior period reserve development. Underwriting income otherwise decreased during 2007, reflecting a reduction in ~~professional lines~~net premiums earned and ~~political risk~~an increase in our general and administrative expenses. The 7% reduction in net premiums earned was primarily due to an increase in premiums ceded this year, associated with an expansion of our reinsurance coverage and also changes in business ~~mitigated~~mix. The increase in our general and administrative cost ratio was partially related to the ~~decline~~reduction in ~~total premium~~net premiums earned but was also due to the costs of growing our underwriting platform, in particular those costs associated with the ~~segment.~~Media Pro business we purchased during the year.

~~Our loss ratio~~

2006 versus 2005:Underwriting income in 2006 increased significantly over 2005, included 33.8 percentage points of net losses incurred relating to Hurricanes Katrina, Rita and Wilma while our 2004 loss ratio included 8.5 percentage points relating to Hurricanes Charley, Frances, Ivan and Jeanne. In 2006 there wasreflecting an absence of major catastrophes ~~and therefore our reported loss ratio was significantly lower. Our underwriting results have also been significantly impacted by development on prior year net loss reserves. In~~in 2006 ~~we experienced net favorable prior year development of 12.8 percentage points~~ compared to ~~22.4 percentage points and 9.3 percentage points~~2005 when we incurred significant losses from KRW. The 9% increase in net premiums earned in 2006 was driven by lower ceded premiums amortized which were significantly higher in 2005 ~~and 2004, respectively.~~

~~2007 outlook~~

Generally, we are satisfied that the broad property and casualty insurance marketplace, provides us ample opportunity to target attractively priced risks. Current rate levels for some lines of business, like catastrophe-exposed property and energy business, continue to produce returns above historic levels. In areas where the competition has been much more aggressive, such as terrorism and aviation, we are maintaining a conservative posture. Other lines, such as primary casualty, umbrella, and professional lines, still contain good profit potential, but bear closer scrutiny. Smaller accounts are experiencing less pricing pressure and we continue to develop our capabilities for efficiently accessing and underwriting these accounts.

~~The~~ following ~~is a discussion of the underwriting results within our global and U.S. insurance sub-segments:~~

~~Global Insurance Sub-Segment~~ceded reinstatements on KRW.

~~Results of our global insurance sub-segment were as follows:~~

Year ended December 31

2006

2005

2004

(in thousands)

Revenues:

Gross premiums written

$
958,251

$
861,098

$
1,095,328

Net premiums written

850,533

649,703

933,198

Gross premiums earned

885,348

971,548

913,382

Net premiums earned

746,393

748,015

796,566

Other insurance related (loss) income

—

(5,865
)
10,264

Expenses:

Net losses and loss expenses

(331,778
)
(492,667
)
(451,724
)
Acquisition costs

(102,673
)
(97,908
)
(124,953
)
General and administrative expenses

(49,058
)
(36,794
)
(35,052
)
Underwriting income

$
262,884

$
114,781

$
195,101

Ratios:

Loss ratio

44.5
%
65.9
%
56.7
%
Acquisition cost ratio

13.8
%
13.1
%
15.7
%
General and administrative ratio

6.6
%
4.9
%
4.4
%
Combined ratio

64.9
%
83.9
%
76.8
%

Insurance Premiums

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

Year ended December 31

2006

2005

2004

(in thousands)

Property

$
237,155

24.7
%
$
203,258

23.6
%
$
249,200

22.7
%
Marine

182,233

19.0
%
162,893

18.9
%
177,592

16.2
%
Terrorism and War Risk

160,140

16.7
%
190,139

22.1
%
318,887

29.1
%
Aviation and Aerospace

41,128

4.3
%
87,421

10.1
%
175,829

16.1
%
Political Risk

208,625

21.8
%
128,904

15.0
%
125,448

11.5
%
Professional Lines and Other Specialty

128,970

13.5
%
88,483

10.3
%
48,372

4.4
%
Total

$
958,251

100.0
%
$
861,098

100.0
%
$
1,095,328

100.0
%


										Percentage Change
Year ended December 31,	2007			2006⁽¹⁾			2005⁽¹⁾			06 to 07	05 to 06

Property	$	659,595	32%	$	641,245	31%	$	553,744	29%	3%	16%
Marine		218,030	11%		242,759	12%		199,602	11%	(10%)	22%
Terrorism		51,757	3%		81,838	4%		87,473	5%	(37%)	(6%)
Aviation		70,387	3%		113,392	5%		181,969	10%	(38%)	(38%)
Political risk		232,549	11%		209,629	10%		129,368	7%	11%	62%
Professional lines		528,616	26%		493,754	24%		431,654	23%	7%	14%
Liability		248,562	12%		253,973	12%		272,669	14%	(2%)	(7%)
Accident and health		29,718	2%		33,877	2%		18,538	1%	(12%)	83%

Total	$	2,039,214	100%	$	2,070,467	100%	$	1,875,017	100%	(2%)	10%

~~Several~~(1) To facilitate period to period comparisons, certain amounts previously included in our property and liability lines in previous years have been reclassified to our marine line of business to conform to our current presentation.

2007 versus 2006:In general, market conditions globally were increasingly competitive during 2007 and, as a result, we experienced increased pricing pressure across many of our insurance lines. The overall stability of gross premiums written in 2007 versus 2006 reflects our breadth of products and markets worldwide, which gives us the flexibility to allocate capacity where we see the best-rated opportunities. Political risk premium ~~trends that characterized 2005 continued into 2006. We continued~~can vary considerably between periods depending on the timing of transactions. However, additional underwriters in this line have allowed us to ~~reduce our participation~~increase the number of contracts written this year, the majority of which were related to emerging market sovereign and corporate credit insurance. The other notable increase in 2007 was on ~~terrorism and war risk and aviation and aerospace lines due to pricing considerably below our threshold for this business. Simultaneously, we grew~~ our professional lines book. This was largely associated with renewal rights acquired in the ~~addition~~May 2007 purchase of ~~a London market-based underwriting team~~the Media Pro business. Other than U.S. exposed catastrophe property business, which continued to present good opportunities, market conditions in ~~early 2004~~our other lines of business continued to be less favorable during 2007. This largely limited our ability to expand these lines, although we continued to seek out the better priced and ~~the acquisition of a large specialty program in mid-2005. While total gross~~structured opportunities.

2006 versus 2005:Gross premiums written ~~decreased in 2005 over 2004, we experienced an increase of 11.3%~~ in 2006 ~~over~~increased 10% versus 2005, reflecting growth in several lines of business. The increase in property premium was primarily due to several factors. During 2005, the property and offshore energy markets were characterized by strong competition, particularly on non-U.S. exposures, with pricing pressure leading to reductions in our renewal participation. However, this trend reversed in 2006significant rate increases for natural ~~perils-~~

~~exposed~~peril-exposed property and offshore energy risks in the U.S. and Gulf of Mexico, ~~where significant rate increases were implemented~~ following ~~the 2005 hurricane losses. Growth~~KRW. Gross premiums written in ~~these lines would have been greater had it not been for initiatives to reduce our natural peril catastrophe exposure. In 2006, we grew~~ our political risk ~~business~~book increased through a combination of an additional underwriting resource and new market opportunities. Our professional lines unit generated additional premiums during 2006 reflecting an expansion of our London and U.S. operations in recent years. The increase in premium in our marine line was largely associated with growth of two custom accounts which we began to write in 2005. Partially offsetting these increases was our reduced participation for terrorism and aviation business due to pricing considerably below our threshold. We also experienced a reduction in excess and surplus primary liability premium, which was primarily due to a more competitive market.

Premiums ceded:

~~Ceded premiums:~~2007 versus 2006:~~The percentage of premiums~~Premiums ceded in ~~our global insurance sub-segment varies depending on our analysis of the relative attractiveness of reinsurance buying opportunities. Premiums ceded as a percentage~~2007 were $713 million, or 35% of gross premiums written, compared with $610 million, or 29% of gross premiums written in 2006. The increase in premiums ceded was ~~11.2%, 24.5%~~largely related to the impact of changes in business mix and ~~14.8%~~additional reinsurance cover purchased during the year. While we significantly reduced gross premiums written on our aviation and terrorism lines during 2007, we offset these reductions with growth of our political risk, property and professional lines business. Because we have historically purchased more reinsurance cover on our property and professional lines business relative to our aviation and terrorism lines, this change in business mix had the effect of increasing our ceded premium ratio. Furthermore, we also purchased additional coverage this year, both on our professional lines quota share reinsurance and also on our worldwide property program.

2006 versus 2005:Premiums ceded in 2006 ~~2005 and 2004, respectively.~~were $610 million, or 29% of gross premiums written, compared with $707 million, or 38% of gross premiums written in 2005. The ~~significant increase in ceded premiums in 2005~~decrease was ~~largely~~primarily due to lower ceded reinstatement premiums. These were significantly higher ~~reinstatement premiums~~in 2005 following our utilization of reinsurance protections on Hurricanes Katrina, Rita and Wilma. In 2006, there were few attractive reinsurance buying opportunities and we concentrated on reducing our gross exposures in order to mitigate volatility in our portfolio.KRW.

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

Year ended December 31

2005

2004

(in thousands)

Property

$
168,248

22.5
%
$
151,905

20.3
%
$
199,774

25.1
%
Marine

139,655

18.7
%
95,059

12.7
%
133,883

16.8
%
Terrorism and War Risk

196,513

26.3
%
262,458

35.1
%
252,061

31.6
%
Aviation and Aerospace

53,298

7.1
%
121,412

16.2
%
148,184

18.6
%
Political Risk

87,972

11.8
%
54,202

7.2
%
38,491

4.8
%
Professional Lines and
Other Specialty

100,707

13.6
%
62,979

8.5
%
24,173

3.1
%
Total

$
746,393

100.0
%
$
748,015

100.0
%
$
796,566

100.0
%



										Percentage Change
Year ended December 31,	2007			2006⁽¹⁾			2005⁽¹⁾			06 to 07	05 to 06

Property	$	317,497	26%	$	335,759	26%	$	313,438	26%	(5%)	7%
Marine		156,981	13%		178,128	14%		110,637	9%	(12%)	61%
Terrorism		59,674	5%		84,441	6%		80,736	7%	(29%)	5%
Aviation		88,280	7%		160,561	12%		297,643	25%	(45%)	(46%)
Political risk		112,837	9%		88,100	7%		55,081	4%	28%	60%
Professional lines		330,646	28%		312,898	24%		203,353	17%	6%	54%
Liability		109,005	9%		117,242	9%		128,408	11%	(7%)	(9%)
Accident and health		33,520	3%		28,631	2%		12,253	1%	17%	134%

Total	$	1,208,440	100%	$	1,305,760	100%	$	1,201,549	100%	(7%)	9%

~~Between 2005~~(1) To facilitate period to period comparisons, certain amounts previously included in our property and ~~2006~~liability lines in previous years have been reclassified to our marine line of business to conform to our current presentation.

2007 versus 2006:The 7% decrease in net premiums earned ~~decreased by 0.2% despite~~in 2007 largely reflects an ~~increase~~9% reduction in net premiums written ~~of 30.9%. This partially relates to the significant reduction in aviation and aviation war premium since 2004. This business is primarily renewed~~ in the ~~fourth quarter. Consequently, 2005 includes~~year, associated with the ~~earn-out of significantly more aviation and aviation war~~increase in premiums ceded.

2006 versus 2005:The 9% growth in net premium ~~from the 2004 underwriting year than was~~ earned in 2006 ~~from the 2005 underwriting year. In assessing~~was impacted by KRW related ceded reinstatement premiums, amortized in 2005. Net premiums earned otherwise increased 1%, compared with growth in net premiums written in the year of 15% (also excluding KRW reinstatements). Net premium earned ~~another~~growth was reduced by the fact that a significant ~~consideration relates to~~portion of our net premium written in 2006 was generated from our political risk book. This ~~line~~business typically provides multi-year ~~insurance~~ coverage and therefore the earning of this premium is ~~earned~~spread over a greater number of ~~years. Less than 10% of~~periods. In addition, premiums ~~written~~earned on our aviation line decreased significantly in 2006 ~~were earned~~having substantially reduced our participation for this business in ~~2006. This was also due to the fact that a significant amount of premiums were written in the last quarter.~~recent years.

Insurance Losses

Loss ratio:The table below shows the components of our loss ratio:

Year ended December 31

2006

2005

2004

(in thousands)

Current year, before hurricane losses

61.0
%
59.7
%
62.0
%
Hurricane losses

—

38.6
%
6.3
%
Prior period net favorable development

(16.5
)%
(32.4
)%
(11.6
)%
Loss ratio

44.5
%
65.9
%
56.7
%



Year ended December 31,	2007	Point Change	2006	Point Change	2005
Current year	61.9%	0.3%	61.6%	(34.3%)	95.9%
Prior period reserve development	(17.7%)	(4.9%)	(12.8%)	9.6%	(22.4%)

Loss ratio	44.2%	(4.6%)	48.8%	(24.7%)	73.5%

Current Year Loss Ratios:

2007 versus 2006:Our current year loss ratio in 2007 was relatively flat compared with 2006. Although ~~major losses are an inevitable part of~~changes in business mix increased our ~~business, the hurricane~~current year ratio in 2007, this was largely offset by lower attritional losses in ~~2004~~the year, most notably on our energy onshore account. During 2007, we experienced a shift in business mix from aviation and terrorism lines to our professional lines account. Our professional lines business typically has a higher initial expected loss ratio than our aviation and terrorism lines.

2006 versus 2005:Our current year loss ratio in 2006 was 34.3 ratio points lower than in 2005, ~~had such a~~reflecting an absence of major catastrophe losses in 2006 compared to 2005 when we incurred significant ~~impact that we have highlighted them separately above. The~~losses on KRW.

Prior Period Reserve Development:

We recognized net favorable prior period reserve development ~~was the~~of $214 million, $168 million and $269 million, in 2007, 2006 and 2005, respectively. These amounts were almost entirely generated from our short-tail lines of business.

For our long tail lines, our loss experience on older accident years is generally considered insufficiently developed as yet to recognize deviations from our initial expectations. The only two significant exceptions to this both occurred during 2007. First, we recognized $15 million, or 1.3 ratio points, of favorable development on our directors and officers’ liability business. This related to a specific claim, which we had previously made provision for, but removed following a favorable court ruling. Second, we recognized $6 million, or 0.5 ratio points, of adverse development on our accident year 2004 and 2005 casualty reserves, due to a higher than expected emergence of claims on a specific program.

The net ~~result of several underlying~~ favorable ~~and adverse developments, primarily~~reserve development on our short tail lines, which we have recognized due to the emergence of ~~business.~~better than expected loss experience, is summarized as follows:

2007: The largest component of favorable development in 2007 was on 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 on previously reported claims. The balance of the favorable development in 2007 was generated from our accident year 2003 and 2004 aviation, marine and property lines. Accident year 2005 included adverse development on claims arising from KRW of approximately $34 million, or 2.8 ratio points. The majority of this development was on our property and energy offshore lines. The nature and extent of KRW resulted in some claims that increased over previously reported damage estimates. We also experienced adverse development of $8 million, or 0.7 ratio points, on our 2006 accident and health business due to a higher than expected emergence of claims.

2006: Favorable development in 2006 was largely generated by our accident year 2003-2005 aviation and property lines and accident year 2003-2004 marine lines. This was partially offset by adverse development of $51 million, or 3.9 ratio points, on claims arising from KRW, and was largely related to losses on our energy offshore account.

2005: In ~~2006 it included 7.9 percentage~~2005, we generated approximately $107 million, or 8.9 ratio points, of ~~reserve strengthening in relation~~favorable development on our aviation and terrorism lines, predominately from accident year 2004. The majority of this related to ~~Hurricanes Katrina, Rita and Wilma.~~

Our loss ratio also fluctuates year on year depending on a number of variables that include the volume of estimated attritional losses, changes in mix of business and changes in pricing and other assumptions used to establish our loss ratios. In 2005, the Company began to incorporate its own specific loss information in establishing initial net loss ratios on certain short tail lines of business.

~~Acquisition Costs:~~ Incentive commission costs accounted for 3.3 percentage points of our 2004 acquisition cost ratio however we discontinued such arrangements at the end of that year. Our acquisition cost ratio has otherwise increased in each of the last two years reflecting changes in our ~~mix~~loss development profiles on these lines. Having observed a lack of ~~business.~~claim development on our aviation war and terrorism business, we adjusted our reserving assumptions on these lines to incorporate reporting that was more prompt than we had originally expected. The balance of the other favorable development in 2005 was largely generated from our accident year 2002-2004 property and energy accounts.

2008 Insurance Outlook

We expect competition and rate pressures to further intensify across the insurance marketplace during 2008. The benign insured catastrophe season in 2007 combined with increasing capacity in the market is expected to contribute towards an even more competitive pricing environment throughout our property lines. For catastrophe-exposed property and energy business, this pressure is against historically-high price levels, and therefore we still foresee the opportunity to target business that meets our pricing threshold. For U.S. retail property business, we are beginning to witness pressure on terms and conditions, including increased sub limits and lower deductibles, and we continue to maintain our cautious posture on this line. Our aviation and terrorism lines continue to be under significant pricing pressure and we expect to reduce our participation on this business further in 2008.

In our liability business, we continue to witness increasing competitive pricing pressure, particularly on our larger U.S. excess and surplus accounts. In our professional lines business, there remain some pricing pressures, although we are now witnessing some moderation in competition in our financial institutions business, driven by the impact of deterioration in the credit markets. We believe our areas of focus in both our liability and professional lines business still contain good profit potential, but risk selection and overall execution strategy have become more critical.

~~U.S Insurance~~REINSURANCE SEGMENT

Overview

Results from our reinsurance segment were as follows:


Year ended December 31,	2007		Percent Change	2006		Percent Change	2005

Revenues:
Gross premiums written	$	1,550,876	1%	$	1,538,569	1%	$	1,518,868
Net premiums written		1,537,110	1%		1,528,780	3%		1,491,222
Net premiums earned		1,525,970	10%		1,388,510	3%		1,352,134
Other insurance related income		2,051			1,135			-
Expenses:
Current year net losses and loss expenses		(958,955)			(838,174)			(1,282,575)
Prior period reserve development		122,959			49,003			114,253
Acquisition costs		(258,074)			(234,957)			(218,383)
General and administrative expenses		(69,721)			(53,658)			(48,410)

Underwriting income (loss)	$	364,230	17%	$	311,859	nm	$	(82,981)


			Point Change			Point Change
Ratios:
Current year loss ratio		62.9%	2.6%		60.3%	(34.6%)		94.9%
Prior period reserve development		(8.1%)	(4.6%)		(3.5%)	5.0%		(8.5%)
Acquisition cost ratio		16.9%	-		16.9%	0.7%		16.2%
General and administrative ratio		4.6%	0.7%		3.9%	0.3%		3.6%

Combined ratio		76.3%	(1.3%)		77.6%	(28.6%)		106.2%

nm – not meaningful

2007 versus 2006:In 2007, underwriting income in our reinsurance segment increased 17% over the prior year, primarily due to higher levels of prior period reserve development. Underwriting income otherwise decreased during 2007, primarily reflecting an increase in our current year loss ratio. This was in large part due to changes in our business mix, with a significant portion of our growth in net premium earned this year arising from longer tail lines, which typically have a higher initial expected loss ratio compared to our other business.

2006 versus 2005:Underwriting income in 2006 increased significantly over 2005, reflecting an absence of major loss activity in 2006, compared to 2005 when we incurred significant losses from KRW. Excluding the impact of reinstatement premiums on KRW in 2005, net premiums earned increased 9% in 2006, reflecting growth of our U.S. ~~insurance sub-segment were as follows:~~and European reinsurance business.

Year ended December 31

2006

2005

2004

(in thousands)

Revenues:

Gross premiums written

$
1,112,216

$
1,013,919

$
824,235

Net premiums written

609,866

518,064

430,087

Gross premiums earned

1,070,619

918,271

689,037

Net premiums earned

559,367

453,534

349,287

Other insurance related income

1,758

780

—

Expenses:

Net losses and loss expenses

(304,906
)
(390,140
)
(234,746
)
Acquisition costs

(49,329
)
(21,092
)
(10,779
)
General and administrative expenses

(106,858
)
(80,909
)
(71,482
)
Underwriting income (loss)

$
100,032

$
(37,827
)
$
32,280

Ratios:

Loss ratio

54.5
%
86.0
%
67.2
%
Acquisition cost ratio

8.8
%
4.7
%
3.1
%
General and administrative ratio

19.1
%
17.8
%
20.5
%
Combined ratio

82.4
%
108.5
%
90.8
%

Reinsurance Premiums

Gross ~~premiums written:~~Premiums Written: The following table provides gross premiums written by line of business:

Year ended December 31

2006

2005

2004

(in thousands)

Property

$
432,921

38.9
%
$
366,578

36.2
%
$
322,302

39.1
%
Professional Lines

365,787

32.9
%
343,635

33.9
%
272,224

33.0
%
Liability

279,631

25.1
%
285,168

28.1
%
229,562

27.9
%
Other Specialty

33,877

3.1
%
18,538

1.8
%
147

0.0
%
Total

$
1,112,216

100.0
%
$
1,013,919

100.0
%
$
824,235

100.0
%



										Percent Change
Year ended December 31,	2007			2006			2005			06 to 07	05 to 06
Catastrophe	$	471,514	30%	$	464,096	30%	$	520,057	34%	2%	(11%)
Property		281,363	18%		338,562	22%		383,278	25%	(17%)	(12%)
Professional lines		230,040	15%		274,435	18%		232,259	15%	(16%)	18%
Credit and bond		124,976	8%		97,664	6%		103,277	7%	28%	(5%)
Motor		96,999	6%		84,171	6%		73,992	5%	15%	14%
Liability		244,612	16%		204,619	13%		165,122	11%	20%	24%
Other		101,372	7%		75,022	5%		40,883	3%	35%	84%

Total	$	1,550,876	100%	$	1,538,569	100%	$	1,518,868	100%	1%	1%

2007 versus 2006:Gross premiums written in 2007 benefited from a weakened dollar relative to 2006. In ~~2006 we were able to consolidate, build~~particular, the dollar was weaker against the Euro and ~~strengthen the market position we had established by the end~~Sterling at our major reinsurance renewal date of ~~2005. The majority of growth~~January 1. Excluding this impact, gross premiums written decreased 3% in 2006 was driven by significant rate increases in our natural peril exposed property catastrophe business following the 2005 hurricane losses. This was achieved while substantially reducing our natural peril aggregate exposures. The premium trends that characterized 2005 continued into 2006. These included: growth of custom accounts2007, reflecting reductions in our property ~~line~~and professional lines business. The decrease in property premiums was primarily due to a large 16-month pro rata contract, written in the fourth quarter of ~~business, writing additional errors and omissions insurance in our~~2006. Our professional lines book ~~(having appointed a managing general underwriter effective January 1, 2005), expanding our umbrella and excess liability~~was impacted by the non-renewal of several large contracts, driven by cedants opting to increase their retention of business. Our other lines of business ~~and growing our employer stop-loss business in our other specialty account. Despite the aforementioned~~

all reported an increase in ~~umbrella and excess premiums, growth in our liability book was tempered during 2006 by a reduction in excess and surplus primary business due to a more competitive market.~~

~~Ceded premiums:~~ ~~Premiums ceded as a percentage of~~ gross premiums written ~~was 45.2%, 48.9% and 47.8%~~ in ~~2006, 2005 and 2004, respectively. The increase~~2007. These increases were largely generated from our increased participation in the ~~percentage of~~U.S. and European reinsurance markets, mainly during the January 1 renewal season.

2006 versus 2005:Gross premiums ~~ceded~~written in 2005 were inflated by significant KRW related reinstatement premiums. Excluding the impact of these, which were mostly on our catastrophe book, gross premiums written increased 8% in 2006. This growth was ~~largely~~primarily due to ~~higher reinstatement premiums following~~an expansion of our ~~utilization~~U.S. and European operations, which allowed us to increase our market penetration for professional lines and liability business in particular. We also wrote new property exposed engineering business, included within our “other” line of reinsurance protections on Hurricanes Katrina, Rita and Wilma. The 2006 ratio was also impacted by business mix; a higher percentage of earned premiums were derived from our errors and omissions book which has a low ceding percentage.business.

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

Year ended December 31

2006

2005

2004

(in thousands)

Property

$
184,153

32.9
%
$
166,478

36.7
%
$
154,336

44.2
%
Professional Lines

212,319

38.0
%
141,253

31.1
%
79,431

22.7
%
Liability

134,264

24.0
%
133,550

29.5
%
115,503

33.1
%
Other Specialty

28,631

5.1
%
12,253

2.7
%
17

0.0
%
Total

$
559,367

100.0
%
$
453,534

100.0
%
$
349,287

100.0
%



Year ended December 31,	2007			2006			2005			Percent Change
Year ended December 31,	2007			2006			2005			06 to 07	05 to 06
Catastrophe	$	463,091	30%	$	441,311	32%	$	497,724	37%	5%	(11%)
Property		333,064	22%		335,462	24%		346,134	26%	(1%)	(3%)
Professional lines		245,672	16%		225,902	16%		207,298	15%	9%	9%
Credit and bond		107,618	7%		94,487	7%		83,030	6%	14%	14%
Motor		98,997	6%		86,193	6%		73,249	5%	15%	18%
Liability		217,645	15%		165,391	12%		110,242	8%	32%	50%
Other		59,883	4%		39,764	3%		34,457	3%	51%	15%

Total	$	1,525,970	100%	$	1,388,510	100%	$	1,352,134	100%	10%	3%

~~Changes in~~In 2007, net premiums earned ~~reflect~~increased 10% over 2006, while gross premiums written stayed mostly flat. The correlation between gross premiums written and net premiums earned in a particular calendar year varies depending on normal variability in earning patterns and also period to period changes in business mix. The composition of premiums written in each of our lines of business varies. For example, on our catastrophe and motor accounts, we typically write 12-month non-proportional contracts, largely in the first quarter of the year. Consequently changes in gross premiums written on these lines more closely align to changes in net premiums earned in a given calendar year. In contrast, our professional lines premium is written more evenly throughout the year and includes a higher level of proportional business. Consequently, net premiums earned in a calendar year on this line tend to include a significant amount of premium written in prior years. For example, in 2007, approximately 69% of premium earned on our professional lines business ~~mix, together with normal variability in earning patterns. The increase~~was from prior underwriting years. Overall, the growth in net premiums earned in each of the last two years reflects ~~growth~~the expansion of our U.S and European reinsurance operations in ~~our net premiums written. Changes in mix of business over this period have not significantly impacted this trend.~~the last several years.

Reinsurance Losses

Loss ~~Ratio:~~ratio:The table below shows the components of our loss ratio:

Year ended December 31

2006

2005

2004

Current year, before hurricane losses

62.4
%

66.0
%

57.9
%

Hurricane losses

—

25.8
%

13.4
%

Net favorable prior period development

(7.9
)%

(5.8
)%

(4.1
)%

Loss ratio

54.5
%

86.0
%

67.2
%


Year ended December 31,	2007	Point Change	2006	Point Change	2005

Current year	62.9%	2.6%	60.3%	(34.6%)	94.9%
Prior period reserve development	(8.1%)	(4.6%)	(3.5%)	5.0%	(8.5%)

Loss ratio	54.8%	(2.0%)	56.8%	(29.6%)	86.4%

~~Although major losses are an inevitable part of~~Current Year Loss Ratios:

The movements in our current year loss ratios primarily reflect changes in business ~~the hurricane losses in 2004~~mix and 2005 had such a significant impact that we have highlighted them separately above. Net favorable development in each of the last three years has been driven by lower than expected frequency and severity on our property accounts. In 2006, approximately 86.0% of the net favorable development related to the 2005 accident year.

~~Our loss ratio also fluctuates year on year depending on a number of other variables that include~~ the level of ~~estimated attritional losses,~~loss activity each year, rather than from any significant changes in our ~~business mix and~~underlying actuarial assumptions.

2007 versus 2006:Our current year loss ratio in 2007 was 2.6 ratio points higher compared with 2006, partially reflecting changes in ~~pricing~~business mix. We experienced a shift towards liability business, which typically has a higher initial expected loss ratio compared to our other lines. Although there was a higher incidence of mid-sized catastrophes in 2007, most notably European windstorm Kyrill and ~~other assumptions used~~flood damages in the UK, our exposure to ~~establish~~these events did not have a substantial impact on our ~~loss ratios.~~total estimated current year losses relative to 2006.

~~Acquisition Costs:~~2006 versus 2005: ~~Incentive commission costs accounted for 3.9 percentage points of our 2004 acquisition cost ratio, however, we discontinued such arrangements at the end of that year.~~ Our current year loss ratio has otherwise increased in each of the last two years reflecting the growing share of business generated by managing general underwriters within our professional lines book. This business generally has higher gross acquisition costs than the rest of the book and a significant portion of it does not have an override commission associated with reinsurance coverage.

~~Reinsurance Segment~~

~~Results in our reinsurance segment were as follows:~~

Year ended December 31

2006

2005

2004

(in thousands)

Revenues:

Gross premiums written

$
1,538,569

$
1,518,868

$
1,092,748

Net premiums written

1,528,780

1,491,222

1,060,388

Gross premiums earned

1,397,917

1,388,447

908,428

Net premiums earned

1,388,510

1,352,134

882,544

Other insurance related income

1,135

—

989

Expenses:

Net losses and loss expenses

(789,171
)
(1,168,322
)
(559,774
)
Acquisition costs

(234,957
)
(218,383
)
(144,836
)
General and administrative expenses

(53,658
)
(48,410
)
(41,662
)
Underwriting income (loss)

$
311,859

$
(82,981
)
$
137,261

Ratios:

Loss and loss expenses ratio

56.8
%
86.4
%
63.5
%
Acquisition cost ratio

16.9
%
16.2
%
16.4
%
General and administrative ratio

3.9
%
3.6
%
4.7
%
Combined ratio

77.6
%
106.2
%
84.6
%

~~The increase in underwriting income~~ in 2006 ~~reflects~~was 34.6 ratio points lower than in 2005, reflecting an absence of major catastrophe losses in 2006 compared to 2005 when we incurred significant losses on KRW.

Prior period reserve development:

We recognized net favorable development of $123 million, $49 million and ~~2004.~~$114 million, in 2007, 2006 and 2005 respectively. These amounts were almost entirely generated from our short-tail lines of business. For our long tail lines, our loss experience on older accident years is generally considered insufficiently developed as yet to recognize deviations from our initial expectations. The ~~book of business underlying~~only significant adverse development on our ~~results has grown considerably~~long tail lines in the last three years ~~reflecting~~was on our ~~geographic~~motor liability account. Due to higher than expected loss emergence on this account, in 2006 we increased our accident year 2004 and ~~product expansion.~~2005 expected ultimate losses on this account by $9 million, or 0.7 percentage points.

~~Gross Premiums Written:~~The ~~following table provides gross premiums written by line~~net favorable reserve development on our short tail lines, which we have recognized with the emergence of ~~business:~~

Year ended December 31

2006

2005

2004

(in thousands)

Catastrophe

$
464,096

30.2
%
$
520,057

34.2
%
$
424,847

38.9
%
Property

338,562

22.0
%
383,278

25.2
%
246,838

22.6
%
Professional Lines

274,435

17.8
%
232,259

15.3
%
204,637

18.7
%
Credit and bond

97,664

6.3
%
103,277

6.8
%
73,352

6.7
%
Motor

84,171

5.5
%
73,992

4.9
%
37,761

3.4
%
Liability

204,619

13.3
%
165,122

10.9
%
80,496

7.4
%
Other

75,022

4.9
%
40,883

2.7
%
24,817

2.3
%
Total

$
1,538,569

100.0
%
$
1,518,868

100.0
%
$
1,092,748

100.0
%

better than expected loss experience, is summarized as follows:

~~Our reinsurance segment provides treaty property and casualty reinsurance on a worldwide basis through~~2007: The majority of the net favorable development in 2007 was related to our ~~offices in Bermuda, the U.S and Europe. We initially began writing traditional~~ catastrophe and property reinsurance from our Bermuda office, however, following the commencement of our U.S and European operations in 2003, we have since expanded into specialty property risks, casualty, motor, credit and bond and other select risks. The substantial increase in gross premiums written between 2004 and 2005 primarily reflects the early growth and market penetration of these new operations. In 2006, although we further increased our participation on all these lines of business, ~~growth was naturally less significant than in earlier periods. In addition unfavorable foreign exchange rates reduced gross premiums written in~~principally from accident year 2006. For these lines, accident year 2006 ~~relative to 2005.~~

Trends in our catastrophe account over the last three years are distorted by reinstatement premiums. These were significantly higher in 2005 following cedants’ utilization of coverage in Hurricanes Katrina, Rita and Wilma. Excluding reinstatement premiums, we experienced growth in our catastrophe book of 3.8% between 2005 and 2006. This was driven by significant rate increases, particularly on U.S exposures impacted by the hurricane losses of 2005. Growth, however, was tempered by our decision to reduce our aggregate natural peril catastrophe exposures on this line. The decrease in gross premiums written in our property account in 2006 is driven by a reduction in our property pro rata renewal. This was partially a result of certain cedants exiting the property market and was also due to the fact that such business was considered less attractive than in 2005.

~~Ceded premiums written:~~ Premiums ceded as a percentage of gross premiums written was 0.6%, 1.8% and 3.0% in 2006, 2005 and 2004 respectively. We primarily purchase reinsurance as and when market opportunities arise to mitigate the impact of catastrophe loss events. Consequently, the level of premiums ceded can fluctuate period to period. The percentage of premiums ceded was lower in 2006 due to a reduction in the availability of appropriately priced coverage.

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

Year ended December 31

2006

2005

2004

(in thousands)

Catastrophe

$
441,311

31.8
%
$
497,724

36.8
%
$
396,753

45.0
%
Property

335,462

24.1
%
346,134

25.6
%
188,572

21.4
%
Professional Lines

225,902

16.3
%
207,298

15.3
%
142,183

16.1
%
Credit and bond

94,487

6.8
%
83,030

6.1
%
36,873

4.2
%
Motor

86,193

6.2
%
73,249

5.4
%
29,617

3.3
%
Liability

165,391

11.9
%
110,242

8.2
%
67,862

7.7
%
Other

39,764

2.9
%
34,457

2.6
%
20,684

2.3
%
Total

$
1,388,510

100.0
%
$
1,352,134

100.0
%
$
882,544

100.0
%

Changes in net premiums earned reflect period to period changes in net premiums written and business mix, together with normal variability in earning patterns. The increase in net premiums earned in each of the last two years has largely ~~correlated~~proven to ~~the growth in our net premiums written over this period. Changes in mix~~be a benign loss year with limited late reported loss activity and minimal deterioration on previously reported claims.

2006: The majority of ~~business over this period have not significantly impacted this trend.~~

~~Loss ratio:~~~~The table below shows the components of our loss ratio:~~

Year ended December 31

2006

2005

2004

Current year, before hurricane losses

60.3
%

49.5
%

52.8
%

Hurricane losses

—

45.4
%

19.2
%

Prior period development

(3.5
)%

(8.5
)%

(8.5
)%

Loss ratio

56.8
%

86.4
%

63.5
%

~~Although major losses are an inevitable part of our business, the hurricane losses in 2004 and 2005 had such a significant impact that we have highlighted them separately above. The~~ net favorable development in 2006 ~~includes 3.9 percentage~~was generated from our accident year 2004 and 2003 catastrophe and property lines of business. We experienced net adverse development of $72 million, or 5.2 ratio points, from accident year 2005 which was largely related to reserve strengthening on KRW reserves. The nature and extent of ~~strengthening to net reserves relating to Hurricanes Katrina, Rita and Wilma. The favorable~~KRW resulted in some claims that increased over previously reported damage estimates.

2005: Favorable development in ~~all three years~~2005 was primarily ~~due to better than expected claims experience on~~generated from our accident year 2004 property ~~catastrophe~~ and ~~other short tail~~catastrophe lines of business. We also removed several event specific IBNR reserves from our accident year 2003 catastrophe line having established that claims on these events did not develop to a sufficient level to reach our attachment points.

2008 Reinsurance Segment Outlook

Our ~~loss ratio also fluctuates~~2008 treaty reinsurance renewals are progressing well and we are satisfied with the quality, diversity and balance of the portfolio we reassembled at January 1, 2008. Typically, approximately 50% of our reinsurance gross premiums written within any calendar year renews on ~~year depending on~~this date. Although we have not yet finalized all the business we expect to bind, we anticipate that our first quarter treaty reinsurance renewals in 2008 will represent a ~~number of other variables that include~~modest decline in premium relative to the ~~volume of attritional losses, changes~~same period in ~~mix of business and changes in pricing and other assumptions used to establish our loss ratios.~~

~~2007 outlook~~

~~Generally,~~2007. Although overall discipline throughout the global reinsurance marketplace ~~continues.~~continues, our reinsurance portfolio continues to be impacted by an ongoing trend of cedants retaining more business. Also, as expected, modest catastrophe claims for the reinsurance market has led to some decreases in margins for property reinsurance business, in most, if not all, geographic regions. However, overall returns generally remain above acceptable levels, in particular, business with major U.S. perils. Although we are experiencing increased competition and pricing pressure on our non-property lines in the U.S. and Europe, terms and conditions have generally held firm, and we continue to identify opportunities in attractively priced areas.

CASH AND INVESTMENTS

At December 31, 2007 and 2006, total cash and investments, including accrued interest receivable and net receivable/payable for investments sold/purchased were $10.5 billion and $9.7 billion, respectively. Our investment strategy seeks to preserve principal and maintain liquidity while trying to maximize investment return through a high quality, diversified portfolio. In this regard, at December 31, 2007 and 2006, our investment portfolio consisted primarily of fixed maturity investments and cash and cash equivalents. The composition of our investment portfolio is summarized as follows:



At December 31,	2007			2006
U.S. government and agency	$	1,058,926	10%	$	1,177,911	12%
Non U.S. government		280,577	3%		153,258	1%
Corporate debt		2,149,666	21%		1,418,553	15%
Mortgage-backed		3,482,215	33%		2,868,578	30%
Asset-backed		532,780	5%		538,350	6%
Municipals		827,502	8%		376,073	4%

Total Fixed Maturities		8,331,666	80%		6,532,723	68%
Cash at investment managers, net of unsettled trades		572,897	5%		811,295	8%

Total Invested Assets		8,904,563	85%		7,344,018	76%
Other cash and cash equivalents		846,380	8%		1,115,807	12%

Total Cash and Fixed Maturities	$	9,750,943	93%	$	8,459,825	88%
Other Investments		645,987	6%		1,130,664	11%
Accrued interest receivable		87,338	1%		76,967	1%

Total Cash and Investments	$	10,484,268	100%	$	9,667,456	100%

Fixed Maturity Investments

Our investment strategy is to invest primarily in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. Within our fixed income portfolio, we attempt to limit our credit exposure by purchasing fixed income investments rated BBB or higher. In addition, we have limited our exposure to any single issuer to 5% or less of our portfolio for securities rated A- or above and 3% or less of our portfolio for securities rated between BBB and BBB+. At December 31, 2007 and 2006, we did not have an aggregate exposure to any single issuer of 10% or more of our shareholders’ equity, other than with respect to U.S. government and agency securities. At December 31, 2007 and 2006, all of the fixed maturity securities were investment grade with 78.6% and 84.1%, respectively, rated AA- or better, with an overall weighted average rating of AA+, based on ratings assigned by Standard & Poor’s.

The duration target range for our investment portfolios is two to four years. The duration of an investment is based on the maturity of the security and also reflects the payment of interest and the possibility of early principal payment of such security. We seek to use investment performance benchmarks that reflect this duration target. With respect to the duration of our investment portfolio, we manage asset durations to both maximize return given market conditions and provide sufficient liquidity to cover future loss payments. In a low interest rate environment, the overall duration of our fixed maturity investments tends to be shorter and in a high interest rate environment, such durations tend to be longer. At December 31, 2007 and 2006, our invested assets had an approximate average duration of 2.7 and 3.0 years, respectively. When incorporating our other cash and cash equivalents into this calculation, the average duration at December 31, 2007 and 2006 is reduced to 2.5 and 2.6 years, respectively.

The amortized cost and fair values of our fixed maturity investments was as follows:


At December 31, 2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Type of Investment
U.S. government and agency	$	1,032,441	$	26,672	$	(187)	$	1,058,926
Non-U.S. government		264,109		20,712		(4,244)		280,577
Corporate debt		2,174,333		36,020		(60,687)		2,149,666
Mortgage-backed		3,467,573		29,946		(15,304)		3,482,215
Asset-backed		539,125		1,800		(8,145)		532,780
Municipals		823,947		3,792		(237)		827,502

Total fixed maturity investments	$	8,301,528	$	118,942	$	(88,804)	$	8,331,666


At December 31, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Type of Investment
U.S. government and agency	$	1,190,700	$	3,639	$	(16,428)	$	1,177,911
Non-U.S. government		146,847		9,182		(2,771)		153,258
Corporate debt		1,423,146		5,470		(10,063)		1,418,553
Mortgage-backed		2,896,362		9,758		(37,542)		2,868,578
Asset-backed		540,118		549		(2,317)		538,350
Municipals		377,076		1,257		(2,260)		376,073

Total fixed maturity investments	$	6,574,249	$	29,855	$	(71,381)	$	6,532,723

The increase in the gross unrealized losses of $17 million was due to various changes in yield in the fixed income market. During the first half of the year, there was a general increase in yields that negatively impacted prices to varying degrees across all fixed income sectors. In the second half of 2007, a broad re-pricing of risk dramatically increased spreads in the corporate, mortgage and asset-backed sectors, which negatively impacted the pricing of these securities, but resulted in an increase in demand for U.S. Treasuries, which favorably impacted pricing in this sector.

Other Investments

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



At December 31,	2007			2006

Hedge funds	$	277,757	43%	$	235,377	21%
Credit funds		194,241	30%		156,337	14%
Collateralized loan obligations		120,596	19%		263,621	23%
Short duration high yield fund		45,648	7%		97,562	9%
Other		7,745	1%		-	-
Life settlement contracts		-	-		377,767	33%

Total other investments	$	645,987	100%	$	1,130,664	100%

During 2007, we sold our life settlement contracts investment. As discussed in Notes 5 (b) and 8 (c) of the Consolidated Financial Statements, in Item 8 of this report, on September 26, 2007, we sold our Note at par to a related party of the SPE (“buyer”), which resulted in the deconsolidation of the life settlement contracts. On the same day, this Note was repurchased by the SPE using proceeds from the issuance of a newly issued $400 million 10-year asset-backed note to the buyer. We simultaneously entered into an insurance contract with the buyer whereby we agreed to indemnify the buyer in the event of non-payment on the principal of this security. In doing so, we continue to have an implicit interest in the original life settlements portfolio and the related longevity risk exposure. However, as a result of not having a direct interest through the Note and a new hedging program put in place by the SPE, we have significantly reduced our exposure to interest rate risk.

The decreases in our collateralized loan obligations and short duration high yield fund were due to sales and redemptions, respectively, in order to reduce our exposure to credit risk. The credit funds increased as we subscribed into a credit strategies fund in the fourth quarter to take advantage of the credit market dislocation. The increase in the hedge funds is due to positive returns generated during the year, including a net redemption of $4 million during the year.

Impact of credit market movements

During the year, increasing delinquencies in the U.S. sub-prime residential mortgage collateral triggered increased volatility and decreased liquidity across financial markets as a whole, particularly in the area of structured credit assets.

We define sub-prime related risk as any security that is backed by or contains sub-prime collateral even if that sub-prime component is incidental. We do not invest directly in sub-prime loans nor do we have any direct sub-prime investment commitments. Our exposure to the sub-prime sector is within our fixed maturity portfolio as part of the collateral in our mortgage-backed and asset-backed securities. We also have exposure to Alternative-A mortgages which are considered riskier than prime but less risky than sub-prime. The following table summarizes our holdings in these investment types at December 31, 2007:


At December 31, 2007	Holdings at Fair Value		Percentage of Cash and Investments	Net Unrealized Gain/(Loss)		Realized Losses and Impairments
Subprime Agency MBS	$	26,398	0.25%	$	38	$	-
Subprime Non-Agency MBS		1,892	0.02%		(26)		-
Subprime ABS		47,874	0.46%		(3,456)		(427)

Total Subprime		76,164	0.73%		(3,444)		(427)


Alternative-A Agency MBS		604	0.01%		1		-
Alternative-A Non-Agency MBS		127,845	1.22%		56		(730)
Alternative-A ABS		6,611	0.06%		(283)		-

Total Alternative-A		135,060	1.29%		(226)		(730)


Total Subprime and Alternative-A	$	211,224	2.02%	$	(3,670)	$	(1,157)

* MBS and ABS denote mortgage-backed or asset-backed securities, respectively.

The above balances are all held within investment grade tranches, with 98% rated Agency or AAA and the remainder rated AA. The duration and weighted average life of these investments at December 31, 2007 was 1.61 and 2.39 years, respectively.

With respect to the rest of our investment portfolio, our exposure to credit risk is broadly diversified by industry, concentration and geography through our investments in high grade fixed maturities and our other investments. Some of the markets for these asset classes have experienced higher than typical volatility during 2007, as a result of the financial market instability and widening credit spreads on corporate and structured credit assets. However, these market developments did not have a material adverse impact on our results during 2007. Although we experienced a reduction in net investment income on our credit related funds compared to 2006, these funds still produced positive returns for the year. Our book value was negatively impacted through an increase in unrealized losses on our corporate and asset-backed fixed income securities, however, this was more than offset by the positive impact on our U.S. treasury positions.

All asset-backed securities, including those with sub-prime exposure, are reviewed as part of our ongoing other-than-temporary-impairment monitoring process. We continue to ~~experience the ongoing trend of greater risk~~monitor our exposures, and retention appetite in the industry bringing to bear modest price reductions. For property catastrophe business, major buyers dropped lower layers in favor of larger limits at the upper end of their programs, whilst, for casualty reinsurance business, cedants tended to retain more business. Critically, we have not seen major slippage in terms and conditions.

~~Rates continue to be up substantially for U.S. catastrophe-exposed reinsurance business relative~~ to the ~~1st~~extent market disruptions continue, our financial position may be negatively impacted. For further information on the investment portfolio, including analysis of ~~January 2006 as an element~~rating and maturity distributions, refer to Note 5 of ~~catch-up~~the Consolidated Financial Statements, included in Item 8.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Liquidity is a measure of a company’s ability to mid-year 2006 levels took place. However, the market dislocation evident at mid-year 2006 renewals has further corrected. Reinsurance renewals in Continental Europe, where the primary renewal date is January 1st, were characterized by an abundancegenerate sufficient cash flows to meet short-term and long-term cash requirements of capacity. We expect that Windstorm Kyrill, which caused damage across a number of European countries in January of 2007, will stabilize this marketplace. Finally, we expect the impact of recent Florida legislation bypassing the private reinsurance marketplace to directly impact less than 2% of reinsurance premiums.

~~Liquidity and Capital Resources~~

~~Liquidity~~

its business operations. As a holding company, ~~we have~~AXIS Capital has no substantial operations of ~~our~~its own and ~~our~~its assets consist primarily of ~~our~~ investments in its subsidiaries. Accordingly, ~~our~~AXIS Capital’s future cash flows depend primarily upon the availability of dividends or other statutorily permissible payments from ~~our~~its subsidiaries. See Item 8, Note 17, to the Consolidated Financial Statements for further discussion.

Cash flows:

~~Liquidity~~Our consolidated sources of funds consist primarily of net premiums written, reinsurance recoverable, net investment income and proceeds from sales and maturities of investments. Funds are primarily used to pay claims, operating expenses, dividends and to service our debt obligations. After satisfying our cash requirements, excess cash flows are generally invested. Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time claims are paid. The following is a ~~measure~~discussion of ~~a Company’s ability to generate sufficient~~our cash flows for the years ended December 31, 2007 and 2006:

Our net cash flows from operating activities were $1,573 million in 2007, compared with $1,613 million in 2006. These amounts reflect net income for each year, adjusted for non-cash items and changes in working capital. Net income in 2007 of $1,092 million compared with $963 million in the prior year. In 2007, significant adjustments included an increase in unpaid losses and loss expenses of $572 million (2006: $272 million) and unearned premiums of $131 million (2006: $255 million), offset by an increase in net insurance and reinsurance receivable balances of $155 million (2006: $119 million).

Our consolidated net cash flows used for investing activities were $1,417 million in 2007, compared with $1,166 million in 2006. In 2007, net cash flows used for investing activities were related principally to ~~meet short-term and long-term~~net purchases of fixed maturities, while in 2006 these also included significant purchases of other investments. These investing activities have resulted in a substantial increase in our average investment balances over the last two years.

Our net cash ~~requirements. Our liquidity requirements have been~~flows used for financing activities were $847 million in 2007, compared with net cash flows provided by financing activities of $290 million in 2006. Net cash inflows in 2006 included the receipt of $400 million from a repurchase agreement used to fund our life settlement contracts investment. This amount was repaid during 2007 following the sale of this investment, with the corresponding sale proceeds included in our investing activities. Other net cash flows used for financing activities in 2007 primarily ~~met by funds generated from operations, routine sales~~comprise share repurchases of ~~investments and financing arrangements~~$308 million (see capital resources section below), dividends paid on common shares of $111 million (2006: $91 million) and preferred shares of $37 million (2006: $37 million).

Cash flows are affected by claim payments that, due to the nature of our operations, may comprise large loss payments on a limited number of claims and which can fluctuate significantly from period to period. The irregular timing of these loss payments can create significant variations in cash ~~provided~~flows from ~~these sources is primarily used to pay loss and loss expenses and other operating costs. Our~~operations between periods. However, our diversified portfolio and risk management practice has demonstrated our ability to withstand extraordinary losses, as was the case in 2005. To further ensure the sufficiency of funds ~~we hold~~to settle unforeseen claims, our investment portfolio includes a ~~certain amount~~significant portion of ~~invested assets in~~highly liquid securities (cash and cash ~~and short term~~equivalents, short-term investments and ~~other readily marketable securities. At December 31, 2006 this balance was $8,459.8 million. Although~~high grade fixed maturity securities). We also maintain a $1.5 billion credit facility, as disclosed in Item 8, Note 9 (b) of the ~~timing and amount of catastrophe claim payments are inherently unpredictable, we anticipate~~Consolidated Financial Statements. We believe that our cash balances, cash flows from operations and the ~~above sources~~liquidity provided by our credit facility will continue to be sufficient to meet our future ~~liquidity needs, including our contractual obligations, detailed below.~~cash requirements.

~~Operating cash flows:~~Our cash flows from operations generally represent the difference between: (1) premiums collected, reinsurance recoveries and investment income received and (2) losses and loss expenses paid, reinsurance purchased and underwriting and other expenses paid. Cash inflows from operations have been consistent during the last three years despite substantial variations in our levels of net income. We generated net operating cash inflows of $1,613.3 million, $1,582.9 million and $1,600.0 million in 2006, 2005 and 2004 respectively, compared to net income of $963.1 million, $94.4 million and $495.0 million, respectively. The difference between net income and net cash inflow in each of the last three years is primarily due to increases in our net loss reserves, net of paid losses and recoveries.

~~Financing activities:~~CAPITAL RESOURCESCash flows relating to financing activities include the payment of dividends, share related transactions and the issue or repayment of debt. During 2006, we generated $289.5 million from financing activities compared to $260.8 million and $426.8 million in 2005 and 2004, respectively. These cash inflows primarily related to the following: during 2006 we received $400.0 million from a repurchase agreement used to fund an investment in an asset-backed note (refer to “commitments and contingencies” below). In 2005 we raised $693.6 million of additional capital in the form of common and

~~preferred shares offset by a $350.0 million repurchase of common shares from initial investors at the formation of the Company. In 2004, we raised $495.7 million from a senior notes offering.~~

~~Investing cash flows:~~Generally, positive cash flows from our operating and financing activities are invested in the Company’s investment portfolio. For further discussion of our investment activities, including our strategy and current durations refer to Item 1 and also Note 6 of the Consolidated Financial Statements included in Item 8 of this report.

~~Capital Resources~~

In addition to common equity, we depend upon other external sources of finance such as debt, preferred shares and our credit ~~facilities~~facility to support our operating activities. Having sufficient capital allows us to take advantage of profitable opportunities, maintain our financial strength ratings and also comply with various local statutory regulations. The following table summarizes our consolidated capitalization ~~at December 31:~~position:

2006

2005

(in thousands)

Long-term debt

$
499,144

$
499,046

Preferred shares

500,000

500,000

Common equity

3,912,647

3,012,351

Shareholders’ equity

4,412,647

3,512,351

Total capitalization

$
4,911,791

$
4,011,397

Ratio of debt to total capitalization

10.2
%
12.4
%



As at December 31,	2007		2006

Long-term debt	$	499,261	$	499,144


Preferred shares		500,000		500,000
Common equity		4,658,622		3,912,647

Shareholders’ equity		5,158,622		4,412,647

Total capitalization	$	5,657,883	$	4,911,791

Ratio of debt to total capitalization		8.8%		10.2%

Long-term debt:Long-term debt represents senior notes we issued during ~~2004; for further information refer to Item 8, Note 10 (a) of the Consolidated Financial Statements.~~

~~Shareholders’ equity:~~ At December 31, 2006, our shareholders’ equity was $4,412.6 million compared to $3,512.3 million at December 31, 2005. The increase of $900.3 million was primarily due to 2006 net income of $963.1 million. During 2006, we declared dividends of $101.7 million to common shareholders and $37.3 million to preferred shareholders. For further information on our shareholders’ equity refer to Item 8, Note 13 of the Consolidated Financial Statements.

~~Credit facilities:~~~~At December 31, 2006 and 2005 we had a credit facility agreement of $1.5 billion and letters of credit outstanding on the facility of $365.0 million and $685.1 million, respectively.~~2004. For further information refer to Item 8, Note ~~10 b)~~9 (a) of the Consolidated Financial ~~Statements~~.Statements.

Preferred Shares:During 2005, we issued $250 million of series A and $250 million of series B Preferred shares. For further information refer to Item 8, Note 12 (b) of the Consolidated Financial Statements.

Common equity: Our common equity increased by $746 million during 2007. The following table is a summary of this movement:



Common equity - December 31, 2006	$	3,912,647
Net income		1,092,018
Share repurchases		(308,110)
Change in accumulated other comprehensive income		67,306
Common share dividends		(112,347)
Preferred share dividends		(36,775)
Share-based compensation and other		43,883

Common equity - December 31, 2007	$	4,658,622

A summary of our share repurchases in 2007 is disclosed in Item 8, Note 12 (a), of the Consolidated Financial Statements.

Shelf ~~registrations:~~registrations:On August 6, 2004, we filed an unallocated universal shelf registration statement with the ~~Securities and Exchange Commission~~SEC that was declared effective on August 27, 2004. Under the shelf registration statement, we may issue up to ~~$750.0~~$750 million of equity, debt, trust preferred securities or a combination of these securities. On November 15, 2004, we completed a public offering of $500 million of senior notes. In addition, the shelf registration statement also registered for possible future sales up to 68,216,017 common shares held by certain of ~~the Company’s~~our founding shareholders. The registration of the founding shareholders’ common shares did not obligate these shareholders to offer or sell any of the securities held by them. As atof December 31, ~~2006,~~2007, there ~~were 36,501,410 remaining~~remained one founding shareholder with 20,930,928 common shares (including warrants) potentially available for ~~sale by founding shareholders.~~sale.

On October 3, 2005, we filed an unallocated universal shelf registration statement with the ~~Securities and Exchange Commission~~SEC that was declared effective on October 11, 2005. Under the shelf registration statement, we may issue up to $1.5 billion of equity, debt, trust preferred securities or a combination of these securities. On November 21, 2005, we completed a common share offering of 6,800,000 shares at

~~$29.42~~ $29.42 per share raising aggregate net proceeds of ~~$200.1~~$200 million. In addition, we issued ~~$250.0~~$250 million of series B preferred shares under this shelf registration statement. The remaining capacity at December 31, ~~2006~~2007 was ~~$1,050.0 million.~~$1.1 billion.

Financial strength ratings:

~~We believe~~AXIS Capital and our insurance subsidiaries are assigned debt and financial strength ~~provides us with~~(insurance) ratings from internationally recognized rating agencies, including S&P, A.M. Best and Moody’s Investors Service. The ratings issued on our companies by these agencies are announced publicly and are available directly from the ~~flexibility~~agencies.

Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to ~~continue~~meet the obligations of insurance policies. Independent ratings are one of the important factors that establish our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to ~~obtain external funding within~~support the ~~foreseeable future.~~business operations of the company.

~~Commitments~~These ratings are based upon factors relevant to policyholders, agents and ~~Contingencies~~intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities. Debt ratings apply to short-term and long-term debt as well as preferred stock. These ratings are assessments of the likelihood that we will make timely payments of principal, interest and preferred share dividends.

The following are the most recent financial strength and claims paying ratings from internationally recognized agencies in relation to our principal insurance and reinsurance subsidiaries:


Rating agency	Agency’s description of rating	Rating	Agency’s rating definition	Ranking of Rating
Standard & Poor’s	“A Standard & Poor’s issuer credit rating is a current opinion of an obligor’s overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor’s capacity and willingness to meet its financial commitments as they come due.”	A (Positive Outlook)	An obligor rated ‘A’ has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.	The “A” rating is the sixth highest out of twenty-one rating levels.

A.M. Best	“Best’s Financial Strength Ratings provide an opinion of an insurer’s financial strength and ability to meet ongoing obligations to policyholders.”	A (Stable Outlook)	Assigned to companies that have, in A.M. Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders.	The “A” rating is the third highest out of fifteen rating levels.

Moody’s	“Moody’s Insurance Financial Strength Ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations.”	A2 (Stable Outlook)	Insurance companies rated A offer good financial security. However, elements may be present which suggest a susceptibility to impairment sometime in the future.	The “A2” rating is the sixth highest out of twenty-one ratings.

In addition, our $500 million of senior notes were assigned a senior unsecured debt rating of Baa1 (stable) by Moody’s Investors Service and BBB+ (positive) by Standard & Poor’s. Our Series A and B preferred shares are rated Baa3 (stable) by Moody’s Investors Service and BBB- by Standard and Poor’s. These ratings are subject to periodic review by, and may be revised downward or revoked, at the sole discretion of the rating agencies.

COMMITMENTS AND CONTINGENCIES

The following table provides ~~an analysis~~a breakdown of our contractual obligations by period due:

At December 31, 2006

Less than

1-3

3-5

More than

Total

1 year

years

years

5 years

(in thousands)

Estimated gross loss payments

$
5,015,113

$
775,843

$
2,247,045

$
1,005,671

$
986,554

Senior notes (including interest payments)

727,604

28,750

57,500

57,500

583,854

Estimated life insurance premiums

636,638

59,184

142,645

122,129

312,680

Liability under repurchase agreement

400,000

400,000

—

—

—

Operating lease obligations

85,379

18,343

20,549

19,767

26,720

Reinsurance purchase commitments

47,137

47,137

—

—

—

Investment commitments

19,400

19,400

—

—

—

Total

$
6,931,271

$
1,348,657

$
2,467,739

$
1,205,067

$
1,909,808


	At December 31, 2007
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Operating activities
Estimated gross loss payments¹	$	5,587,311	$	707,200	$	2,346,219	$	1,204,142	$	1,329,750
Operating lease obligations²		91,543		12,026		25,182		24,188		30,147
Reinsurance purchase commitments³		52,356		52,356		-		-		-
Insurance-related derivative payment⁴		84,390		-		-		-		84,390
Financing activities
Senior notes (including interest payments)⁵		698,854		28,750		57,500		57,500		555,104
Investing activities
Investment commitments⁶		36,000		36,000		-		-		-

Total	$	6,550,454	$	836,332	$	2,428,901	$	1,285,830	$	1,999,391

Estimated gross loss payments. Given the limited loss payout pattern information specific to our experience, we have used industry data, on a line by line basis, to estimate our expected payments. The amount and timing of actual loss payments may differ materially from the estimated payouts in the table above. For further discussion refer to our critical accounting estimates section below.

Operating lease obligations:We lease office space in the countries in which we operate under operating leases which expire at various dates. We renew and enter into new leases in the ordinary course of business as required.

Reinsurance purchase commitments:During 2007, we purchased reinsurance coverage for our insurance lines of business. The minimum reinsurance premiums are contractually due on a quarterly basis in advance.

Insurance-related derivative payment: based on an estimated undiscounted indemnity payment due in September 2017 (refer to Item 8, Note 8(c)); actual indemnity payment may differ significantly.

Senior notes (including interest payments): For further information on the repayment terms of amounts due on our senior unsecured debt refer to Item 8, Note 9 (a), to the Consolidated Financial Statements.

Investment commitments: During September 2007, we made an investment commitment of $75 million in an alternative investment fund, of which $36 million was still outstanding at December 31, 2007.

~~Estimated gross loss payments:~~Estimated gross loss payments represent actuarial and statistical projections of our expected ultimate settlement and administration costs of claims incurred. There are numerous factors and assumptions involved in estimating loss and loss expense reserves. For further discussion refer to our critical accounting estimates section below. Given the limited loss payout pattern information specific to our experience, we have used industry data, on a line by line basis, to estimate our expected payments. The amount and timing of actual loss payments may differ materially from the estimated payouts in the table above.

~~Estimated life insurance premiums:~~To avoid life policies from lapsing, we are required to make monthly life premium payments on 222 life policies in connection with our investment in life settlement contracts. We will fund these payments through the use of the $65.0 million premium reserve account set aside for this purpose and with future life insurance proceeds and investment income earned on the cash flows relating to the life settlement contracts portfolio. Any shortfall from these funding sources will be met by the Company’s cash flows from operations.

~~Liability under repurchase agreement~~:~~On December 20, 2006 we entered into a repurchase agreement to fund our investment in a life settlement contracts portfolio.~~ Under the arrangement we sold a $400.0 million asset-backed note which we have agreed to repurchase on March 16, 2007 for a predetermined price. The agreement provides for the ability to renew for the duration of the asset-backed note. We may renew the repurchase agreement at its maturity.

~~Further information on the above contractual obligations, refer to Item 8, Notes~~ ~~to the Consolidated Financial Statements.~~CRITICAL ACCOUNTING ESTIMATES

~~Critical Accounting Estimates~~

There are certain accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of those policies. In calculating financial statement estimates, the use of different assumptions could produce materially different estimates. We believe the following

critical accounting policies affect significant estimates used in the preparation of our consolidated financial statements.

~~Reserve for losses and loss expenses~~RESERVE FOR LOSSES AND LOSS EXPENSES

~~For most insurance and reinsurance companies,~~General

We believe the most significant judgment made by management is the estimation of ~~the~~our reserve for losses and loss expenses, which we also refer to as loss reserves. We are required by U.S. GAAP to establish loss reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses (“ultimate losses”) under the terms of our policies and agreements with our insured and reinsured customers. Our loss reserves ~~are established based upon our estimate of~~comprise the ~~total~~following components:

Case reserves - cost of claims that were reported to us but not yet paid, ~~or case reserves, the costs of additional case reserves on claims reported to us but not considered to be adequately reserved, or ACR,~~ and ~~the~~

IBNR - anticipated cost of claims incurred but not ~~reported, or IBNR.~~reported.

Loss reserves also include an estimate of the expense associated with settling claims, including legal and other fees and the general expenses of administering the claims adjustment process. The following table shows our net loss reserves segregated between case reserves and IBNR at December 31, 2007 and 2006:


	2007						2006
As at December 31,	Gross		Ceded		Net		Gross		Ceded		Net
Case Reserves	$	1,697,385	$	480,354	$	1,217,031	$	1,831,344	$	692,709	$	1,138,635
IBNR		3,889,926		876,539		3,013,387		3,183,769		666,445		2,517,324

Total	$	5,587,311	$	1,356,893	$	4,230,418	$	5,015,113	$	1,359,154	$	3,655,959

Case Reserves

For reported losses, wemanagement primarily establishes case reserves based on the amounts reported from insureds or ceding companies. Management may also establish additional case reserves on reported claims which are not considered adequately reserved. At December 31, 2007, additional case reserves were $70 million, or 4% of our total case reserves compared to $41 million, or 2%, respectively at December 31, 2006.

Case reserves are established on a case by case basis within the parameters of ~~the~~ coverage provided in ~~our~~the insurance orand reinsurance contracts. The method of establishing case reserves for reported losses differs among our segments.

With respect to our insurance operations, we are notified of insured losses by brokers and insureds and record a case reserve for the estimated amount of the ultimate expected liability arising from the claim. The estimate reflects the judgment of our claims personnel based on general reserving practices, the experience and knowledge of such personnel regarding the nature of the specific claim and, where appropriate, advice of ~~counsel. Reserves are also established to provide for the estimated expense of settling claims, including legal~~counsel, loss adjusters and other ~~fees and the general expenses of administering the claims adjustment process.~~relevant consultants.

Our reinsurance business is predominantly short to medium tail in nature, which typically allows us to determine the ultimate loss experience within a relatively short period after a contract has expired. However, theThe reserving process for our reinsurance operations is more complicated than for our insurance operations. For reported losses, we generally establish case reserves based on reports received primarily from brokers and also from ceding companies. With respect to contracts written on an excess of loss basis, we typically are notified of insured losses on specific contracts and record a case reserve for the estimated amount of the ultimate expected liability arising from the claim. With respect to contracts written on a pro rata basis, we typically receive aggregated claims information and record a case reserve based on this information.

Following the occurrence of a reinsured loss, an insured notifies its insurance company which then reports the information to its reinsurer, generally via a broker. The period of time that elapses between the notification to the insurance company and the reinsurance company varies depending upon a number of factors such as: the type of business; whether the reinsurance is written on an excess of loss or proportional basis; the size of the loss; and whether the loss information is provided by brokers or cedants. Typically, the delay can vary from a few weeks to several months. In addition, as reinsurers, we do not separately evaluate each of the underlying risks assumed and, therefore, we rely upon our cedants’ underwriting, risk management and claims administration practices. These factors necessarily create a higher degree of uncertainty in establishing our estimate of loss reserves for our reinsurance operations than for our insurance operations.

In order to reflect this increased level of uncertainty in establishing our ~~loss~~case reserves, some of our underwriting, claims and reserving practices have been modified for our reinsurance business. In deciding whether to provide treaty reinsurance, we carefully review and analyze the cedant’s underwriting and risk management practices to ensure appropriate underwriting, data capture and reporting procedures. We ~~also utilize~~undertake an extensive program of cedant audits, utilizing outsourced ~~claims audit program that~~legal and industry expertise when necessary. This allows us to review a cedant’s claims administration to ensure that its claim reserves are consistent with reinsured exposures, are adequately established and are properly reported in a timely manner, and to verify that claims are being handled appropriately. For those losses where we receive contract-specific loss notifications, our claims department evaluates each notification and, as discussed above, may record ~~ACRs~~additional case reserves if claims are not considered to be adequately ~~reserved.~~reserved by the ceding company. This requires considerable judgment. Where claims information is received in an aggregated form, our reinsurance contracts typically require that pre-defined large losses must be separately notified so that these losses can

be adequately evaluated. ~~As, Ernst & Young,~~

IBNR

Reserves for incurred but not reported (“IBNR”) claims are necessary due to time lags between when a loss occurs and when it is actually reported and settled. This is often referred to as the “claim-tail”. Reporting lags arise from the use of intermediaries to provide loss reports, complexities in the claims adjusting process and other related factors. IBNR reserves are calculated by projecting our ultimate losses on each class of business and subtracting paid losses and case reserves.

Unlike case reserves, IBNR is generally calculated at an aggregate level and cannot usually be directly identified as reserves for a particular loss or contract (see “Specific Reserving Issues – Catastrophe losses” for discussion of specific IBNR provisions). Our loss and premium data is aggregated by exposure class and by accident year (i.e. the year in which losses were incurred).

The evaluation process to determine our ultimate losses involves the collaboration of our underwriting, claims, internal actuarial, legal and finance departments, consultation with an independent external actuarial firm, and includes various segmental committee meetings, culminating with the approval of a single point best estimate by senior management in our Group Reserving Committee. Further, we compare our estimated claims and claim expense reserves to those estimated by the independent actuarial firm as part of our overall assessment of reasonableness.

On an annual basis, our independent ~~actuaries,~~actuarial firm performs work for the purpose of issuing an actuarial opinion for each of our operating subsidiaries on the reasonableness of our loss reserves, which are prepared in compliance with the requirements of each related jurisdiction. The actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm discusses its opinions with management and the Audit Committee of our Board of Directors.

Reserving Methodology:

We utilize the following actuarial methods in our reserving process:

Initial expected loss ratio method (“IELR”): This method calculates an estimate ~~reserves~~of ultimate losses by applying an estimated loss ratio to an estimate of ultimate earned premium for each underwriting year. The estimated loss ratio is based on pricing information and industry data and is independent of the current claim experience to date. This method is appropriate for classes of business where the actual paid or reported loss experience is not yet mature enough to override our initial expectations of the ultimate loss ratios.

Chain Ladder: This method uses the historical development profile of claims experienced on older accident years to project the more recent, less developed accident years to their ultimate position. The chain ladder method does not incorporate any information regarding market conditions or pricing. This method is more appropriate for homogeneous and low volatility lines under stable economic conditions.

Bornhuetter-Ferguson (“BF”): The BF method uses as a starting point an assumed IELR and blends in the loss ratio implied by the claims experience to date by using benchmark loss development patterns. The BF method allows a logical transition between the IELR and Chain Ladder methods. This method is appropriate for accident years at an early stage of claim development or where claim development observed to date is not considered sufficiently credible as a basis of projection under the Chain Ladder method.

The basis of our selected single point best estimate on a particular line of business ~~basis, their~~is often a blend of the results from two or more methods (e.g. weighted averages). Our estimate is highly dependant on actuarial and management judgment as to which method (s) is most appropriate for a particular accident year and class of business. Our methodology ~~allows~~changes over time as new information emerges regarding underlying loss activity and other data issues.

Reserving by class of business:

The weight given to a particular actuarial method is dependent upon the characteristics specific to each class of business, including: the types of coverage and the expected claim-tail. Short-tail exposures describe classes of business for which losses are usually known and paid within a relatively short period after a loss event has occurred. Our short-tail lines include the majority of our property, marine, terrorism and aviation classes of business within our insurance segment, and the majority of our property and catastrophe classes of business within our reinsurance segment.

Due to the relatively short reporting development pattern for our short-tail lines, our estimate of ultimate losses responds quickly to the latest loss data, and therefore we typically assign credibility to methods that incorporate actual loss emergence, sooner than would be the case for medium to long-tail lines at a similar stage of development. In doing so, we primarily select the BF method due to the low frequency, high severity nature of much of our business (which limits the usefulness of the Chain Ladder method). In addition, the significant growth of our business in the last five years has generally reduced the degree to which we can rely upon our own development trends from older accident years.

Medium and long-tail business describes lines of business for which specific losses may not be known for some period and claims can take significant time ~~lags when establishing ultimate loss~~to emerge and ~~loss expenses for~~subsequently settle. Our medium-tail exposures include certain classes within our political risk insurance lines and credit and bond, motor and engineering reinsurance business. ~~In addition, because we have limited loss experience~~Our long-tail exposures include most of our professional lines and ~~insufficient claims development data to calculate credible trends, our independent actuaries use industry data when establishing ultimate loss and loss expenses for our reinsurance business.~~

~~Loss reserving for catastrophe events~~liability classes of business in both our insurance and reinsurance ~~businesses~~segments. On these longer tailed exposures, we primarily use the IELR method, across all accident years.

The following tables provide a break down of our net loss reserves by segment and type of exposure:


	INSURANCE
	2007						2006
As at December 31,	Gross		Ceded		Net		Gross		Ceded		Net
Property and all other
Case reserves	$	755,492	$	356,977	$	398,515	$	1,017,547	$	614,678	$	402,869
IBNR		715,562		143,330		572,232		749,090		94,284		654,806

		1,471,054		500,307		970,747		1,766,637		708,962		1,057,675

Liability
Case reserves		102,132		53,778		48,354		53,756		27,347		26,409
IBNR		613,770		323,939		289,831		499,746		246,695		253,051

		715,902		377,717		338,185		553,502		274,042		279,460

Professional Lines
Case reserves		134,677		69,599		65,078		84,954		45,684		39,270
IBNR		1,012,110		384,785		627,325		766,652		306,043		460,609

		1,146,787		454,384		692,403		851,606		351,727		499,879

Insurance Total
Case reserves		992,301		480,354		511,947		1,156,257		687,709		468,548
IBNR		2,341,442		852,054		1,489,388		2,015,488		647,022		1,368,466

Total	$	3,333,743	$	1,332,408	$	2,001,335	$	3,171,745	$	1,334,731	$	1,837,014

      REINSURANCE
      2007    2006
As at December 31,    Gross    Ceded    Net    Gross    Ceded    Net
Catastrophe, property and other

Case reserves
     $ 360,986        $ -        $ 360,986        $ 460,584        $ 5,000        $ 455,584
IBNR
   428,858      -      428,858      384,320      -      384,320

   789,844      -      789,844      844,904      5,000      839,904

Credit and bond, motor and liability

Case reserves
   259,878      -      259,878      160,943      -      160,943
IBNR
   555,332      18,520      536,812      367,873      13,424      354,449

   815,210      18,520      796,690      528,816      13,424      515,392

Professional Lines

Case reserves
   84,220      -      84,220      53,560      -      53,560
IBNR
   564,294      5,965      558,329      416,088      5,999      410,089

   648,514      5,965      642,549      469,648      5,999      463,649

Reinsurance Total

Case reserves
   705,084      -      705,084      675,087      5,000      670,087
IBNR
   1,548,484      24,485      1,523,999      1,168,281      19,423      1,148,858

Total
     $     2,253,568        $     24,485        $     2,229,083        $     1,843,368        $     24,423        $     1,818,945

Our Significant Reserving Assumptions:

Implicit in the actuarial methodologies utilized above are two critical reserving assumptions; the selected IELR for each accident year and the expected loss emergence profiles. We regularly monitor these assumptions and, at each quarter end, undertake a full actuarial review. Any adjustments that result from this review are recorded in the quarter in which they are identified.

1. Selection of IELR

For our insurance business, the current accident year IELRs are primarily developed using industry benchmarks adjusted for changes in pricing, terms and conditions observed by our underwriters. In 2005, we began to give varying levels of weight to our own loss experience on certain classes of business within our property and marine lines of business.

For our reinsurance business, the current accident year IELRs are based on a contract by contract review which incorporates information provided by clients together with estimates provided by our underwriters and actuaries concerning the impact of changes in pricing, terms and conditions and coverage. Our estimate of the impact of these changes includes assumptions which consider, among other things, the market experience of our independent external actuarial firm.

2. Expected patterns of loss emergence

Given our limited operating history and developing book of business, our loss development factors continue to be primarily established using industry benchmarks. These factors are only revised when the weight of our own actual experience becomes sufficiently credible to identify deviations from the market based assumptions. The most significant change made to our loss emergence patterns to date was on our terrorism and aviation lines. In 2005, having observed a lack of claims development on these lines, we adjusted our loss development assumptions on these lines to incorporate reporting that was more prompt than we had originally expected.

In addition to our limited loss experience, our current reliance on industry development patterns is ~~an inherently uncertain process.~~driven by the substantial growth of our business in recent years, which, overall has had the effect of reducing the degree to which we can rely upon our own development trends from older accident years.

Specific Reserving Issues – Catastrophe Losses

On contracts that respond to highly visible, major loss events, we establish IBNR where potential exposure has been identified. When a ~~catastrophe~~significant loss event occurs, we review our ~~exposures~~contracts to determine ~~which exposures will~~those that could be ~~impacted by~~potentially exposed to the loss event. We contact brokers and clients to determine their estimate of involvement and the extent to which their programs are affected. We may also use computer modeling to estimate loss exposures under the actual event scenario. We ~~currently~~ use Risklink ~~version 6.0~~ licensed by RMS, Classic/2 and CATRADER ~~version 8.5~~ licensed by AIR and WORLDCAT Enterprise licensed by Eqecat. As part of the underwriting process, we obtain exposure data from our clients, so that when an event occurs we can run ~~our~~the models to produce an estimate of the losses incurred by clients on programs that we insure or reinsure. Typically, we derive our estimate for the losses from a catastrophic event by blending all of the sources of loss information available to us. This estimate is derived by the claims team and, where there are no reported case reserves, we establish a separate provision for IBNR. Because much of our excess insurance and excess of loss reinsurance business has high attachment points, there is known as “case IBNR”. For catastrophic events, there generally is considerable uncertainty underlying the assumptions and associated estimated reserves for losses and loss expenses. The potential also exists, after a catastrophe loss, for the development of inflationary pressures in a local economy. The anticipated effects on us are considered in our catastrophe loss models. The effects of inflation are also considered in pricing andsignificant judgment required in estimating ~~reserves for unpaid~~whether claims will exceed those attachment points. The inherent uncertainties relating to coverage and ~~claim expenses. The actual effects of inflation~~damage assessment on our results cannot be accurately known until claims are ultimately settled. Reserves are reviewed quarterly and as experience develops and additional information is known, the reserves are adjusted as necessary. Adjustments are reflected in the period in which they become known.

Our estimate of our ultimate loss and loss expenses is determined in consultation with Ernst & Young and is based on generally accepted actuarial principles. Ernst & Young receives all Large Claims Information Database (“LCID”) flash reports and has access to our claims information and individual contracts as part of their quarterly review. Ernst & Young utilize various actuarial methodologies to arrive at a single point estimate for baseline ultimate loss and loss expenses. The selection of an actuarial methodology and the associated loss ratio is applied at a line of business level to determine the ultimate loss and loss expenses by line of business. The actuarial method is dependent upon characteristics specific to each line of business, including: the extent of company-specific loss experience, the maturity of the line of business and the type of coverage. The actuarial methods utilized include the Bornhuetter-Ferguson method, the initial expected loss ratio method (“IELR”) and the chain ladder (“loss emergence”) method. The Bornhuetter-Ferguson method takes as a starting point an assumed ultimate loss and loss expense ratio developed by the actuaries and blends in the loss and loss expense ratio implied by the experience to date. The chain ladder method uses the historical development profile of incurred claims experience to project the more recent, less developed profile of claims experience and to generate ultimate loss and loss expenses. The IELR method estimates ultimate loss and loss expenses based on pricing information and industry data. Due to our limited loss experience, for most lines of business the independent actuaries primarily utilize the Bornhuetter-Ferguson and IELR methods to derive a single point estimate of baseline ultimate loss and loss expenses.

For our insurance segment, the assumed ultimate loss and loss expense ratios developed by the independent actuaries are based on benchmarks derived from the independent actuaries wider market experiencecatastrophe events, together with our typically large line sizes, add to the complexity of estimating our potential exposure.

Potential Volatility in Our Estimates

While we believe that our loss reserves at December 31, 2007 are adequate, new information, events or circumstances, unknown at the original valuation date, may lead to future developments in our ultimate losses significantly greater or less than the reserves currently provided. The actual final cost of settling both claims outstanding at December 31, 2007 and claims expected to arise from unexpired period of risk is uncertain. There are many other factors that would cause our reserves to increase or decrease, which include, but are not limited ~~historical data. These benchmarks are then adjusted for rating increases and~~to, changes in ~~terms~~claim severity, changes in the expected level of reported claims, judicial action changing the scope and/or liability of coverage, changes in the regulatory, social and ~~conditions that have been observed by the market~~economic environment and ~~by us. For our reinsurance segment, the assumed ultimate~~unexpected changes in loss ~~and loss expense ratios are based on contract-by-contract initial expected loss ratios derived during pricing and benchmarks derived from the independent actuaries~~

wider market experience together with our limited historical data. Under U.S. GAAP, we are not permitted to establish loss reserves until an event that gives rise to a loss occurs. On contracts that respond to highly visible, major loss events, we establish IBNR where potential exposure has been identified.inflation.

Our independent actuary applies loss and loss expense ratios to our earned premium to generate estimated baseline ultimate costs of the losses. From the estimated baseline ultimate costs of losses, we deduct paid losses and reported case reserves to generate our baseline IBNR. The estimated baseline ultimate costs of losses will almost certainly differ materially from our actual losses and loss expenses. The uncertainty ~~surrounding~~in our ~~actual losses and loss expenses~~reserve estimate is ~~greater~~particularly pronounced for a company like ours that has a limited operating history and claims loss development patterns. In addition, our limited operating history and claims loss development patterns have necessitated the use of benchmarks in deriving our IBNR. These benchmarks could differ materially from our actual experience despite management’s and the independent actuaries care in selecting them.

therefore relies more upon industry benchmarks. To reduce some of ~~this~~the uncertainty, ~~our independent actuary~~management performs ~~in conjunction with management,~~ an analysis of additional factors to be considered when establishing our ~~IBNR. These uncertainties are~~IBNR, intended to ~~compensate for~~enhance our ~~limited operating history and claims loss development patterns, which require the use of industry information that may not be indicative of our actual loss experience.~~best estimate beyond quantitative techniques. At December 31, ~~2006,~~2007, we recorded additional IBNR for uncertainties relating to the timing of the emergence of claims. ~~We anticipate that~~Although time lags are incorporated within the actuarial methods discussed above, these uncertainties may vary over time. A combination of the baseline estimate of IBNR and the reserves for the additional uncertainties produces a single point estimate that constitutes management’s and the actuaries’ best estimate of IBNR.

~~The following table provides a breakdown of reserves for losses and loss expenses by segment by type of exposure:~~

At December 31

2006

2005

2004

(in thousands)

Property, marine, aviation and aerospace

$
1,242.6

$
1,305.6

$
694.5

Terror, war risk and political risk

122.5

106.4

158.9

Professional lines and other speciality

151.6

88.7

28.5

Total—Global Insurance

$
1,516.7

$
1,500.7

$
881.9

Property

$
413.8

$
701.0

$
301.8

Liability and other specialty

561.5

401.7

198.6

Professional lines

679.8

460.7

260.2

Total—U.S. Insurance

$
1,655.1

$
1,563.4

$
760.6

Catastrophe, property and other

$
1,049.1

$
1,106.6

$
517.8

Professional lines

449.1

299.2

150.0

Credit and bond, motor and liability

345.1

273.4

94.3

Total—Reinsurance

$
1,843.3

$
1,679.2

$
762.1

Total reserves for losses and loss expenses

$
5,015.1

$
4,743.3

$
2,404.6

~~In estimating our ultimate loss and loss expenses, our independent actuaries utilize actuarial methodologies that~~ rely on the use of various assumptions. At December 31, 2006, the key assumptions used by our actuaries were the establishment of initial expected loss ratios and the establishment of development factors. Both of these assumptions are largely based upon loss information,industry experience which may not be indicative of our business. For example, the low frequency, high severity nature of much of our business, together with the vast and diverse expanse of our worldwide exposures, may limit the usefulness of claims experience of other insurers and reinsurers for similar types of business.

Changes to our previous estimate of prior year loss reserves can impact the reported calendar year underwriting results by worsening our reported results if reserves prove to be deficient or improving our reported results if reserves prove to be redundant.

As discussed above, there is considerable judgment involved in determining our ultimate loss ratios, and therefore we believe the potential variance with actual loss experience could be relatively wide by line of business. On an aggregate basis, we believe it is reasonably likely our net loss reserves could increase or decrease by up to 10% from current amounts based on our more recent claims experience. For the year ended December 31 2007, we experienced net favorable development of 9% (2006: 7%) on our beginning net loss reserves. A 5%10% change in our ~~gross~~net loss reserves at December 31, 2007 equates to ~~$250.8~~$423 million and represents ~~27.1%~~37% of our income before ~~income~~ taxes for ~~2006~~2007.

The above is informational only and ~~5.7%~~should not be considered projections of ~~our shareholders’ equity at December 31, 2006.~~future events. For a summary of ~~the~~ cumulative redundancies on our loss reserves since ~~our~~ inception refer to “Reserves” in Item 1 of this report.

The methodology of estimating loss reserves is reviewed each quarter to evaluate whether the assumptions made continue to be appropriate. Any adjustments that result from this review are recorded in the quarter in which they are identified.

Our reserving practices and the establishment of any particular reserve reflect management’s judgment concerning sound financial practice and do not represent any admission of liability with respect to any claims made against us. No assurance can be given that actual claims made and related payments will not be in excess of the amounts reserved. During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised estimates.

~~Reinsurance Recoverable Balances~~REINSURANCE RECOVERABLE BALANCES

Reinsurance recoverable balances include amounts owed to us in respect of paid and unpaid ceded losses and loss expenses and are presented net of a reserve for non-recoverability. At December 31, ~~2006~~2007 and ~~2005,~~2006, reinsurance recoverable balances were ~~$1,359.2~~$1,357 million and ~~$1,518.1~~$1,359 million, respectively. In establishing our reinsurance recoverable balances, significant judgment is exercised by management in determining the amount of unpaid losses and loss expenses to be ceded as well as our ability to cede losses and loss expenses under our reinsurance contracts.

Our ceded unpaid losses and loss expenses consist of two elements, those for ~~reported losses~~our gross case reserves and those for our gross IBNR. ~~Ceded amounts for~~Recoveries on our gross case estimates are determined on a case-by-case basis by applying the terms of any applicable reinsurance recoveries to the individual case estimates. As the gross case estimates are adjusted over time in accordance with the settlement of the claim, the corresponding ceded case estimates will be adjusted. Recoveries on gross IBNR are developed as part of our loss reserving process. Consequently, the estimation of ceded unpaid losses and loss expenses is subject to similar risks and uncertainties as the estimation of gross IBNR (see “Reserve for ~~losses~~Losses and ~~loss expenses”~~Loss Expenses”). ~~At December 31, 2006~~In our reinsurance segment, our reinsurance coverage is principally limited to industry loss warranty contracts. Under these types of contracts a recovery will only be made following a predefined industry loss of a particular size and ~~2005, ceded IBNR recoverable balances were $666.5 million and $555.0 million, respectively.~~frequency.

As the majority of the reinsurance recoverable balances will not be due for collection until some point in the future, the recoverability of such amounts may ultimately differ materially from the recorded amounts due to the ability and willingness of reinsurers to pay our claims, for reasons including insolvency, contractual dispute over contract language or coverage and for other reasons. Additionally, over this period of time, the economic conditions and operational performance of a particular reinsurer may change and consequently these changes may affect the reinsurer’s willingness and ability to meet their contractual obligations to us. Accordingly, we review our reinsurance recoverable balances on a quarterly basis to estimate and record a valuation provision for potential uncollectible amounts, with changes in the provision flowing through earnings.

To estimate this valuation provision, we ~~start with~~begin by applying case-specific valuation allowances against any reinsurance recoverable balances that we deem unlikely to collect in full. We also perform a default analysis ~~by applying specific percentages against each recovery, net of collateral,~~ based on the financial strength rating of the reinsurer using A.M. Best credit ratings. These percentages are based on historical industry default statistics developed by Standards & Poor (S&P) and are then adjusted by us based on industry knowledge and best judgment. For example, when a recoverable is expected to be paid in a brief period of time by a highly rated reinsurer, such as certain property catastrophe claims, we may not apply a default factor to such amount. We also apply case-specific valuation allowances against certain reinsurance recoverable balances that we deem

~~unlikely to collect in full.~~rating agencies. Lastly, we evaluate the overall adequacy of the valuation allowance for the total reinsurance recoverable balances based on qualitative and judgmental factors. Based on this process, at December 31, 2007, we recorded a valuation provision against reinsurance recoverable balances of ~~$34.0~~$34 million ~~and $15.6 million as at December 31, 2006 and 2005, respectively.~~(2006: $34 million). We have not written off any significant reinsurance recoverable balances in the last three years.

See Item 8, Note 87 to the Consolidated Financial Statements for an analysis of reinsurance recoverable and valuation provision by segment. For an analysis of credit risk with respect our reinsurance recoverable balances at December 31, ~~2006,~~2007, refer to Item 8, Note ~~11,~~10 (a), to the Consolidated Financial Statements.

~~Premiums~~PREMIUMS

Our revenue is generated primarily by gross premiums written from our underwriting operations. The basis for the amount of gross premiums recognized varies by the type of contract we write.

For the majority of our insurance business, we receive a flat premium which is identified in the policy and which is recorded as unearned premium on the inception date of the contract. This premium will adjust only if the underlying insured values adjust. We actively monitor underlying insured values and record adjustment premiums in the period in which amounts are reasonably determinable.

We also write business on a line slip basis, under which we assume a fixed percentage of the premiums and losses on a particular risk or group of risks along with numerous other unrelated insurers. Statement of Financial Accounting Standard No. 60 ~~“Accounting~~Accounting and Reporting By Insurance ~~Enterprises”~~Enterprises requires that if the ultimate premium is reasonably estimable, the estimated ultimate premium should be recognized as revenue over the period of the contract. Although a premium estimate is not contractually stated for business written on a line slip basis, we believe that the premium is reasonably estimable because we receive an initial estimate of the expected premium written from the client via the broker. This estimate has been derived by reference to one or more of the following: the historical premium volume experienced by the line slip; historical premium volume of similar line slips; and industry information on the underlying business. We may, if we believe appropriate, adjust the initial estimates provided by the broker to reflect management’s best judgments and expectations. This is most likely where the underwriter believes that the estimate is not prudent. Under these circumstances, we will generally recognize as revenue a lower than advised premium written estimate. We actively monitor the development of actual reported premium to the estimates made.

Where actual reported premium deviates from the estimate, we carry out an analysis to determine the cause and may, if necessary, adjust the estimated premium in the period in which the determination was made. ~~During 2006, 2005 and 2004, line~~Line slip ~~premiums~~premium accounted for ~~10%, 8% and 5%, respectively,~~3% of total gross premiums ~~written.~~written in each of the last three years. Our line slip contracts are predominately written in our insurance segment and within our property, marine, political risk and aviation lines of business. Our limited historical experience has shown that estimated premiums from line slip contracts have varied and have been adjusted by up to approximately 10%, although larger variations, both positive and negative, are possible. A 10% variation in the our line slip premiums receivable balance at December 31, 2007, after considering the related expected losses and loss expenses and acquisition costs, would increase or decrease our pre tax net income by approximately $5 million.

For our reinsurance business, we write contracts on both an excess of loss basis and a proportional basis. For excess of loss contracts, the amount of premium is usually contractually documented at inception and no management judgment is necessary. For most such contracts, a deposit premium is generally contractually specified and is payable during the contract period. After the contract has expired, a premium adjustment is calculated, which is based on the underlying exposure of the ceded business. We record the deposit premium at the inception of the contract and record adjustments in the periods in which they are reasonably determinable.

For business written under a proportional contract, similar to our line slip business, we are able to reasonably estimate the premium written by reference to an initial estimate of expected ceded premium received from our clients. In most cases, the treaties are not new and the client can use historical experience to estimate the amount of premium. We may adjust the initial estimate of premium, and any adjustment is usually a result of the underwriter’s prior experience with a client. ~~We actively monitor~~

Where actual reported premium deviates from the ~~development of actual~~estimate, we carry out an analysis to determine the cause and may, if necessary, adjust the estimated premium ~~data and, if an adjustment in the premium estimate is warranted, it will be~~

~~recorded~~ in the period ~~during~~in which the ~~adjustment is determined.~~determination was made. During 2007, 2006 ~~2005~~ and ~~2004,~~2005, proportional premiums accounted for ~~15%~~13%, ~~15%~~14% and ~~10%~~15%, respectively, of total gross premiums written. Our proportional contracts are predominately written in our reinsurance segment and within our property, professional lines and casualty lines of business. Our limited historical experience has shown that estimated premiums from proportional contracts have varied and have been adjusted by up to approximately 10%, although larger variations, both positive and negative, are possible. A 10% variation in the our proportional premiums receivable balance at December 31, 2007, after considering the related expected losses and loss expenses and acquisition costs, would increase or decrease our pre tax net income by approximately $11 million.

Reinstatement premiums for our insurance and reinsurance operations are recognized at the time a loss event occurs, where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The accrual of reinstatement premiums is based on an estimate of losses and loss adjustment expenses, which reflects management’s judgment, as described above in “Reserves for Losses and Loss Expenses.”

Our premiums are earned over the period during which we are exposed to the insured or reinsured risk. Generally, this period equates to the contract period, except for contracts written on a line slip or proportional basis. For line slip and proportional business, the earning period is generally twice the contract period due to the fact that some of the underlying exposures may attach towards the end of our contracts, and such underlying exposures generally have a one year coverage period.

~~Other Investments~~

Other investments consist of collateralized loan obligations (“CLOs”), investment funds (such as short duration high yield fund, credit funds, and fund of hedge funds) and life settlement contracts. We record our other investments at fair value.

A CLO is an asset-backed security that is primarily supported by commercial loans. We invest in both senior debt and equity tranches of CLOs. The fair value of senior debt tranches is based on available market prices; accordingly, there is little measurement uncertainty. However, for equity tranches the fair value is derived by amortizing the invested amounts at rates which incorporate certain assumptions such as market default rates, weighted average spread earned and recovery rates over the expected life of the security. We use significant judgment in establishing appropriate assumptions, which are reviewed annually to incorporate current market conditions.

The fair value for investment funds is determined by management using the net asset values provided by the third party administrators of these funds. Generally, the fair value is determined based upon the valuation criteria established by the governing documents of such investments. Further, the valuation for certain funds is reported on a one month lag, which contributes to the fair value measurement uncertainty at a point in time. Additionally, some funds are subject to restrictions on redemptions and sales and therefore limit our ability to liquidate these investments in the short term. Accordingly, the estimated fair value may differ materially from the values that would have been used had ready markets existed for these funds.

~~We have elected to use the fair value method to account for all the life settlement contracts in accordance with FASB Staff Position FTB 85-4-1,~~ ~~Accounting for Life Settlement Contracts by Third-Party Investors~~. As there are no active markets for these contracts, we are required to estimate fair value, which is based on discounting the future cash flows of the life insurance policies including life insurance proceeds and premium payments.

There is significant judgment involved in the fair value estimation process. The timing of life insurance receipts is dependent on the longevity of the insured individuals underlying the life insurance policy. The estimation of life expectancy of an individual is a complex process which may include, but not limited to, subjective interpretation of the following: sex; age; height; weight; race; lifestyle; medical history and ancestry; marital status; educational background; improvements in mortality rates; wealth; and access to and impact of changes in medical techniques. The subjectivity of these input variables can lead to vast complexities. Further, experts in the field of estimating life expectancy can arrive at materially different quotes for life expectancy for the same individual based on the same input information. The discount factor used in discounting future cash flows adds to the measurement uncertainty. It is calculated by deriving a risk yield curve which incorporates the USD LIBOR swap rates, credit spreads for the life insurance companies and a spread for longevity risk as observed in the secondary market. A third key assumption in discounting future cash flows is life premiums. We assume fairly stable life premium rates over the life of the respective policies.

The estimated fair value was initially calculated and provided by the seller, a financial institution, using a proprietary Monte Carlo model. Prior to the consummation of the transaction as disclosed in Item 8, Note 6 (c) of the Consolidated Financial Statements, we engaged Ernst & Young, as an independent actuary, to perform due diligence on the pricing of the structured life deal which included a review of life expectancy data, the survival probability curves, and the Monte Carlo model methodology used by the above financial institution. Based on the results of this due diligence, we have established the estimated fair value of the life settlement contracts at December 31, 2006.

~~The following table illustrates the fair value sensitivity due to changes in life expectancy assumptions:~~

Change in Average

Fair

Life Expectancy

Values

(in thousands)

-1 year

$
485,816

-0.5 year

$
430,127

0

$
377,767

+0.5 year

$
326,003

+ 1 year

$
277,257

~~Recent Accounting Pronouncements~~RECENT ACCOUNTING PRONOUNCEMENTS

See Item 8, Note 2 (l) to the Consolidated Financial Statements for a discussion on recently issued accounting pronouncements not yet adopted.

~~Off-Balance Sheet and Special Purpose Entity Arrangements~~OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS

At December 31, ~~2006,~~2007, we have not entered into any off-balance sheet arrangements, as defined by Item 303 (a) (4) of Regulation S-K.

~~Non-GAAP Financial Measure~~

We have presented diluted book value per common share calculated using the “If-Converted” method, rather than the “Treasury Stock” method, which is a non-GAAP financial measure. We have included this measure because it takes into account the effect of dilutive securities and, therefore, we believe this is a better measure of calculating shareholder returns than book value per share. The following table is a reconciliation of diluted book value per share to book value per share:

At December 31

2006

2005

2004

(in thousands, except per share)

Common shareholders’ equity

$
3,912,647

$
3,012,351

$
3,238,064

Shares outstanding

149,982

148,831

152,737

Book value per share

$
26.09

$
20.24

$
21.20

Diluted book value on a

“as if converted basis”

Common shareholders equity

3,912,647

3,012,351

3,238,064

add in:

proceeds on excerise of options

94,811

117,808

94,724

proceeds on exercise of warrants

244,363

244,812

244,812

Adjusted shareholders equity

$
4,251,821

$
3,374,971

$
3,577,600

As if converted diluted shares outstanding

Shares outstanding

149,982

148,831

152,737

add in:

vested phantom stock units

46

38

28

vesting of restricted stock

2,229

1,172

2,183

exersice of options

5,147

6,174

5,694

exercise of warrants

19,644

19,651

19,619

Diluted shares outstanding

177,048

175,866

180,261

Diluted book value per share

$
24.02

$
19.19

$
19.85

ITEM ~~7A.~~7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ~~Quantitative~~

Our Balance Sheets include a substantial amount of assets and ~~Qualitative Disclosure about~~to a lesser extent liabilities whose fair values are subject to market risks. Market ~~Risk~~

~~We are exposed~~risk represents the potential for an economic loss due to ~~potential loss on our investment portfolio from various~~adverse changes in the fair value of a financial instrument. Our most significant market risks ~~including~~are primarily associated with changes in interest rates and foreign currency exchange rates, and from credit risk. Our investment portfolio primarily consists of fixed income securities denominated in both U.S. and foreign currencies. External investment professionals manage our portfolio underrates. The following provides a sensitivity analysis on the ~~direction~~potential effects that these market risk exposures could have on the future earnings, fair values or cash flows of our management in accordance with investment guidelines provided by us. Our guidelines do not permit the use of derivatives other than foreign currency forward contracts. In the future, we may change our guidelines to permit the use of derivatives.material financial instruments.

~~Interest Rate Risk.~~INTEREST RATE RISK

Fluctuations in interest rates have a direct impact on the market valuation of our fixed income ~~securities included in our investment portfolio.~~investments. As interest rates rise, the market value of our fixed income portfolio falls, and the converse is also true. We manage interest rate risk by selecting investments with characteristics such as duration, yield, currency and liquidity tailored to the anticipated cash outflow characteristics of our insurance and reinsurance liabilities.

The current duration target range for our investment portfolios is two to four years. The duration of an investment is based on the maturity of the security and also reflects the payment of interest and the possibility of early principal payment of such security. We seek to use investment performance benchmarks that reflect this duration target. Management periodically revises these investment benchmarks based on business and economic factors, including the average duration of our potential liabilities. At December 31,

2006 and 2005, our invested assets (assets under management by external investment managers) had an approximate average duration of 3.0 years. When incorporating our operating cash into this calculation, the average duration at December 31, 2006 and 2005 is reduced to 2.6 years.

At December 31, 2006, we held $2,868.6 million (2005: $2,433.6 million) at fair value, or 29.9% (2005: 31.6%) of our total cash and investments, in mortgage-backed securities. When interest rates decline, these assets are exposed to prepayment risk, which occurs when holders of underlying mortgages increase the frequency with which they prepay the outstanding principal before the maturity date and refinance at a lower interest rate cost. When interest rates increase, these assets are exposed to extension risk, which occurs when holders of underlying mortgages reduce the frequency with which they prepay the outstanding principal before the maturity date and delay any refinancing of the outstanding principal.

We have calculated the effect that an immediate parallel shift in the U.S. interest rate yield curve would have on our ~~assets under management by third party investment managers~~total cash and fixed maturity investments at December 31, ~~2006.~~2007. The modeling of this effect was performed on each security individually using the security’s effective duration and changes in prepayment expectations for mortgage-backed and asset-backed securities. The results of this analysis are summarized in the table below. The hypothetical changes in interest rate risk do not reflect what could be deemed the best or worst case scenarios.

Interest Rate Movement Analysis on Market Value of ~~total~~Total Cash and Fixed Maturity Investments


	Interest Rate Shift in Basis Points
	-100		-50		0		+50		+100
Total Market Value	$	9,895,406	$	9,783,367	$	9,664,588	$	9,547,299	$	9,422,473
Market Value Change from Base		2.39%		1.23%		-		(1.21%)		(2.51%)
Change in Unrealized Value	$	230,818	$	118,779	$	-	$	(117,289)	$	(242,115)

We manage interest rate risk by selecting investments with durations, yields, currency and liquidity tailored to the anticipated cash outflow characteristics of our insurance and ~~fixed maturities investments~~

Interest Rate Shift in Basis Points

-100

-50

0

+50

+100

(in thousands)

Total Market Value

$
8,666,341

$
8,573,917

$
8,474,607

$
8,370,234

$
8,262,453

Market Value Change from Base

2.26
%
1.17
%
0.00
%
(1.23
)%
(2.57
)%
Change in Unrealized Value

$
191,734

$
99,310

$
—

$
(104,373
)
$
(212,154
)

reinsurance liabilities. Refer to “Cash and Investments” section above, for a discussion of target and actual durations on our investment portfolios.

~~Foreign Currency Risk.~~FOREIGN CURRENCY RISK

Fluctuations in foreign currency exchange rates have a direct impact on the ~~market~~ valuation of ~~fixed income securities included in~~ our ~~investment portfolio that are~~assets and liabilities denominated in those currencies. Therefore, we attempt to manage our foreign currency risk by seeking to match our liabilities under insurance and reinsurance policies that are payable in foreign currencies with cash and investments that are denominated in such currencies. ~~From time to time,~~Additionally, we have entered into several foreign currency forward contracts in order to minimize the effects of fluctuations in foreign currency exchange rates on our foreign currency denominated assets and liabilities. Additionally our investment managers may also enter into foreign currency forward contracts to manage portfolio risk and enhance our investment returns. ~~A foreign currency forward contract involves an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract.~~ Foreign currency forward contracts ~~will~~do not eliminate fluctuations in the value of our assets and liabilities denominated in foreign currencies but rather allow us to establish a rate of exchange for a future point in time. ~~However, we do not expect to enter into such contracts with respect to a material amount of our assets.~~ Foreign currency forward contracts purchased are not specifically identifiable against cash, any single security or any groups of securities and, therefore, do not qualify and are not designated as a hedge for financial reporting purposes. All realized gains and losses and unrealized gains and losses on foreign currency forward contracts are recognized in our Consolidated Statements of ~~Operations under Item 8 of this report.~~Operations.

~~At December 31, 2006,~~

The principal currencies creating foreign exchange risk to the ~~net contractual amount of foreign currency forward contracts was $7.2 million (2005: $87.0 million) with an unrealized loss of $0.9 million (2005: $0.5 million gain).~~

At December 31, 2006, we had insurance and reinsurance premium balances receivable of $1,125.8 million (2005: $1,027.0 million). Of this balance, 86.4% was denominated in U.S. dollars, 5.0% was denominated in Euro and 6.3% in Sterling. A 10% increase or decrease inCompany are the ~~value of~~Sterling, the Euro, the Australian dollar, the Canadian dollar and ~~Sterling currencies against~~ the ~~U.S. dollar would produce~~Japanese Yen. The following table provides a ~~gain or loss of approximately $12.7 million~~hypothetical analysis on our exposure to foreign exchange rate risk at December 31, ~~2006 compared to $11.4 million at December 31, 2005.~~2007 and 2006:



As at December 31,	2007		2006

Fair value of net assets denominated in foreign currencies	$	862,664	440,118
As a percentage of total shareholder’s equity		17%	10%
Pre-tax impact on equity of hypothetical 10% movement of the U.S dollar	$	78,424	40,011

~~Credit Risk.~~VALUE AT RISKWe have exposure to credit risk primarily as a holder of fixed income securities. Our risk management strategy and investment policy is to invest in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to particular ratings categories and any one issuer. We attempt to limit our credit exposure by purchasing fixed income investments rated BBB-/Baa3 or higher. In addition, we have limited our exposure to any single corporate issuer to 5% or less of our portfolio for securities rated A-/A3 or above and 2% or less of our portfolio for securities rated between BBB-/Baa3 and BBB+/Baa1. At December 31, 2006, we did not have an aggregate exposure to any single issuer of more than 10% of our shareholders’ equity, other than with respect to U.S. government and agency securities. In addition, we have credit risk under some contracts where we receive premiums in return for assuming the risk of default on pre-determined portfolios of sovereign and corporate obligations.

~~Value-at-Risk:~~Our management uses Value-at-Risk (“VaR”) as one of its tools to measure potential losses in the fair values of our cash and ~~invested assets.~~investments. The VaR calculation is calculated using a Monte Carlo simulation to project many different prices of fixed income securities, derivatives and currencies taking into account, among other things, the volatility and the correlation between security price changes over various forecast horizons. The VaR of our cash and ~~invested assets~~investments at December 31, ~~2006~~2007 was approximately ~~$202.1~~$276 million, or ~~2.1%~~2.6%, compared to ~~$252.2~~$202 million, or ~~2.6%~~2.1% at December 31, ~~2005,~~2006, which represents the potential loss in fair value of our ~~invested assets portfolio~~cash and investments over a one year time horizon within a 95% confidence level. ~~There was a decrease~~The increase in our VaR ~~which resulted from~~was primarily related to increased volatility in the ~~shortening of the invested assets duration over the period.~~markets. The VaR computation is a risk analysis tool and does not purport to represent actual losses in fair value. We cannot predict actual future movements in market rates and do not present these results to be indicative of future movements in such market rates or to be representative of any actual impact that future changes in market rates may have on our future results of operations or financial position. During the years ended ~~2006~~2007 and ~~2005~~2006 actual changes in fair value did not exceed the VaR amount.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Index to Consolidated Financial Statements and Related Notes			Page
Report of Independent Registered Public Accounting Firm		60
	73
Consolidated Balance Sheets as at December 31, ~~2006~~2007 and ~~2005~~2006		61
	74
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		62
	75
Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		63
	76
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		64
	77
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		65
	78
Notes to Consolidated Financial Statements

Note 1 – History		66

Note 2 – Significant Accounting Policies		66

79Note 3 – Segment Information		72

Note 4 – Goodwill and Intangible Assets		76

Note 5 – Investments		77

Note 6 – Reserves for Losses and Loss Expenses		82

Note 7 – Reinsurance		83

Note 8 – Derivative Instruments		84

Note 9 – Debt and Financing Arrangements		85

Note 10 – Commitments and Contingencies		86

Note 11 – Earnings Per Common Share		88

Note 12 – Shareholders’ Equity		88

Note 13 – Benefits Plans		90

Note 14 – Stock Compensation Plans		90

Note 15 – Related Party Transactions		93

Note 16 – Taxation		93

Note 17 – Statutory Financial Information		95

Note 18 – Fair Values of Financial Instruments		96

Note 19 – Condensed Quarterly Financial Data - Unaudited		97

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

AXIS Capital Holdings Limited

We have audited the accompanying consolidated balance sheets of AXIS Capital Holdings Limited and subsidiaries (the “Company”) as of December 31, ~~2006~~2007 and ~~2005,~~2006, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2006.~~2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AXIS Capital Holdings Limited and subsidiaries as of December 31, ~~2006~~2007 and ~~2005,~~2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2006,~~2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the ~~effectiveness of the~~ Company’s internal control over financial reporting as of December 31, ~~2006,~~2007, based on the criteria established in Internal ~~Control—~~Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February ~~28, 2007~~25, 2008 expressed ~~an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and~~ an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

~~/s/ Deloitte & Touche~~
~~Hamilton, Bermuda~~
~~February 28, 2007~~
/S/ DELOITTE & TOUCHE

Hamilton, Bermuda

73February 25, 2008

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS
~~DECEMEBER~~

DECEMBER 31, ~~2006~~2007 AND ~~2005~~2006

2006

2005

(in thousands)

Assets

Investments:

Fixed maturity investments available for sale, at fair value
(Amortized cost 2006: $6,574,249; 2005: $6,090,998)

$
6,532,723

$
6,012,425

Other investments, at fair value

1,130,664

409,504

Total investments

7,663,387

6,421,929

Cash and cash equivalents

1,989,287

1,280,990

Accrued interest receivable

76,967

59,784

Insurance and reinsurance premium balances receivable

1,125,822

1,026,975

Reinsurance recoverable balances

1,293,660

1,455,248

Reinsurance recoverable balances on paid losses

65,494

62,862

Deferred acquisition costs

251,799

196,388

Prepaid reinsurance premiums

241,821

281,579

Securities lending collateral

794,149

998,349

Goodwill and intangible assets

29,041

37,013

Other assets

133,860

104,859

Total assets

$
13,665,287

$
11,925,976

Liabilities

Reserve for losses and loss expenses

$
5,015,113

$
4,743,338

Unearned premiums

2,015,556

1,760,467

Insurance and reinsurance balances payable

294,374

314,232

Securities lending payable

791,744

995,287

Senior notes

499,144

499,046

Liability under repurchase agreement

400,000

—

Net payable for investments purchased

62,185

76

Other liabilities

174,524

101,179

Total liabilities

9,252,640

8,413,625

Commitments and Contingencies

Shareholders’ Equity

Series A preferred shares
(issued and outstanding 2006: 10,000; 2005: 10,000)

$
125

$
125

Series B preferred shares
(issued and outstanding 2006: 2,500; 2005: 2,500)

31

31

Common shares
(issued and outstanding 2006: 149,982; 2005: 148,831)

1,875

1,861

Additional paid-in capital

2,429,250

2,386,200

Accumulated other comprehensive loss

(44,638
)
(77,798
)
Retained earnings

2,026,004

1,201,932

Total shareholders’ equity

4,412,647

3,512,351

Total liabilities and shareholders’ equity

$
13,665,287

$
11,925,976


(in thousands)	2007		2006
Assets
Investments:
Fixed maturity investments available for sale, at fair value (Amortized cost 2007: $8,301,528; 2006: $6,574,249)	$	8,331,666	$	6,532,723
Other investments, at fair value		645,987		1,130,664

Total investments		8,977,653		7,663,387
Cash and cash equivalents		1,332,921		1,989,287
Accrued interest receivable		87,338		76,967
Insurance and reinsurance premium balances receivable		1,231,494		1,125,822
Reinsurance recoverable balances		1,280,295		1,293,660
Reinsurance recoverable balances on paid losses		76,598		65,494
Deferred acquisition costs		276,801		251,799
Prepaid reinsurance premiums		242,940		241,821
Securities lending collateral		865,256		794,149
Net receivable for investments sold		86,356		-
Goodwill and intangible assets		61,653		29,041
Other assets		156,004		133,860

Total assets	$	14,675,309	$	13,665,287

Liabilities
Reserve for losses and loss expenses	$	5,587,311	$	5,015,113
Unearned premiums		2,146,087		2,015,556
Insurance and reinsurance balances payable		244,988		294,374
Securities lending payable		863,906		791,744
Senior notes		499,261		499,144
Other liabilities		175,134		174,524
Liability under repurchase agreement		-		400,000
Net payable for investments purchased		-		62,185

Total liabilities		9,516,687		9,252,640


*Commitments and Contingencies*

Shareholders’ Equity
Preferred shares - Series A and B		500,000		500,000
Common shares(2007: 142,520; 2006: 149,982 shares issued)		1,850		1,875
Additional paid-in capital		1,869,810		1,929,406
Accumulated other comprehensive income (loss)		22,668		(44,638)
Retained earnings		2,968,900		2,026,004
Treasury shares, at cost(2007: 5,466; 2006: nil shares)		(204,606)		-

Total shareholders’ equity		5,158,622		4,412,647

Total liabilities and shareholders’ equity	$	14,675,309	$	13,665,287

See accompanying notes to ~~consolidated financial statements.~~Consolidated Financial Statements

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

2006

2005

2004

(in thousands, except per share amounts)

Revenues

Net premiums earned

$
2,694,270

$
2,553,683

$
2,028,397

Net investment income

407,100

256,712

152,072

Net realized investment (losses) gains

(25,702
)
(16,912
)
13,634

Other insurance related income (loss)

2,893

(5,085
)
11,253

Total revenues

3,078,561

2,788,398

2,205,356

Expenses

Net losses and loss expenses

1,425,855

2,051,129

1,246,244

Acquisition costs

386,959

337,383

280,568

General and administrative expenses

268,396

212,842

187,305

Foreign exchange (gains) losses

(32,505
)
54,090

(14,484
)
Interest expense and financing costs

32,954

32,447

5,285

Total expenses

2,081,659

2,687,891

1,704,918

Income before income taxes

996,902

100,507

500,438

Income tax expense

33,842

6,067

5,440

Net income

963,060

94,440

494,998

Preferred share dividends

37,295

4,379

—

Net income available to common shareholders

$
925,765

$
90,061

$
494,998

Weighted average common shares and common share equivalents:

Basic

149,745

143,226

152,554

Diluted

164,394

157,524

165,876

Earnings per common share:

Basic

$
6.18

$
0.63

$
3.24

Diluted

$
5.63

$
0.57

$
2.98

Cash dividends declared per common share

$
0.615

$
0.60

$
0.50


	2007		2006		2005
	(in thousands, except for share amounts)
Revenues
Net premiums earned	$	2,734,410	$	2,694,270	$	2,553,683
Net investment income		482,873		407,100		256,712
Net realized investment gains (losses)		5,230		(25,702)		(16,912)
Other insurance related income (loss)		3,911		2,893		(5,085)

Total revenues		3,226,424		3,078,561		2,788,398


Expenses
Net losses and loss expenses		1,370,260		1,425,855		2,051,129
Acquisition costs		384,497		386,959		337,383
General and administrative expenses		303,831		268,396		212,842
Foreign exchange (gains) losses		(16,826)		(32,505)		54,090
Interest expense and financing costs		51,153		32,954		32,447

Total expenses		2,092,915		2,081,659		2,687,891


Income before income taxes		1,133,509		996,902		100,507
Income tax expense		41,491		33,842		6,067

Net income		1,092,018		963,060		94,440

Preferred share dividends		36,775		37,295		4,379

Net income available to common shareholders	$	1,055,243	$	925,765	$	90,061


Weighted average common shares and common share equivalents:
Basic		147,524		149,745		143,226

Diluted		164,515		164,394		157,524


Earnings per common share:
Basic	$	7.15	$	6.18	$	0.63

Diluted	$	6.41	$	5.63	$	0.57


Cash dividends declared per common share	$	0.68	$	0.615	$	0.60

See accompanying notes to ~~the consolidated financial statements.~~Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

2006

2005

2004

(in thousands)

Net income

$
963,060

$
94,440

$
494,998

Other comprehensive income, net of tax

Net loss on supplemental executive retirement plans (SERPs)

(484
)
—

—

Unrealized gains (losses) arising during the year

22,517

(72,211
)
(3,216
)
Adjustment for re-classification of investment losses (gains) realized in net income

15,630

(18,542
)
(9,033
)
Comprehensive income

$
1,000,723

$
3,687

$
482,749


	2007		2006		2005
	(in thousands)
Net income	$	1,092,018	$	963,060	$	94,440
Other comprehensive income, net of tax
Change in unrecognized prior service cost on the supplemental executive retirement plans (SERPs)		2,465		(484)		-
Unrealized gains (losses) arising during the period		70,377		22,517		(72,211)
Adjustment for re-classification of investment (gains) losses realized in net income		(5,536)		15,630		(18,542)

Comprehensive income	$	1,159,324	$	1,000,723	$	3,687

See accompanying notes to ~~consolidated financial statements.~~Consolidated Financial Statements

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

2006

2005

2004

(in thousands)

Preferred shares

Balance at beginning of year

$
156

$
—

$
—

Series A and B preferred shares issued during the year

—

156

—

Balance at end of year

156

156

—

Common shares

Balance at beginning of year

1,861

1,910

1,906

Issued during the year

14

111

4

Repurchased during the year

—

(160
)
—

Balance at end of year

1,875

1,861

1,910

Additional paid-in capital

Balance at beginning of year

2,386,200

2,017,144

2,000,731

Shares issued during year, net of costs

305

684,765

(1,718
)
Repurchased during year

(335
)
(349,840
)
—

Stock option exercise

17,411

8,577

729

Share-based compensation expense

25,669

25,554

17,402

Balance at end of year

2,429,250

2,386,200

2,017,144

Accumulated other comprehensive (loss) income

Balance at beginning of year

(77,798
)
12,915

25,164

Change in unrealized gains (losses) on fixed maturity investments

38,326

(92,409
)
(12,594
)
Change in net loss on SERP

(484
)
—

—

Adjustment to initially adopt FASB Statement No. 158

(4,503
)
—

—

Change in deferred taxes

(179
)
1,696

345

Balance at end of year

(44,638
)
(77,798
)
12,915

Retained earnings

Balance at beginning of year

1,201,932

1,206,095

789,347

Net income for year

963,060

94,440

494,998

Series A and B preferred shares dividends

(37,295
)
(4,379
)
—

Common share dividends

(101,693
)
(94,224
)
(78,250
)
Balance at end of year

2,026,004

1,201,932

1,206,095

Total Shareholders’ Equity

$
4,412,647

$
3,512,351

$
3,238,064


(in thousands)	2007		2006		2005
Common shares (shares outstanding)
Balance at beginning of period		149,982		148,831		152,737
Shares issued, net		791		1,162		8,877
Shares repurchased for treasury		(5,466)		-		-
Shares repurchased and cancelled		(2,787)		(11)		(12,783)

Balance at end of period		142,520		149,982		148,831

Preferred shares - Series A and B
Balance at beginning and end of period	$	500,000	$	500,000	$	500,000

Common shares (par value)
Balance at beginning of period		1,875		1,861		1,910
Shares issued		10		14		111
Shares repurchased and cancelled		(35)		-		(160)

Balance at end of period		1,850		1,875		1,861

Additional paid-in capital
Balance at beginning of period		1,929,406		1,886,356		2,017,144
Shares issued		1,385		305		184,921
Shares repurchased and cancelled		(103,469)		(335)		(349,840)
Stock options exercised		7,503		17,411		8,577
Share-based compensation expense		34,985		25,669		25,554

Balance at end of period		1,869,810		1,929,406		1,886,356

Accumulated other comprehensive income (loss)
Balance at beginning of period		(44,638)		(77,798)		12,915
Unrealized appreciation (depreciation) on fixed maturity investments		67,238		38,326		(92,409)
Amortization of prior service cost on the SERPs		2,465		(484)		-
Change in deferred taxes		(2,397)		(179)		1,696

		22,668		(40,135)		(77,798)
Adjustment to initially apply FASB No. 158		-		(4,503)		-

Balance at end of period		22,668		(44,638)		(77,798)

Retained earnings
Balance at beginning of period		2,026,004		1,201,932		1,206,095
Net income		1,092,018		963,060		94,440
Series A and B preferred share dividends		(36,775)		(37,295)		(4,379)
Common share dividends		(112,347)		(101,693)		(94,224)

Balance at end of period		2,968,900		2,026,004		1,201,932

Treasury shares, at cost
Balance at beginning of period		-		-		-
Shares repurchased for treasury		(204,606)		-		-

Balance at end of period		(204,606)		-		-

Total shareholders’ equity	$	5,158,622	$	4,412,647	$	3,512,351

See accompanying notes to ~~consolidated financial statements.~~Consolidated Financial Statements

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

2006

2005

2004

(in thousands)

Cash flows from operating activities:

Net income

$
963,060

$
94,440

$
494,998

Adjustments to reconcile net income to net cash provided by operating activities:

Net realized investment losses (gains)

25,702

16,912

(13,634
)
Change in carrying value of other investments

(32,384
)
(9,517
)
0

Amortization/accretion of fixed maturities

31,913

32,009

31,136

Other amortization and depreciation

8,680

9,274

5,213

Share-based compensation expense

25,669

25,553

17,403

Changes in:

Accrued interest receivable

(17,183
)
(12,076
)
(17,957
)
Reinsurance recoverable balances

158,956

(898,894
)
(471,400
)
Deferred acquisition costs

(55,411
)
14,694

(74,801
)
Prepaid reinsurance premiums

39,758

(10,355
)
(106,188
)
Reserve for loss and loss expenses

271,775

2,315,861

1,411,714

Unearned premiums

255,089

115,659

501,324

Insurance and reinsurance balances, net

(118,705
)
(46,121
)
(157,473
)
Other items

56,386

(64,498
)
(20,384
)
Net cash provided by operating activities

1,613,305

1,582,941

1,599,951

Cash flows from investing activities:

Acquisitions, net of cash acquired

—

(27,751
)
—

Purchase of available-for-sale securities

(4,900,182
)
(7,324,809
)
(7,632,473
)
Sales and maturities of available-for-sale securities

4,435,543

6,440,423

5,747,301

Purchases of other investments

(701,584
)
(300,872
)
(105,812
)
Net cash used in investing activities

(1,166,223
)
(1,213,009
)
(1,990,984
)
Cash flows from financing activities:

Dividends paid—common shares

(90,575
)
(82,777
)
(67,966
)
Dividends paid—preferred shares

(37,295
)
—

—

Proceeds from issuance of senior notes

—

—

495,714

Proceeds from repurchase agreement

400,000

—

—

Repurchase of shares

(335
)
(350,000
)
—

Issuance of common shares, net

17,856

204,046

(986
)
Issuance of preferred shares, net

(126
)
489,564

—

Net cash provided by financing activities

289,525

260,833

426,762

Effect of exchange rate changes on foreign currency cash

(28,310
)
17,896

(8,575
)
Increase in cash and cash equivalents

708,297

648,661

27,154

Cash and cash equivalents—beginning of period

1,280,990

632,329

605,175

Cash and cash equivalents—end of period

$
1,989,287

$
1,280,990

$
632,329

Supplemental disclosures of cash flow information:

Income taxes paid

$
56,178

$
27,800

$
17,626

Interest paid

$
28,750

$
30,051

$
—


	2007		2006		2005
	(in thousands)
Cash flows from operating activities:
Net income	$	1,092,018	$	963,060	$	94,440
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment (gains) losses		(5,230)		25,702		16,912
Change in fair value of other investments		(23,251)		(32,384)		(9,517)
Amortization/accretion of fixed maturities		(13,946)		31,913		32,009
Other amortization and depreciation		29,111		8,680		9,274
Share-based compensation expense		34,985		25,669		25,553
Changes in:
Accrued interest receivable		(10,371)		(17,183)		(12,076)
Reinsurance recoverable balances		2,261		158,956		(898,894)
Deferred acquisition costs		(25,002)		(55,411)		14,694
Prepaid reinsurance premiums		(1,119)		39,758		(10,355)
Reserve for loss and loss expenses		572,198		271,775		2,315,861
Unearned premiums		130,531		255,089		115,659
Insurance and reinsurance balances, net		(155,058)		(118,705)		(46,121)
Other items		(54,111)		56,386		(64,498)

Net cash provided by operating activities		1,573,016		1,613,305		1,582,941

Cash flows from investing activities:
Purchases of available-for-sale fixed maturities		(8,578,190)		(4,900,182)		(7,324,809)
Sales and maturities of available-for-sale fixed maturities		6,755,461		4,435,543		6,440,423
Purchases of other investments		(139,250)		(701,584)		(300,872)
Sales of other investments		592,361		-		-
Purchase of assets		(47,026)		-		(27,751)

Net cash used in investing activities		(1,416,644)		(1,166,223)		(1,213,009)

Cash flows from financing activities:
(Repayment) proceeds from repurchase agreement		(400,000)		400,000		-
Repurchase of shares		(308,110)		(335)		(350,000)
Dividends paid - common shares		(111,226)		(90,575)		(82,777)
Dividends paid - preferred shares		(36,775)		(37,295)		-
Proceeds from issuance of common shares		8,898		17,856		204,046
Proceeds from issuance of preferred shares, net		-		(126)		489,564

Net cash (used in) provided by financing activities		(847,213)		289,525		260,833

Effect of exchange rate changes on foreign currency cash		34,475		(28,310)		17,896

(Decrease) increase in cash and cash equivalents		(656,366)		708,297		648,661
Cash and cash equivalents - beginning of period		1,989,287		1,280,990		632,329

Cash and cash equivalents - end of period	$	1,332,921	$	1,989,287	$	1,280,990

Supplemental disclosures of cash flow information:
Income taxes paid	$	60,023	$	56,178	$	27,800

Interest paid	$	47,970	$	28,750	$	30,051

See accompanying notes to ~~consolidated financial statements.~~Consolidated Financial Statements

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

1. ~~History~~

History

AXIS Capital Holdings Limited (“AXIS Capital”) is the Bermuda-based holding company for the AXIS group of companies, collectively ~~“the Company”~~the “Company”. AXIS Capital was incorporated on December 9, 2002, under the laws of Bermuda. Through its subsidiaries organized in Bermuda, Ireland and the United States, AXIS Capital provides a broad range of insurance and reinsurance products on a worldwide basis under two distinct global underwriting platforms, AXIS Insurance and AXIS Re. In these notes, the terms “we,” “us,” “our,” or the “Company” refer to AXIS Capital and its direct and indirect subsidiaries.

2. ~~Summary of Significant Accounting Policies~~

~~a) Basis of Presentation~~

2.	Significant Accounting Policies

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

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The consolidated financial statements include ~~the accounts of the Company as well as~~ all variable interest entities (VIEs) for which ~~the Company is~~we are the primary ~~beneficiary, as defined under FASB Interpretation No. 46 (revised December 2003),~~ ~~Consolidation of Variable Interest Entities~~ (FIN 46). FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns or both.beneficiary. All significant inter-company accounts and transactions have been eliminated. ~~All amounts are reported in U.S. dollars.~~

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates reflected in ~~the Company’s~~our consolidated financial statements are:

the reserve for losses and loss expenses;

· ~~the estimate of~~ reinsurance recoverable balances, including the provision for unrecoverable reinsurance;

· ~~the~~ premium ~~estimates for business~~ written on a line slip orand proportional basis;

·the ~~estimation of fair values for other investments;~~

· ~~the estimation of~~ prepayment for mortgage-backed and asset-backed securities;

·the valuation of deferred tax assets; ~~and~~

·the impairments to the carrying value of the investment ~~portfolio.~~portfolio;

the fair value of certain derivatives; and

the fair values for other investments.

While the amounts included in the consolidated financial statements reflect management’s best estimates and assumptions, these amounts could ultimately differ from those estimates.

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

2. ~~Summary of Significant Accounting Policies (Continued)~~

Any such adjustments are reflected in income in the period in which they become known. Certain reclassifications have been made to prior ~~year~~period amounts to conform to the current ~~year’s~~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. Tabular dollars and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars. Our significant accounting policies are as follows:

a)	Investments

~~b) Investments~~

Investments available for sale

Investments that are considered to be “available for sale” under the definition included in FAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, are reported at fair value at the balance sheet date. The fair value of investments is based upon quoted market values where available or by reference to broker or underwriter bid indications. The net unrealized gain or loss on investments, net of tax, is included as accumulated other comprehensive income (loss) in shareholders’ equity.

Purchases and sales of investments are recorded on a trade date basis. Realized gains or losses on sales of investments are determined based on the specific identification method.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

2.	Significant Accounting Policies (Continued)

Net investment income is recognized when earned and includes interest and dividend income together with amortization of market premiums and discounts using the effective yield method and is net of investment ~~fees.~~management fees and other expenses. Formortgage-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the change in effective yields and maturities are recognized on a prospective basis through yield adjustments.

Other investments

~~Other investments~~

~~The Company accounts~~We account for ~~its~~our collateralized loan obligations (“CLOs”), investment funds and life settlement contracts at fair value. Interest, dividend income, income distributions, changes in net asset values, and realized gains and losses are included in net investment income. We have no significant influence and do not and have not participated in the management of CLOs, investment funds or the life settlement contracts. Many of the investments are subject to restrictions on redemptions and sales which are determined by the governing documents and limit our ability to liquidate these investments in the short term.

~~The Company invests~~We invest in both senior debt and equity tranches of CLOs. The fair value of senior debt tranches is based on available market prices; whereas, the fair value of equity tranches is derived by amortizing the invested amounts at rates which incorporate certain assumptions such as market default rates, weighted average spread earned and recovery rates over the expected life of the security. Any adjustments required due to the change in effective yields and maturities are recognized on a prospective basis through yield adjustments.

Investment funds include a short duration high yield fund, credit funds and ~~fund of~~ hedge funds. The fair value for these investment funds is determined by management ~~using~~incorporating the net asset value provided by the third party administrators of these funds. The valuation for credit funds is reported on a one month lag.

~~The Company~~We elected to use the fair value method to account for all of the life settlement contracts under FASB Staff Position No. FTB 85-4-1,Accounting for Life Settlement Contracts by Third Party Investors. The fair value of the life settlement contracts is based on discounting the estimated cash flows of the life insurance policies, as calculated by a financial institution and reviewed by management. The discount factor is calculated by deriving a risk yield curve which incorporates the USD LIBOR swap rates, credit spreads for the life insurance companies and a spread for longevity risk as observed in the secondary market. Changes in the fair value of life settlement contracts, life insurance proceeds and life premium

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

2. ~~Summary of Significant Accounting Policies (Continued)~~

payments are included in net investment income. The cash flows relating to the life settlement contracts are included in investing activities in the Consolidated Statements of Cash Flows.

~~The Company has no significant influence and does not participate in the management of CLOs, investment funds and the life settlement contracts.~~

Other than temporary declines in investments

~~The Company assesses~~We assess quarterly whether declines in fair value of ~~its~~our investments represent impairments that are other than temporary. There are several factors that are considered in the assessment of a security, which include (i) the time period during which there has been a significant decline below cost, (ii) the extent of the decline below cost, (iii) ~~the Company’s~~our intent and ability to hold the security, (iv) the potential for the security to recover in value, (v) an analysis of the financial condition of the issuer and (vi) an analysis of the collateral structure and credit support of the security, if applicable. Where ~~the Company has~~we have determined that there is an other than temporary impairment in the fair value of the security, the cost of the security is written down to the fair value and the unrealized loss at the time of the determination is charged to net realized investment gains (losses)~~gains~~ in the Consolidated Statement of Operations.

~~c) Cash and cash equivalents~~

b)	Cash and cash equivalents

Cash equivalents include money-market funds and fixed interest deposits placed with a maturity of under 90 days when purchased. At December 31, ~~2006,~~2007, cash and cash equivalents included restricted cash of ~~$105.7~~$60 million, primarily for ~~funding future life insurance premiums (see Notes 6 (c) and 11(h)) and~~ collateralizing certain reinsurance agreements.

~~d) Premiums and Acquisition Costs~~AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

2.	Our Significant Accounting Policies (Continued)

c)	Premiums and Acquisition Costs

Premiums written are recorded in accordance with the terms of the underlying policies. Reinsurance premiums assumed are estimated based upon information received from ceding companies and any subsequent differences arising on such estimates are recorded in the period they are determined. Premiums are generally contractually stated except for business written on a line slip or proportional basis.

Under FAS No. 60,Accounting and Reporting by Insurance Enterprises, a company is permitted to book premium as long as it is reasonably estimable. For line slip premiums, ~~the Company receives~~we receive an initial estimate of expected premium from the client via the broker. This estimate has been derived by reference to one or more of the following: the historical premium volume experienced by the line slip; historical premium volume of similar line slips; and industry information on the underlying business. We may, if we believe appropriate, adjust the initial estimates provided by the broker to reflect management’s best judgment and expectations. This is most likely where the underwriter believes that the estimate is not prudent. In the case of proportional contracts, similar to our line slip business, we are able to reasonably estimate the ~~Company receives~~premium written by reference to an initial estimate of expected ceded premium received from our clients. In most cases, the ~~expected premium~~treaties are not new and the client can use historical experience to ~~be ceded from its client. The Company monitors~~estimate the amount of premium. We may, if we believe appropriate, adjust the initial estimates provided by the broker to reflect management’s best judgments and expectations. This is most likely where the underwriter believes that the estimate is not prudent. We monitor the emergence of actual premium data on line slip policies and proportional reinsurance contracts and ~~adjusts its~~adjust our estimates of written premiums to reflect reported premiums on a periodic basis as additional information becomes available.

Premiums are earned over the terms of the policies in proportion to the risks to which they relate. Unearned premiums represent the portion of premiums written that is applicable to the unexpired portion of the policies in force.

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~ The accrual of reinstatement premiums is based on an estimate of losses and loss adjustment expenses, which reflects management’s judgment, as described in Note 2 (e) below.

2. ~~Summary of Significant Accounting Policies (Continued)~~

Acquisition costs, which comprise primarily of fees and commissions paid to brokers and taxes, vary with and are directly related to the acquisition of ~~policies and~~policies. Acquisition costs are shown net of commissions earned on ceded business. These net costs are deferred and amortized over the ~~period~~periods in which the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. If such costs are estimated to be unrecoverable, they are expensed.

~~e) Reinsurance~~

d)	Reinsurance

In the normal course of business, ~~the Company seeks~~we seek to reduce the loss that may arise from events that could cause unfavorable underwriting results by reinsuring certain levels of risk in various lines of business with other reinsurers. Reinsurance premiums ceded are expensed over the period the reinsurance coverage is provided. Prepaid reinsurance premiums represent the portion of premiums ceded on the unexpired term of the policies in force. Reinstatement premiums ceded are recorded at the time a loss event occurs where coverage limits for the remaining life of a contract are reinstated under pre-defined contract terms and are expensed over the remaining risk period.

Reinsurance recoverables are based on contracts in force and are presented net of a reserve for uncollectible reinsurance. The method for determining the reinsurance recoverable on unpaid losses and loss expenses involves actuarial estimates of unpaid losses and loss expenses as well as a determination of ~~the Company’s~~our ability to cede unpaid losses and loss expenses under ~~its~~our reinsurance treaties.

The reserve for uncollectible reinsurance is based on an estimate of the amount of the reinsurance recoverable balance that will ultimately not be recovered due to reinsurer insolvency, contractual disputes or some other reason. The valuation of this reserve ~~for uncollectible reinsurance~~ includes several processes including a review of the credit ratings of the reinsurance recoverables by reinsurer, an analysis of default probabilities as well as coverage issues. These factors require considerable management judgment and the factors are reviewed in detail on a regular basis with any resulting adjustments reflected in losses and loss expenses in our Consolidated Statement of Operations in the period that collection issues are identified.

~~f) Losses and Loss Expenses~~AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

2.	Significant Accounting Policies (Continued)

e)	Loss and Loss Expenses

Reserves for losses and loss expenses are established by management ~~with assistance from the Company’s independent actuaries. They~~and represent an estimate of the total cost of claims that are reported but not yet paid ~~the cost of additional~~ (“case ~~reserves on claims reported to the Company but not considered to be adequately reserved~~reserves”) and the anticipated cost of claims incurred but not reported (“IBNR”).

For reported losses, management primarily establishes case reserves based on amounts reported from insureds or ceding companies. Management may also establish additional case reserves on claims reported which are not considered adequately reserved. Case reserves are established on a case by case basis within the parameters of coverage provided in the insurance and reinsurance contracts. Our general IBNR reserves are calculated by projecting our ultimate losses on each class of business and subtracting paid losses and case reserves. Unlike case reserve, IBNR is ~~estimated by~~generally calculated at an aggregate level and cannot usually be directly identified as reserves for a particular loss or contract.

Within our reserving process, management ~~in consultation with~~utilizes the ~~independent actuaries who use actuarial models to derive IBNR. The Bornhuetter-Ferguson and~~ initial expected loss ratio method (“IELR”) ~~methods are primarily used although the~~, chain ladder and Bornhuetter-Ferguson (“~~loss emergence”~~BF”) method is also utilized for some lines of business. The Bornhuetter-Ferguson method takes as a starting point an assumed ultimate loss and loss expense ratio and blends in the loss and loss expense ratio implied by the experience to date.

actuarial methods. The IELR method estimates ultimate ~~loss and loss expenses~~losses based on pricing information and industry data. ~~Both methods are typically used by companies with limited~~The BF method uses as a starting point an assumed IELR and blends in the loss ~~experience.~~

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

2. ~~Summary of Significant Accounting Policies (Continued)~~

For the insurance segment, the assumed ultimate loss and loss expense ratios are based on benchmarks derived from the independent actuaries wider market experience together with our limited historical data. These benchmarks are then adjusted for rating increases or decreases and changes in terms and conditions that have been observedratio implied by the ~~market and by~~claims experience to date. The chain ladder method uses the ~~Company. For~~historical development profile of claims experienced on older accident years to project the ~~reinsurance segment, the assumed~~more recent, less developed accident years to their ultimate ~~loss and loss expense ratios are based~~position. The basis of our selected single point best estimate on ~~contract-by-contract initial expected loss ratios derived during pricing together with benchmarks derived from the independent actuaries wider market experience.~~

~~Applying these loss and loss expense ratios to earned premium derives the estimated baseline ultimate costs~~a particular line of business is often a blend of the ~~losses~~results from two or more methods (e.g. weighted averages). Our estimate is highly dependent on management’s judgment as to which ~~paid losses~~method(s) is most appropriate for a particular accident year and ~~reported case reserves are deducted to generate baseline IBNR. The actuarial methodologies used to~~ ~~derive the baseline estimate can not fully allow for all uncertainties within the Company’s~~class of business. ~~To reduce some of these uncertainties, management~~Our methodology changes over time as new information emerges regarding underlying loss activity and other data issues.

Management also performs ~~in conjunction with the independent actuaries~~ an analysis of additional factors to be considered when establishing ~~IBNR.~~our IBNR, intended to enhance our best estimate beyond quantitative techniques and reflect uncertainties specific to our business. These uncertainties may vary over time, but generally contemplate matters such as the timing and emergence of claims or short term market ~~trends~~trends. While we believe that ~~might alter the Company’s otherwise consistent baseline approach. A combination of the baseline estimate of IBNR and the~~our reserves for ~~the additional uncertainties constitutes management’s and the actuaries’ best estimate of IBNR.~~

~~While management believes that the reserves for unpaid~~ losses and loss expenses are sufficient to pay losses that fall within the coverages ~~assumed by the Company, the~~we assume, actual losses and loss expenses ~~incurred by the Company~~ may be materially greater or less than the reserve provided. Due to the limited length of time ~~that the Company has~~we have been operating, actual loss experience is limited; this increases the potential for material deviation from currently estimated amounts. The methods of determining such estimates and establishing the resulting reserve are reviewed quarterly and any adjustments are reflected in income in the period in which they become known.

~~g) Foreign Currency Transactions~~

f)	Foreign Currency Transactions

~~The~~Our functional currency ~~of the Company and its subsidiaries~~ is the U.S. dollar. ~~Monetary~~We remeasure monetary assets and liabilities denominated in foreign currencies ~~are translated~~ at year end exchange rates, with the resulting foreign exchange gains and losses recognized in the Consolidated Statements of Operations. Revenues and expenses in foreign currencies are ~~translated~~converted at average exchange rates during the year. In the case of foreign currency denominated fixed maturity investments, the change in exchange rates between the local currency and our functional currency at each balance sheet date represents an unrealized appreciation or decline in value of these securities, and is included as a component of accumulated other comprehensive income.

~~h) Stock Compensation~~

g)	Stock-Based Compensation

OnPrior to January 1, ~~2003, the Company adopted~~2006, we accounted for stock-based awards under the fair value recognition and measurement provisions of FAS No. 123,Accounting for Stock-Based Compensation~~(“FAS 123”), as amended under~~ (“FAS No. ~~148,~~ ~~Accounting for Stock-Based Compensation—Transition and Disclosure~~ ~~(“FAS 148”~~123”)~~, under the prospective method permitted for stock-based awards granted subsequent to January 1, 2003.~~

. Effective January 1, 2006, ~~the Company~~we adopted ~~the provisions of~~ FAS No. 123 (revised 2004),~~Share-Based Payments~~Share Based Payment (“FAS ~~123 (R)~~No. 123(R)”) using the modified prospective approach. ~~Under both FAS 123~~We determine the fair value of the stock-based award at the date of grant and ~~FAS 123 (R),~~recognized the share-based compensation expense ~~for stock options and for restricted stock awards granted to employees is based on the grant-date fair value and recorded~~ over the ~~requisite service period. However, FAS 123(R) requires an~~period the award is earned by the employee, net of our best estimate of forfeiture ~~benefits at the time of grant be incorporated into the~~

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

2. ~~Summary of Significant Accounting Policies (Continued)~~

determination of share-based compensation expense. For awards that have a graded vesting schedule, the Company recognizes compensation expense on a straight-line basis over the vesting period for each separate vesting portion of the award as if the award was, in-substance, multiple awards. The Company has not issued awards subject to performance and market conditions.benefits. The adoption of FAS ~~123 (R)~~123(R) did not have a significant impact on net income and basic and diluted earnings per share for 2006.

~~The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions to all of its stock-based compensation.~~

AXIS CAPITAL HOLDINGS LIMITED

Year ended December 31

2005

2004

(in thousands)

Net income available to common shareholders, as reported

$
90,061

$
494,998

Add: Stock based compensation expense included in net income, net of related tax effects

21,956

15,008

Deduct: Total stock-based employee compensation determined under fair value methods for all awards, net of related tax effects

(22,671
)
(17,848
)
Pro- forma net income available to common shareholders

$
89,346

$
492,158

Earnings per common share:

Basic—as reported

$
0.63

$
3.24

Basic—pro forma

$
0.62

$
3.23

Diluted—as reported

$
0.57

$
2.98

Diluted—pro forma

$
0.57

$
2.97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

2.	Significant Accounting Policies (Continued)

~~i) Derivative Instruments~~

h)	Derivative Instruments

~~The Company accounts~~We account for ~~its~~our derivative instruments using FAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“FAS 133”). For non-hedging transactions, FAS 133 generally requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value with movements in fair value reflected in earnings. ~~The Company~~We may enter into derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts in order to manage duration and foreign currency exposure, obtain exposure to a particular financial market or for yield enhancement. ~~The Company manages~~We manage the exposure to these instruments based on guidelines established by management and these derivative instruments are carried at fair value with the corresponding changes in fair value recognized in the Consolidated Statements of Operations in the period that they occur.

Insurance and Reinsurance Derivative Contracts

From time to time ~~the Company enters~~we enter into insurance and reinsurance contracts that meet the definition of a derivative contract under FAS 133. ~~The Company has recorded~~We record these contracts at fair value with any changes in the value reflected in other insurance related income in the Consolidated Statements of Operations. Generally, the contracts are modeled on prevailing market conditions and certain other factors relating to the structure of the contracts. ~~The Company’s~~Our model takes into account movements on

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

2. ~~Summary of Significant Accounting Policies (Continued)~~

credit spreads and credit ~~qualities and when~~qualities. When data is not readily available from the market, ~~the Company uses~~we use data from independent counterparties.

Investment Related Derivative ~~Instruments~~Contracts

~~The Company~~We currently ~~uses~~use foreign currency forward contracts ~~in its investment portfolios~~ to minimize the effect of fluctuating foreign currencies and to gain exposure to interest rate differentials between differing market rates. Foreign currency forward contracts purchased are not specifically identifiable against cash, any single security or any groups of securities and, therefore, do not qualify and are not designated as a hedge for financial reporting purposes. Realized and unrealized gains (losses) on foreign currency forward contracts that are purchased as part of ~~the Company’s~~our investment strategies are recognized in realized investment gains (losses) in the Consolidated Statements of Operations.

Foreign Currency Related Derivative Instruments

~~The Company~~We currently ~~uses~~use foreign currency forward contracts as part of ~~its~~our process to manage foreign currency exposures in the balance sheet. Foreign currency forward contracts are purchased as economic hedges to minimize the effect of fluctuating foreign currencies but are not specifically identifiable against cash, any single security or any groups of securities, insurance and reinsurance premium balances receivable or the reserve for losses and loss expenses and, therefore, do not qualify and are not designated as a hedge for financial reporting purposes. Realized and unrealized gains (losses) on foreign currency forward contracts that are purchased as economic hedges of ~~the Company’s~~our net foreign exposure are recognized in foreign exchange losses (gains) in the Consolidated Statements of Operations.

~~j) Intangible Assets~~

i)	Intangible Assets

~~The Company accounts for intangible assets in~~In accordance with FAS No. 142,Goodwill and Other Intangible Assets., we classify intangible assets into three categories: (1) intangible assets with finite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization, and (3) goodwill. For intangible assets with finite lives, we amortize the value of the assets over their useful lives. The ~~Company does~~estimated remaining useful lives for these assets range from 3 to 12 years. We also test assets for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or change in the assessment of future operations. We record an impairment charge when the carrying value of the finite lived intangible assets is not recoverable by the cash flows generated from the use of the asset.

We do not amortize ~~goodwill or~~ identifiable intangible assets with indefinite lives ~~but rather re-evaluates~~and goodwill. We test these intangible assets and goodwill for impairment on a yearly basis, or whenever changes in circumstances warrant an analysis of the recoverability of ~~the~~these assets. If ~~it is determined~~we determine that an impairment exists, ~~the Company adjusts~~we adjust the carrying value of ~~the~~these assets to fair ~~value. In respect of intangible assets with finite lives,~~value and record the ~~Company amortizes the value of the assets over their useful lives.~~impairment charge in income.

AXIS CAPITAL HOLDINGS LIMITED

~~The Company has recorded the purchase of numerous U.S. state licenses as intangible assets with indefinite lives as they provide a legal right to transact business indefinitely and could be resold.~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~k) Taxation~~DECEMBER 31, 2007, 2006 AND 2005

~~Certain~~

2.	Significant Accounting Policies (Continued)

Taxation

We have certain subsidiaries ~~of the Company~~which operate in jurisdictions where they are subject to taxation. Current and deferred income taxes are provided based upon enacted tax laws and rates applicable in the relevant jurisdictions. Deferred income taxes are provided on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

2. ~~Summary of Significant Accounting Policies (Continued)~~

A valuation allowance against deferred tax assets is recorded when ~~management’s~~our assessment indicates that it is more likely than not that a portion of the deferred tax asset will not be realized in the foreseeable future.

~~l) Recently Issued Accounting Policies Not Yet Adopted~~

~~In July 2006,~~ We adopted the ~~FASB issued~~provisions of FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN 48”)~~. This Interpretation prescribes detailed guidance for~~ on January 1, 2007. Under FIN 48, the ~~financial statement recognition, measurement and disclosure~~tax benefits of uncertain tax positions may only be recognized ~~in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a~~when the position is more-likely-than-not ~~recognition threshold at the effective date~~ to be ~~recognized~~sustained upon audit by the ~~adoption~~relevant taxing authorities.

k)	Treasury Shares

Treasury shares are common shares repurchased by our Company and not subsequently cancelled. These shares are recorded at cost and result in a reduction of ~~FIN 48 and~~our shareholders’ equity in ~~subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 and~~ the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company will adopt FIN 48 effective January 1, 2007. This interpretation will not have a significant impact on the Company’s financial condition, results of operations and cash flows.Consolidated Balance Sheets.

l)	Recently Issued Accounting Policies Not Yet Adopted

(i) Fair value measurements

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 ~~evel~~level within the fair value hierarchy. FAS 157 iswas effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. ~~Early adoption is permitted as of the beginning of a fiscal year. The Company is currently evaluating the potential adoption impact of~~We will adopt FAS 157 on ~~the Company’s financial condition, results of operations~~January 1, 2008, and ~~cash flows.~~we do not anticipate any cumulative-effect adjustment to beginning retained earnings or any material adjustment prospectively to our earnings and other comprehensive income.

(ii) Fair value option

In February 2007, the FASB issued FAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“FAS 159”). ~~Under this~~This standard permits an entity isto 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 ~~additional information~~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 iswas effective for fiscal years beginning after November 15, 2007, and early adoption is permitted as of January 1, 2007, provided that the entity makes that choice in the first quarter of 2007 and also elects to apply the provisions of FAS 157. The Company is currently evaluating the potential adoption impact of2007. We will adopt FAS 159 on ~~the Company’s~~January 1, 2008, and have no current plans to elect fair value option for our financial ~~condition, results of operations~~assets and ~~cash flows.~~liabilities.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

2.	Significant Accounting Policies (Continued)

3.(iii) Business Combinations and Noncontrolling Interests ~~Segment Information~~

~~The Company has~~In December 2007, the FASB issued FAS No. 141(R),Business Combinations (“FAS 141(R)”) and FAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“FAS 160”). SFAS 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to provide additional disclosures on the nature and financial effect of the business combination. FAS 141(R) applies to all transactions or other events in which the acquirer obtains control of one or more businesses, even if control is not obtained by purchasing equity interests or net assets. FAS 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. Both FAS 141(R) and FAS 160 apply prospectively to business combinations for which the acquisition date is on or after December 15, 2008, except for the presentation and disclosure requirements of FAS 160 which will be applied retrospectively for all periods presented.

3.	Segment Information

Our underwriting operations are organized around our two global underwriting ~~segments:~~platforms, AXIS Insurance and AXIS Re and therefore we have determined that we have two reportable segments, insurance and reinsurance. ~~These have been determined on the basis of underlying information reviewed by the Company’s chief decision maker, the Chief Executive Officer.~~

~~The Company evaluates the performance of its insurance~~Except for goodwill and ~~reinsurance segments based on underwriting results. The Company does~~intangible assets, we do not allocate ~~its~~our assets by segment as ~~it evaluates~~we evaluate the underwriting results of each segment separately from the results of ~~the~~our investment portfolio.

Insurance

~~The Company’s~~Our insurance segment provides insurance coverage on a worldwide basis. In January 2007, we reorganized 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 ~~and is divided into two sub-segments:~~in alignment with the global ~~insurance and U.S. insurance.~~

~~Global insurance provides specialty lines coverage, predominantly through the London broker network.~~needs of many of our clients. The product lines in this segment are property, marine, terrorism, ~~and war risk,~~ aviation, ~~and aerospace,~~ political risk, ~~and professional lines and other specialty.~~

~~U.S. insurance provides specialty lines coverage through a variety of channels in the U.S. and covers exposures predominantly in the U.S. The product lines in this segment are property,~~ professional lines, liability and ~~other specialty~~accident and ~~are offered through wholesale brokers, retail brokers and managing general underwriters.~~health.

Reinsurance

~~The Company’s~~Our reinsurance segment provides treaty and facultative property and casualty reinsurance to insurance companies on a worldwide basis. Treaty reinsurance contracts are contractual arrangements that provide for automatic reinsurance of any agreed upon portion of business written, as specified in a reinsurance contract. Contracts can be written on an excess of loss basis or a pro rata basis, also known as proportional. The product lines in this segment are catastrophe, property, professional liability, credit and bond, motor, liability and other.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

3. ~~Segment Information (Continued)~~

3.	Segment Information (Continued)

The following tables summarize the underwriting results ~~income before income taxes and ratios~~of our operating segments for the ~~Company’s reportable operating segments~~last three years and ~~sub-segments:~~the carrying values of goodwill and intangible assets:

Year ended December 31, 2006

Global

U.S.

Total

Insurance

Insurance

Insurance

Reinsurance

Total

(in thousands)

Gross premiums written

$
958,251

$
1,112,216

$
2,070,467

$
1,538,569

$
3,609,036

Ceded premiums

(107,718
)
(502,350
)
(610,068
)
(9,789
)
(619,857
)
Net premiums written

850,533

609,866

1,460,399

1,528,780

2,989,179

Gross premiums earned

885,348

1,070,619

1,955,967

1,397,917

3,353,884

Net premiums earned

746,393

559,367

1,305,760

1,388,510

2,694,270

Other insurance related income

—

1,758

1,758

1,135

2,893

Net losses and loss expenses

(331,778
)
(304,906
)
(636,684
)
(789,171
)
(1,425,855
)
Acquisition costs

(102,673
)
(49,329
)
(152,002
)
(234,957
)
(386,959
)
General and administrative expenses

(49,058
)
(106,858
)
(155,916
)
(53,658
)
(209,574
)
Underwriting income

$
262,884

$
100,032

$
362,916

$
311,859

674,775

Corporate:

Corporate expenses

(58,822
)
Net investment income

407,100

Net realized investment losses

(25,702
)
Foreign exchange gains

32,505

Interest expense

(32,954
)
Income before income taxes

$
996,902

Net loss and loss expense ratio

44.5
%
54.5
%
48.8
%
56.8
%
52.9
%
Acquisition cost ratio

13.8
%
8.8
%
11.6
%
16.9
%
14.4
%
General and administrative expense ratio

6.6
%
19.1
%
11.9
%
3.9
%
10.0
%
Combined ratio

64.9
%
82.4
%
72.3
%
77.6
%
77.3
%



At and year ended December 31, 2007	Insurance		Reinsurance		Total
Gross premiums written	$	2,039,214	$	1,550,876	$	3,590,090
Net premiums written		1,326,647		1,537,110		2,863,757
Net premiums earned		1,208,440		1,525,970		2,734,410
Other insurance related income		1,860		2,051		3,911
Net losses and loss expenses		(534,264)		(835,996)		(1,370,260)
Acquisition costs		(126,423)		(258,074)		(384,497)
General and administrative expenses		(175,810)		(69,721)		(245,531)

Underwriting income	$	373,803	$	364,230		738,033


Corporate expenses						(58,300)
Net investment income						482,873
Net realized investment gains						5,230
Foreign exchange gains						16,826
Interest expense and financing costs						(51,153)

Income before income taxes					$	1,133,509

Net loss and loss expense ratio		44.2%		54.8%		50.1%
Acquisition cost ratio		10.5%		16.9%		14.1%
General and administrative expense ratio		14.5%		4.6%		11.1%

Combined ratio		69.2%		76.3%		75.3%

Goodwill and intangible assets	$	61,653	$	-	$	61,653

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

3. ~~Segment information (Continued)~~

Year ended December 31, 2005

Global

U.S.

Total

Insurance

Insurance

Insurance

Reinsurance

Total

(in thousands)

Gross premiums written

$
861,098

$
1,013,919

$
1,875,017

$
1,518,868

$
3,393,885

Ceded premiums

(211,395
)
(495,855
)
(707,250
)
(27,646
)
(734,896
)
Net premiums written

649,703

518,064

1,167,767

1,491,222

2,658,989

Gross premiums earned

971,548

918,271

1,889,819

1,388,447

3,278,266

Net premiums earned

748,015

453,534

1,201,549

1,352,134

2,553,683

Other insurance related (loss) income

(5,865
)
780

(5,085
)
—

(5,085
)
Net losses and loss expenses

(492,667
)
(390,140
)
(882,807
)
(1,168,322
)
(2,051,129
)
Acquisition costs

(97,908
)
(21,092
)
(119,000
)
(218,383
)
(337,383
)
General and administrative expenses

(36,794
)
(80,909
)
(117,703
)
(48,410
)
(166,113
)
Underwriting income (loss)

$
114,781

$
(37,827
)
$
76,954

$
(82,981
)
(6,027
)
Corporate:

Corporate expenses

(46,729
)
Net investment income

256,712

Net realized investment losses

(16,912
)
Foreign exchange losses

(54,090
)
Interest expense

(32,447
)
Income before income taxes

$
100,507

Net loss and loss expense ratio

65.9
%
86.0
%
73.5
%
86.4
%
80.3
%
Acquisition cost ratio

13.1
%
4.7
%
9.9
%
16.2
%
13.2
%
General and administrative expense ratio

4.9
%
17.8
%
9.8
%
3.6
%
8.3
%
Combined ratio

83.9
%
108.5
%
93.2
%
106.2
%
101.8
%

3.	Segment Information (Continued)



At and year ended December 31, 2006	Insurance		Reinsurance		Total
Gross premiums written	$	2,070,467	$	1,538,569	$	3,609,036
Net premiums written		1,460,399		1,528,780		2,989,179
Net premiums earned		1,305,760		1,388,510		2,694,270
Other insurance related income		1,758		1,135		2,893
Net losses and loss expenses		(636,684)		(789,171)		(1,425,855)
Acquisition costs		(152,002)		(234,957)		(386,959)
General and administrative expenses		(155,916)		(53,658)		(209,574)

Underwriting income	$	362,916	$	311,859		674,775

Corporate expenses						(58,822)
Net investment income						407,100
Net realized investment losses						(25,702)
Foreign exchange gains						32,505
Interest expense and financing costs						(32,954)

Income before income taxes					$	996,902

Net loss and loss expense ratio		48.8%		56.8%		52.9%
Acquisition cost ratio		11.6%		16.9%		14.4%
General and administrative expense ratio		11.9%		3.9%		10.0%

Combined ratio		72.3%		77.6%		77.3%

Goodwill and intangible assets	$	29,041	$	-	$	29,041

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

3. ~~Segment information (Continued)~~

Year ended December 31, 2004

Global

U.S.

Total

Insurance

Insurance

Insurance

Reinsurance

Total

(in thousands)

Gross premiums written

$
1,095,328

$
824,235

$
1,919,563

$
1,092,748

$
3,012,311

Ceded premiums

(162,130
)
(394,148
)
(556,278
)
(32,360
)
(588,638
)
Net premiums written

933,198

430,087

1,363,285

1,060,388

2,423,673

Gross premiums earned

913,382

689,037

1,602,419

908,428

2,510,847

Net premiums earned

796,566

349,287

1,145,853

882,544

2,028,397

Other insurance related income

10,264

—

10,264

989

11,253

Net losses and loss expenses

(451,724
)
(234,746
)
(686,470
)
(559,774
)
(1,246,244
)
Acquisition costs

(124,953
)
(10,779
)
(135,732
)
(144,836
)
(280,568
)
General and administrative expenses

(35,052
)
(71,482
)
(106,534
)
(41,662
)
(148,196
)
Underwriting income

$
195,101

$
32,280

$
227,381

$
137,261

364,642

Corporate:

Corporate expenses

(39,109
)
Net investment income

152,072

Net realized investment gains

13,634

Foreign exchange gains

14,484

Interest expense

(5,285
)
Income before income taxes

$
500,438

Net loss and loss expense ratio

56.7
%
67.2
%
59.9
%
63.5
%
61.4
%
Acquisition cost ratio

15.7
%
3.1
%
11.8
%
16.4
%
13.8
%
General and administrative expense ratio

4.4
%
20.5
%
9.3
%
4.7
%
9.2
%
Combined ratio

76.8
%
90.8
%
81.0
%
84.6
%
84.4
%

3.	Segment Information (Continued)



At and year ended December 31, 2005	Insurance		Reinsurance		Total
Gross premiums written	$	1,875,017	$	1,518,868	$	3,393,885
Net premiums written		1,167,767		1,491,222		2,658,989
Net premiums earned		1,201,549		1,352,134		2,553,683
Other insurance related (loss) income		(5,085)		-		(5,085)
Net losses and loss expenses		(882,807)		(1,168,322)		(2,051,129)
Acquisition costs		(119,000)		(218,383)		(337,383)
General and administrative expenses		(117,703)		(48,410)		(166,113)

Underwriting income (loss)	$	76,954	$	(82,981)		(6,027)

Corporate expenses						(46,729)
Net investment income						256,712
Net realized investment losses						(16,912)
Foreign exchange losses						(54,090)
Interest expense and financing costs						(32,447)

Income before income taxes					$	100,507

Net loss and loss expense ratio		73.5%		86.4%		80.3%
Acquisition cost ratio		9.9%		16.2%		13.2%
General and administrative expense ratio		9.8%		3.6%		8.3%

Combined ratio		93.2%		106.2%		101.8%

Goodwill and intangible assets	$	30,575	$	-	$	30,575	⁽¹⁾

(1) This balance excludes $6,438 of intangible assets relating to SERP (see Note 4)

The following table presents our gross premiums written by the geographical location of ~~subsidiary:~~our subsidiaries:

Year ended December 31

2006

2005

2004

(in thousands)

Bermuda

$
1,084,716

$
1,027,494

$
1,163,389

Europe

900,778

762,777

660,064

United States

1,623,542

1,603,614

1,188,858

Total gross premium written

$
3,609,036

$
3,393,885

$
3,012,311

4.                 ~~Business Combinations~~

Year ended December 31,    2007    2006    2005
Bermuda
     $ 933,058        $ 1,084,716        $     1,027,494
Europe
   974,225      900,778      762,777
United States
   1,682,807      1,623,542      1,603,614

Total gross premium written
     $     3,590,090        $     3,609,036        $ 3,393,885

On August 1, 2005, the Company completed the purchase of Fireman’s Fund Insurance Company of Wisconsin, which is licensed in 48 states of the United States and the District of Columbia. Fireman’s Fund

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

3.	Segment Information (Continued)

4. ~~Business Combinations (Continued)~~The following table presents our gross premiums written by segment and line of business:

Insurance Company of Wisconsin was subsequently redomiciled to the state of Illinois and renamed AXIS Insurance Company (“AXIS Insurance U.S.”). The Company paid a purchase price of $28.5 million. The Company does not consider this to be a material acquisition. The purchase of AXIS Insurance U.S. was made to expand the Company’s ability to write insurance on an admitted basis within the U.S.



Year ended December 31,	2007		2006		2005
Insurance
Property	$	659,595	$	641,245	$	553,744
Marine		218,030		242,759		199,602
Terrorism		51,757		81,838		87,473
Aviation		70,387		113,392		181,969
Political risk		232,549		209,629		129,368
Professional lines		528,616		493,754		431,654
Liability		248,562		253,973		272,669
Accident and health		29,718		33,877		18,538

Total Insurance		2,039,214		2,070,467		1,875,017

Reinsurance
Catastrophe		471,514		464,096		520,057
Property		281,363		338,562		383,278
Professional lines		230,040		274,435		232,259
Credit and bond		124,976		97,664		103,277
Motor		96,999		84,171		73,992
Liability		244,612		204,619		165,122
Other		101,372		75,022		40,883

Total Reinsurance		1,550,876		1,538,569		1,518,868

Total	$	3,590,090	$	3,609,036	$	3,393,885

At the date of acquisition, Fireman’s Fund Insurance Company assumed all known, unknown and contingent liabilities of AXIS Insurance U.S. relating to events occurring on or before the acquisition date. In addition, Fireman’s Fund Insurance Company entered into a reinsurance agreement to fully assume $22.9 million of outstanding loss reserves of AXIS Insurance U.S. on the acquisition date. These loss reserves and a reinsurance recoverable of the same amount were recorded on the date of ~~acquisition. To the extent Fireman’s Fund Insurance Company does not meet its obligation under these agreements, AXIS Insurance U.S. remains liable for these liabilities.~~

In addition to the loss reserves and related reinsurance recoverable, the assets of AXIS Insurance U.S. included fixed income securities and accrued interest of $18.8 million, cash equivalents of $0.7 million and licenses of $9.0 million (recorded as an intangible asset with an indefinite life: refer to Note 5, below). These assets were recorded at their fair values on the date of acquisition. The purchase price has been fully allocated against the fair values of the assets and liabilities; consequently, no goodwill was recorded.

5. ~~Goodwill and Intangible Assets~~

4.	Goodwill and Intangible Assets

The following table shows an analysis of goodwill and intangible assets:

Intangible

Intangible

assets with an

assets with a

Goodwill

indefinite life

finite life

Total

(in thousands)

Net balance at December 31, 2004

$
2,750

$
17,079

$
11,905

$
31,734

Additions

—

8,957

—

8,957

Amortization

—

—

(3,678
)

(3,678
)
Net balance at December 31, 2005

2,750

26,036

8,227

37,013

Additions

—

—

401

401

Reclassification on adoption of FAS 158

—

—

(4,571
)

(4,571
)
Amortization

—

—

(3,802
)

(3,802
)
Net balance at December 31, 2006

$
2,750

$
26,036

$
255

$
29,041

Gross balance

$
2,750

$
26,036

$
6,135

$
34,921

Accumulated amortization

—

—

(5,880
)

(5,880
)
Net balance

$
2,750

$
26,036

$
255

$
29,041


	Goodwill		Intangible assets with an indefinite life		Intangible assets with a finite life		Total
Net balance at December 31, 2005	$	2,750	$	26,036	$	8,227	$	37,013
Additions		-		-		401		401
Reclassification on adoption of FAS 158		-		-		(4,571)		(4,571)
Amortization		-		-		(3,802)		(3,802)

Net balance at December 31, 2006		2,750		26,036		255		29,041
Additions		24,003		-		9,700		33,703
Amortization		-		-		(1,091)		(1,091)

Net balance at December 31, 2007	$	26,753	$	26,036	$	8,864	$	61,653

Gross balance	$	26,753	$	26,036	$	15,836	$	68,625
Accumulated amortization		-		-		(6,972)		(6,972)

Net balance	$	26,753	$	26,036	$	8,864	$	61,653

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

4.	Goodwill and Intangible Assets (Continued)

In 2006, ~~the Company~~we adopted ~~FASB Statement~~FAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans(“ (“FAS 158”), an amendment of ~~FASB Statements No~~FAS No. 87, 88, 106 and 132 (R). Accordingly, at December 31, 2006, ~~the Company~~we reclassified the remaining unrecognized prior service ~~costs~~cost on the SERPs from intangible assets with a finite life to accumulated other comprehensive ~~income~~income. In 2007, we acquired the assets and ~~recorded~~operations of the Media Professional Division of MPI Insurance Agency, Inc, which resulted in recording $24 million and $10 million of goodwill and intangible assets with a ~~negligible unfunded pension liability in other liabilities.~~finite life, respectively.

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

5.	Investments

6. ~~Investments~~

a)	Fixed Maturity Investments

~~a) Fixed Maturity Investments~~

~~All fixed maturity investments are held as available for sale.~~ The amortized cost and fair values ~~are~~of our fixed maturity investments were as follows:

At December 31, 2006

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Type of Investment

Cost

Gains

Losses

Value

(in thousands)

U.S. government and agency securities

$
1,190,700

$
3,639

$
(16,428
)

$
1,177,911

Non-U.S. government securities

146,847

9,182

(2,771
)

153,258

Corporate debt securities

1,423,146

5,470

(10,063
)

1,418,553

Mortgage-backed securities

2,896,362

9,758

(37,542
)

2,868,578

Asset-backed securities

540,118

549

(2,317
)

538,350

States, municipalities and political subdivisions

377,076

1,257

(2,260
)

376,073

Total fixed maturity investments

$
6,574,249

$
29,855

$
(71,381
)

$
6,532,723

At December 31, 2005

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Type of Investment

Cost

Gains

Losses

Value

(in thousands)

U.S. government and agency securities

$
1,589,640

$
2,782

$
(20,011
)

$
1,572,411

Non-U.S. government securities

143,534

475

(6,513
)

137,496

Corporate debt securities

1,236,928

3,406

(20,456
)

1,219,878

Mortgage-backed securities

2,466,324

3,568

(36,243
)

2,433,649

Asset-backed securities

295,043

315

(3,534
)

291,824

States, municipalities and political subdivisions

359,529

470

(2,832
)

357,167

Total fixed maturity investments

$
6,090,998

$
11,016

$
(89,589
)

$
6,012,425


As at December 31, 2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Type of Investment
U.S. government and agency	$	1,032,441	$	26,672	$	(187)	$	1,058,926
Non-U.S. government		264,109		20,712		(4,244)		280,577
Corporate		2,174,333		36,020		(60,687)		2,149,666
Mortgage-backed		3,467,573		29,946		(15,304)		3,482,215
Asset-backed		539,125		1,800		(8,145)		532,780
Municipals		823,947		3,792		(237)		827,502

Total	$	8,301,528	$	118,942	$	(88,804)	$	8,331,666


As at December 31, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Type of Investment
U.S. government and agency	$	1,190,700	$	3,639	$	(16,428)	$	1,177,911
Non-U.S. government		146,847		9,182		(2,771)		153,258
Corporate		1,423,146		5,470		(10,063)		1,418,553
Mortgage-backed		2,896,362		9,758		(37,542)		2,868,578
Asset-backed		540,118		549		(2,317)		538,350
Municipals		377,076		1,257		(2,260)		376,073

Total	$	6,574,249	$	29,855	$	(71,381)	$	6,532,723

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

6. ~~Investments (Continued)~~

5.	Investments (Continued)

The following tables summarize the fixed income securities 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 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

(in thousands)

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 December 31, 2005

12 months or greater

Less than 12 months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Type of Investment

Value

Losses

Value

Losses

Value

Losses

(in thousands)

U.S. government and agency securities

$
527,787

$
(10,823
)

$
746,012

$
(9,406
)

$
1,273,799

$
(20,229
)

Non-U.S. government securities

—

—

115,871

(6,196
)

115,871

(6,196
)

Corporate securities

258,287

(6,361
)

813,927

(14,314
)

1,072,214

(20,675
)

Mortgage-backed securities

309,808

(8,980
)

1,674,865

(27,262
)

1,984,673

(36,242
)

Asset-backed securities

107,636

(2,198
)

85,714

(1,217
)

193,350

(3,415
)

Municipals

55,720

(1,476
)

157,116

(1,356
)

212,836

(2,832
)

Total

$
1,259,238

$
(29,838
)

$
3,593,505

$
(59,751
)

$
4,852,743

$
(89,589
)



As at December 31, 2007	12 months or greater				Less than 12 months				Total
Type of Investment	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government and agency	$	67,131	$	(169)	$	7,304	$	(18)	$	74,435	$	(187)
Non-U.S. government		-		-		87,214		(4,244)		87,214		(4,244)
Corporate		188,901		(4,391)		776,234		(56,296)		965,135		(60,687)
Mortgage-backed		1,064,646		(13,100)		241,920		(2,204)		1,306,566		(15,304)
Asset-backed		68,959		(1,391)		132,735		(6,754)		201,694		(8,145)
Municipals		32,053		(150)		50,782		(87)		82,835		(237)

Total	$	1,421,690	$	(19,201)	$	1,296,189	$	(69,603)	$	2,717,879	$	(88,804)



As at December 31, 2006	12 months or greater				Less than 12 months				Total
Type of Investment	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government and agency	$	536,403	$	(13,909)	$	364,668	$	(2,519)	$	901,071	$	(16,428)
Non-U.S. government		4,957		(151)		131,457		(2,620)		136,414		(2,771)
Corporate		421,943		(7,556)		449,679		(2,507)		871,622		(10,063)
Mortgage-backed		1,420,196		(33,607)		536,721		(3,935)		1,956,917		(37,542)
Asset-backed		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)

The Company’s process for identifying declines in the fair value of investments that are other than temporary involves consideration of several factors. These factors include, the time period during which there has been a significant decline in value, the significance of the decline, an analysis of financial condition of the issuer, and the Company’s intent and ability to hold the investment for a sufficient period of time for the value to recover. Where the Company’s analysis of the above factors results in the Company’s conclusion that declines in fair values are other than temporary, the cost of the security is written down to fair value and the previously unrealized loss is therefore realized in the period in which such determination is made.

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

6. ~~Investments (Continued)~~

~~As of~~At December 31, ~~2006,~~2007, there were approximately ~~1,945~~1,440 securities ~~(2005: 2,113)~~(2006: 1,945) in an unrealized loss position with a fair value of ~~$4,418.2~~$2,718 million ~~(2005: $4,852.7~~(2006: $4,418 million). Of these securities, there are ~~1,497~~1,065 securities ~~(2005: 517)~~(2006: 1,497) that have been in an unrealized loss position for 12 months or greater with a fair value of ~~$2,639.0~~$1,422 million ~~(2005: $1,259.2~~(2006: $2,639 million). At December 31, ~~2006~~2007 and ~~2005~~2006 none of these securities were considered to be other than temporarily impaired. The unrealized losses from these securities were not a result of credit, collateral or structural issues. In ~~2006, the Company~~2007, we recorded an impairment charge of ~~$4.6~~$9 million ~~(2005~~(2006: $5 million and ~~2004:~~2005: nil) relating to 67 securities (2006: 36 ~~securities~~securities) that ~~the Company~~we determined to be other than temporarily impaired, included in net realized investment gains (losses) ~~gains~~ in the Consolidated Statements of Operations.

The following ~~table sets forth certain~~summarizes information regarding the credit ratings of ~~the Company’s~~our fixed maturity portfolio:

At December 31, 2006

Amortized

Fair

% of Total

Rating*

Cost

Value

Fair Value

(in thousands)

AAA

$
5,212,337

$
5,178,035

79.3
%

AA

315,052

312,565

4.8
%

A

483,370

480,502

7.3
%

BBB

563,490

561,621

8.6
%

Total

$
6,574,249

$
6,532,723

100.0
%

At December 31, 2005

Amortized

Fair

% of Total

Rating*

Cost

Value

Fair Value

(in thousands)

AAA

$
4,796,468

$
4,734,087

78.8
%

AA

202,695

199,352

3.3
%

A

543,588

536,377

8.9
%

BBB

548,247

542,609

9.0
%

$
6,090,998

$
6,012,425

100.0
%


As at December 31, 2007	Amortized Cost		Fair Value		% of Total Fair Value
Rating *
AAA	$	5,838,546	$	5,901,762	70.8	%
AA		642,645		648,626	7.8	%
A		1,045,747		1,039,323	12.5	%
BBB		774,590		741,955	8.9	%

Total	$	8,301,528	$	8,331,666	100.0	%

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

5.	Investments (Continued)


As at December 31, 2006	Amortized Cost		Fair Value		% of Total Fair Value
Rating *
AAA	$	5,212,337	$	5,178,035	79.3%
AA		315,052		312,565	4.8%
A		483,370		480,502	7.3%
BBB		563,490		561,621	8.6%

Total	$	6,574,249	$	6,532,723	100.0%

* Ratings as assigned by Standard & Poor’s Corporation

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~6. Investments (Continued)~~

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

At December 31, 2006

Amortized

Fair

% of Total

Maturity

Cost

Value

Fair Value

(in thousands)

Due in one year or less

$
526,194

$
524,190

8.0
%

Due after one year through five years

1,614,763

1,606,197

24.6
%

Due after five years through ten years

853,672

852,387

13.0
%

Due after ten years

143,141

143,021

2.2
%

Mortgage and asset-backed securities

3,436,479

3,406,928

52.2
%

$
6,574,249

$
6,532,723

100.0
%

		At December 31, 2005
		Amortized		Fair		% of Total
As at December 31, 2007									Amortized Cost		Fair Value		% of Total Fair Value
Maturity		Cost		Value		Fair Value
		(in thousands)
Due in one year or less	Due in one year or less	$	361,549	$	357,267		6.0	%	$	888,999	$	869,325	10.4%
Due after one year through five years	Due after one year through five years	1,914,885		1,883,362			31.3	%		2,070,576		2,097,433	25.2%
Due after five years through ten years	Due after five years through ten years	895,809		887,136			14.8	%		873,955		887,499	10.7%
Due after ten years	Due after ten years	157,388		159,187			2.6	%		461,300		462,414	5.5%
Mortgage and asset-backed securities	Mortgage and asset-backed securities	2,761,367		2,725,473			45.3	%		4,006,698		4,014,995	48.2%
		$	6,090,998	$	6,012,425		100.0	%
Total									$	8,301,528	$	8,331,666	100.0%


As at December 31, 2006	Amortized Cost		Fair Value		% ot Total Fair Value
Maturity
Due in one year or less	$	526,194	$	524,190	8.0%
Due after one year through five years		1,614,763		1,606,197	24.6%
Due after five years through ten years		853,672		852,387	13.0%
Due after ten years		143,141		143,021	2.2%
Mortgage and asset-backed securities		3,436,479		3,406,928	52.2%

Total	$	6,574,249	$	6,532,723	100.0%

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

5.	Investments (Continued)

b)	Other Investments

The table below shows our portfolio of other investments:

At December 31,    2007          2006
Hedge funds
     $ 277,757      43.0%      $ 235,377      20.8%
Credit funds
   194,241      30.1%    156,337      13.8%
Collateralized loan obligations
   120,596      18.6%    263,621      23.3%
Short duration high yield fund
   45,648      7.1%    97,562      8.6%
Other
   7,745      1.2%    -      -
Life settlement contracts
   -      -      377,767      33.5%

Total other investments
     $             645,987        100.0%      $             1,130,664        100.0%

Life settlement contracts
On December 20, 2006, we purchased a 20-year asset-backed note (“Note”) in the amount of $400 million issued by a special-purpose entity (“SPE”). Through the purchase of this Note, we assumed longevity risk on 222 life insurance policies for a period of 20 years. We determined the SPE was a variable interest entity and through ownership of the Note we became its primary beneficiary. Accordingly, we consolidated the SPE, as well as the underlying SPEs, in our December 31, 2006 Consolidated Balance Sheet and eliminated all inter-company balances including the Note. At December 31, 2006, the consolidated assets and liabilities of the SPEs consisted primarily of restricted cash of $65 million, life settlement contracts portfolio of $378 million and other liability of $43 million.

On September 26, 2007, we sold the Note for a cash consideration of $400 million to a related party of the SPE (“buyer”), resulting in the deconsolidation of the SPE (see Note 8 (c)). Accordingly, from September 27, 2007, we have not included the results, assets and liabilities of the SPE in our Consolidated Financial Statements. Net ~~Investment Income~~investment income relating to the results of the SPE was negligible for 2007. The $400 million repurchase agreement used to finance the purchase of the Note was also terminated on September 26, 2007. During 2007, we recorded interest expense of $19 million (2006: nil) relating to the repurchase agreement.

c)	Net Investment Income

Net investment income iswas derived from the following sources:

Year ended December 31

2006

2005

2004

(in thousands)

Fixed maturities and cash equivalents

$
368,731

$
246,295

$
156,613

Other investments

46,252

16,956

2,482

Investment expenses, net

(7,883
)
(6,539
)
(7,023
)
Net investment income

$
407,100

$
256,712

$
152,072



Year ended December 31,	2007		2006		2005
Fixed maturities and cash equivalents	$	460,525	$	368,731	$	246,295
Other investments		34,351		46,252		16,956

Gross investment income		494,876		414,983		263,251
Investment expenses		(12,003)		(7,883)		(6,539)

Net investment income	$	482,873	$	407,100	$	256,712

Net investment income on our other investments includes interest, dividend income, income distributions, changes in net asset values, and realized gains and losses. During 2007, we recorded net realized losses on our other investments of $4 million (2006 and 2005: nil).

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

~~6. Investments (Continued)~~

5.	Investments (Continued)

The following ~~represents~~provides an analysis of gross realized ~~gains (losses)~~gains/losses and the change in unrealized ~~gains (losses)~~gains/losses on investments included within accumulated other comprehensive loss:

Year ended December 31

2006

2005

2004

(in thousands)

Gross realized gains

$
10,645

$
18,794

$
30,193

Gross realized losses

(35,291
)
(43,042
)
(13,761
)
Net realized (losses) gains on fixed maturities

(24,646
)
(24,248
)
16,432

Changes in fair values of derivative instruments

(1,056
)
7,336

(2,798
)
Net realized investment (losses) gains on investments

$
(25,702
)
$
(16,912
)
$
13,634

Change in unrealized gains (losses) on fixed maturities

$
38,326

$
(92,409
)
$
(12,594
)



Year ended December 31,	2007		2006		2005
Gross realized gains	$	31,683	$	10,645	$	18,794
Gross realized losses		(26,371)		(35,291)		(43,042)

Net realized gains (losses) on fixed maturities		5,312		(24,646)		(24,248)
Changes in fair values of derivative instruments		(82)		(1,056)		7,336

Net realized investment gains (losses) on investments	$	5,230	$	(25,702)	$	(16,912)

Change in unrealized gains (losses) on fixed maturities	$	71,664	$	37,047	$	(92,452)

Proceeds from sales of fixed maturities classified as available for sale were ~~$4,123.5~~$6,785 million, ~~$6,306.7~~$4,124 million and ~~$5,268.7~~$6,307 million in 2007, 2006 ~~2005~~ and ~~2004~~2005 respectively. The gross gains and losses on those sales are included in the table above.

~~c) Other Investments~~

d)	Securities Lending

Beginning in 2004 the Company expanded its investment strategy to other asset sectors. At December 31, 2006, the Company had $1,130.7 million of other investments at fair value (2005: $409.5 million), representing 11.8% (2005: 5.3%) of total cash and investments. Many of the investments are subject to restrictions on redemptions and sales which are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short term. Due to a lag in the valuations reported by some managers, the majority of our credit fund valuations are reported on a one month lag. Other investments consist of the following:

At December 31

2006

2005

(in thousands)

Life settlement contracts

$
377,767

$
—

Collateralized loan obligations

263,621

192,986

Fund of hedge funds

235,377

106,077

Credit funds

156,337

48,897

Short duration high yield fund

97,562

61,544

Total other investments

$
1,130,664

$
409,504

~~Life settlement contracts~~

On December 20, 2006, the Company purchased a 20-year asset-backed note (“Note”) in the amount of $400.0 million issued by a special-purpose entity (“SPE”). The Note has a scheduled maturity date of December 20, 2026 and earns interest at a rate of 8% payable annually in arrears on December 20 of each year. Through the purchase of this Note, the Company is assuming longevity risk on 222 life insurance policies for a period of 20 years. This SPE was determined to be a VIE and the Company is its primary beneficiary. Accordingly, the Company has consolidated the SPE, as well as the underlying SPEs, in its

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~6. Investments (Continued)~~

December 31, 2006 Consolidated Balance Sheets and eliminated all inter-company balances including the Note. The consolidated assets and liabilities of the SPEs consist primarily of restricted cash of $65.0 million, life settlement contracts portfolio of $377.8 million and an other liability of $42.8 million. To estimate the fair value of the life settlement contracts portfolio the Company used the following three key assumptions: an average life expectancy of 9.96 years, discount yield of USD LIBOR + 3.7%, and stable life premium rates over the life of the respective policies. The following table is based on the estimated remaining life expectancy as at December 31, 2006.

Number of

Carrying

Life Insurance

Year

Contracts Realized

Value

Proceeds

(in thousands)

2007

8

$
14,471

$
54,963

2008

10

21,326

71,615

2009

12

27,936

83,940

2010

13

34,298

93,043

2011

14

40,357

99,559

Later years

165

239,380

1,162,533

Total

222

$
377,768

$
1,565,653

The other liability represents the underlying policyholders’ retained beneficial interest in the life insurance policies. This liability is reported at fair value and is included in other liabilities in the Consolidated Balance Sheets. The Note is collateralized by the net assets of the SPE. The creditors of the SPE do not have recourse to the general credit of the Company.

The purchase of the Note was financed by a $400.0 million three-month repurchase agreement at an interest rate of 3-month USD LIBOR plus 0.9% per annum and is reported as a liability under repurchase agreement in the Consolidated Balance Sheets. The Note serves as collateral for this funding facility; however, the Company is required to meet cash margin calls in the event the Note depreciates in value and to pay capital calls, if any called, in accordance with the terms of the Note.

~~Collateralized loan obligations (“CLOs”)~~

The Company has invested in various CLOs with the investments ranging from equity to senior debt tranches. At December 31, 2006, the Company had invested in 26 (2005: 21) different CLOs with underlying assets totaling $13.6 billion (2005: $8.6 billion).

~~d) Securities Lending~~

~~The Company participates~~We participate in a securities lending program whereby ~~the Company’s~~our securities, which are included in investments, are loaned to third parties, primarily major brokerage firms for short periods of time through a lending agent. ~~The Company maintains~~We maintain control over the securities ~~it lends, retains~~loaned, retain the earnings and cash flows associated with the loaned securities and ~~receives~~receive a fee from the borrower for the temporary use of the securities. Collateral in the form of cash, government securities and letters of credit is required at a rate of 102.0% of the market value of the loaned securities and is monitored and maintained by the lending agent. ~~The Company~~At December 31, 2007, we had ~~$774.4~~$848 million ~~(2005: $974.9~~(2006: $774 million) in

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~6. Investments (Continued)~~

securities on ~~loan at December 31, 2006. The Company considers its~~loan. We consider our securities lending activities to be non-cash investing and financing activities.

~~e) Restricted investments~~

e)	Restricted investments

~~The Company is~~We are required to maintain assets on deposit with various regulatory authorities to support our insurance and reinsurance operations. The assets on deposit are available to settle insurance and reinsurance liabilities. ~~The Company~~We also ~~utilizes~~utilize trust ~~funds~~accounts in certain large transactions ~~where the trust funds are set up~~ for the benefit of ~~the~~ ceding ~~companies and~~companies. These trust accounts generally take the place of Letter of Credit requirements. The assets ~~on deposit and used for~~in trust as collateral are primarily highly rated fixed maturity securities. ~~Additionally, to securitize the repurchase agreements the Company has pledged its investments in the life settlement contracts.~~ The ~~components of the~~ fair value of ~~the~~our restricted assets components are as follows:

At December 31

2006

2005

(in thousands)

Assets used for collateral in Trust for inter-company agreements

$
734,938

$
417,647

Life settlement contracts

377,767

—

Deposits with U.S. regulatory authorities

27,934

26,394

Assets used for collateral in Trust for third party agreements

72,321

12,430

Total restricted investments

$
1,212,960

$
456,471

~~7.   Reserve for Losses and Loss Expenses~~

As at December 31,    2007    2006
Assets used for collateral in Trust for inter-company agreements
     $     781,198        $     734,938
Life settlement contracts
   -      377,767
Deposits with U.S. regulatory authorities
   29,624      27,934
Assets used for collateral in Trust for third party agreements
   143,368      72,321

Total restricted investments
     $ 954,190        $ 1,212,960

~~The~~

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

6.	Reserve for Losses and Loss Expenses

Our reserve for losses and loss expenses ~~consists of:~~comprise the following:

At December 31

2006

2005

(in thousands)

Reserve for reported losses and loss expenses

$
1,831,344

$
2,017,072

Reserve for losses incurred by not reported

3,183,769

2,726,266

Reserve for losses and loss expenses

$
5,015,113

$
4,743,338

~~Net losses and loss expenses incurred consist of:~~

Year ended December 31

2006

2005

2004

(in thousands)

Net losses and loss expenses payments

$
1,018,705

$
620,833

$
311,250

Change in unpaid losses and loss expenses

248,194

2,329,191

1,406,350

Reinsurance recoveries on unpaid losses

161,588

(868,018
)
(463,706
)
Reinsurance recoveries on paid losses

(2,632
)
(30,877
)
(7,650
)
Net losses and loss expenses incurred

$
1,425,855

$
2,051,129

$
1,246,244

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

7. ~~Reserve for losses and loss expenses (Continued)~~



As of December 31,	2007		2006
Reserve for reported losses and loss expenses	$	1,697,385	$	1,831,344
Reserve for losses incurred but not reported		3,889,926		3,183,769

Reserve for losses and loss expenses	$	5,587,311	$	5,015,113

The following table represents ~~an analysis of paid and unpaid losses and loss expenses and~~ a reconciliation of ~~the~~our beginning and ending ~~unpaid~~gross losses and loss expenses:

Year ended December 31

2006

2005

2004

(in thousands)

Gross unpaid losses and loss expenses at beginning of period

$
4,743,338

$
2,404,560

$
992,846

Less reinsurance recoverable balances

(1,518,110
)
(596,299
)
(124,899
)
Net balance at beginning of period

3,225,228

1,808,261

867,947

Net incurred losses related to:

Current year

1,642,391

2,434,125

1,427,956

Prior year

(216,536
)
(382,996
)
(181,712
)

1,425,855

2,051,129

1,246,244

Net paid losses related to:

Current year

(120,143
)
(287,290
)
(198,226
)
Prior year

(898,562
)
(333,543
)
(113,024
)

(1,018,705
)
(620,833
)
(311,250
)
Net losses and loss expenses acquired

—

—

656

Foreign exchange loss (gain)

23,581

(13,329
)
4,664

Net unpaid losses and loss expenses at end of period

3,655,959

3,225,228

1,808,261

Reinsurance recoverable balances at end of period

1,359,154

1,518,110

596,299

Gross unpaid losses and loss expenses at end of period

$
5,015,113

$
4,743,338

$
2,404,560



At and year ended December 31,	2007		2006		2005
Gross unpaid losses and loss expenses at beginning of period	$	5,015,113	$	4,743,338	$	2,404,560
Less reinsurance recoverable balances at beginning of period		(1,359,154)		(1,518,110)		(596,299)

Net losses and loss expense reserves at beginning of period		3,655,959		3,225,228		1,808,261

Net incurred losses related to:
Current year		1,707,237		1,642,391		2,434,125
Prior years		(336,977)		(216,536)		(382,996)

		1,370,260		1,425,855		2,051,129

Net paid losses related to:
Current year		(165,739)		(120,143)		(287,290)
Prior years		(658,650)		(898,562)		(333,543)

		(824,389)		(1,018,705)		(620,833)

Foreign exchange loss (gain)		28,588		23,581		(13,329)

Net losses and loss expense reserves at end of period		4,230,418		3,655,959		3,225,228
Reinsurance recoverable balances at end of period		1,356,893		1,359,154		1,518,110

Gross unpaid losses and loss expenses at end of period	$	5,587,311	$	5,015,113	$	4,743,338

Net loss and loss expenses incurred include net favorable prior period reserve development of ~~$216.5~~$337 million, ~~$383.0~~$217 million and ~~$181.7~~$383 million ~~during~~for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004,~~2005, respectively. Prior period development arises from changes to loss estimates recognized in the current year 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 on our short tail lines of business. The following table summarizes the net favorable reserve development by ~~segment.~~segment:

Year ended Decemeber 31

Global

U.S.

Total

Insurance

Insurance

Insurance

Reinsurance

Total

(in thousands)

2006

$
(123,242
)
$
(44,291
)
$
(167,533
)

$
(49,003
)

$
(216,536
)
2005

$
(242,327
)
$
(26,416
)
$
(268,743
)

$
(114,253
)

$
(382,996
)
2004

$
(92,497
)
$
(14,302
)
$
(106,799
)

$
(74,913
)

$
(181,712
)

8. ~~Reinsurance~~



	Insurance		Reinsurance		Total
2007	$	214,018	$	122,959	$	336,977
2006	$	167,533	$	49,003	$	216,536
2005	$	268,743	$	114,253	$	382,996

The ~~Company purchases~~amounts above were almost entirely generated from our short-tail lines of business. For our long tail lines, our loss experience from older accident years is generally considered too immature as yet to recognize deviations from our initial expectations.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

6.	Reserve for Losses and Loss Expenses (Continued)

Favorable development on our short tail lines has primarily been due to there being significantly fewer late reported claims than we anticipated through our reserving process. The deviation between expected and actual claims experience is often greater for a company like ours that has a limited operating history and therefore relies more heavily upon industry based loss development profiles. Given the inherent limitations of this, our estimate of ultimate losses in prior years have included additional IBNR reserves intended to reflect reporting delays and other uncertainties specific to our business. These include the inherent delays we expect to arise from obtaining loss information on excess layers of business across our diverse worldwide exposures. As it has transpired, our actual claims experience in each of the last three years has been better than we projected, with late reporting being less prevalent than we anticipated.

7.	Reinsurance

We purchase treaty and facultative reinsurance to reduce exposure to a large ~~losses~~loss or a series of large losses. Facultative reinsurance provides for all or a portion of the insurance provided by a single policy and each policy reinsured is individually negotiated. Treaty reinsurance provides for a specified type or category of risks. The reinsurance agreements are written on either an excess of loss or quota share basis. Excess of loss covers provide a contractually set amount of cover after an excess point

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

8. ~~Reinsurance (Continued)~~

has been reached. This excess point can be based on the size of an industry loss or a fixed monetary amount. These covers can be purchased on a package policy basis, which provide cover for a number of lines of business within one contract. Quota share covers provide a proportional amount of coverage from the first dollar of loss. All of these reinsurance covers provide for recovery of a portion of losses and loss expenses from reinsurers. Under ~~its~~our reinsurance security policy, ~~the Company~~we predominantly ~~cedes its~~cede our business to reinsurers rated A- or better by Standard & Poor’s ~~Company (“S&P”)~~ and/or A.M. ~~Best Company (“A.M. Best”). The Company remains~~Best. We remain liable to the extent that reinsurers do not meet their obligations under these agreements either due to solvency issues, contractual disputes or some other reason.

The following table provides a breakdown of our ceded premiums by type of ~~cover was as follows:~~cover:

Year ended December 31

2006

2005

2004

(in thousands)

Treaty:

Quota Share

$
252,241

$
274,967

$
249,441

Excess of Loss

297,207

398,453

295,280

Facultative

70,409

61,476

43,917

Total

$
619,857

$
734,896

$
588,638



Year ended December 31,	2007		2006		2005
Treaty:
Quota Share	$	280,375	$	252,241	$	274,967
Excess of Loss		380,287		297,207		398,453
Facultative		65,671		70,409		61,476

Total	$	726,333	$	619,857	$	734,896

Gross and net premiums written and earned were as follows:

Year ended December 31

2006

2005

2004

Premiums

Premiums

Premiums

Premiums

Premiums

Premiums

written

earned

written

earned

written

earned

(in thousands)

Gross

$
3,609,036

$
3,353,884

$
3,393,885

$
3,278,266

$
3,012,311

$
2,510,847

Ceded

(619,857
)
(659,614
)
(734,896
)
(724,583
)
(588,638
)
(482,450
)
Net

$
2,989,179

$
2,694,270

$
2,658,989

$
2,553,683

$
2,423,673

$
2,028,397



	2007				2006				2005
	Premiums written		Premiums earned		Premiums written		Premiums earned		Premiums written		Premiums earned
Gross	$	3,590,090	$	3,459,816	$	3,609,036	$	3,353,884	$	3,393,885	$	3,278,266
Ceded		(726,333)		(725,406)		(619,857)		(659,614)		(734,896)		(724,583)

Net	$	2,863,757	$	2,734,410	$	2,989,179	$	2,694,270	$	2,658,989	$	2,553,683

Gross and net incurred losses and loss expenses were as follows:



Year ended December 31,	2007		2006		2005

Gross losses and loss expenses	$	1,733,499	$	1,720,353	$	3,185,635
Reinsurance recoveries		(363,239)		(294,498)		(1,134,506)

Net incurred losses and loss expenses	$	1,370,260	$	1,425,855	$	2,051,129

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

7.	Reinsurance (Continued)

Reinsurance recoverable and the provision for unrecoverable reinsurance by segment were as follows:

At December 31, 2006

Global

U.S.

Total

Insurance

Insurance

Insurance

Reinsurance

Total

(in thousands)

Reinsurance recoverable on unpaid losses and loss expenses

$
402,036

$
906,197

$
1,308,233

$
19,425

$
1,327,658

Reinsurance recoverable on paid losses

30,680

15,762

46,442

19,052

65,494

Provision for unrecoverable reinsurance

(19,150
)
(794
)
(19,944
)

(14,054
)

(33,998
)
Total reinsurance recoverable

$
413,566

$
921,165

$
1,334,731

$
24,423

$
1,359,154

% of reinsurance recoverable with Reinsurers rated A- or better*

93.8
%
99.0
%
97.3
%

52.1
%

96.0
%


	At December 31, 2007
	Insurance		Reinsurance		Total
Reinsurance recoverable on unpaid losses and loss expenses	$	1,288,096	$	26,047	$	1,314,143
Reinsurance recoverable on paid losses		64,106		12,492		76,598
Provision for unrecoverable reinsurance		(19,794)		(14,054)		(33,848)

Total reinsurance recoverable	$	1,332,408	$	24,485	$	1,356,893

% of reinsurance recoverable with Reinsurers rated A- or better*		96.6%		34.9%		94.5%

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~


	At December 31, 2006
	Insurance		Reinsurance		Total
Reinsurance recoverable on unpaid losses and loss expenses	$	1,308,233	$	19,425	$	1,327,658
Reinsurance recoverable on paid losses		46,442		19,052		65,494
Provision for unrecoverable reinsurance		(19,944)		(14,054)		(33,998)

Total reinsurance recoverable	$	1,334,731	$	24,423	$	1,359,154

% of reinsurance recoverable with Reinsurers rated A- or better*		97.3%		52.1%		96.0%

8. ~~Reinsurance (Continued)~~

* Ratings as assigned by Standard & Poor’s and/or A.M. Best. At December 31, ~~2006,~~2007, 9.2% of the total reinsurance recoverable balance was collateralized (2006: 13.8% ~~collateralized.~~

At December 31, 2005

Global

U.S.

Total

Insurance

Insurance

Insurance

Reinsurance

Total

(in thousands)

Reinsurance recoverable on unpaid losses and loss expenses

$
405,366

$
974,760

$
1,380,126

$
90,719

$
1,470,845

Reinsurance recoverable on paid losses

16,236

33,633

49,869

12,993

62,862

Provision for unrecoverable reinsurance

—

(2,604
)
(2,604
)

(12,993
)

(15,597
)
Total reinsurance recoverable

$
421,602

$
1,005,789

$
1,427,391

$
90,719

$
1,518,110

% of reinsurance recoverable with Reinsurers rated A- or better*

99.7
%
99.4
%
99.5
%

50.2
%

96.5
%

* ~~Ratings as assigned by S&P and/or A.M. Best~~).

9. ~~Derivative Instruments~~

8.	Derivative Instruments

a) ~~Investment Derivatives~~

a)	Investment Derivatives

During ~~2006, the Company~~2007, we recorded a negligible amount of realized and unrealized losses on foreign currency forward contracts in ~~its~~our investment portfolio ~~of $1.1~~(2006: $1 million ~~(2005: $7.3~~loss; 2005: $7 million ~~gain; 2004: $3.0 million loss)~~gain). ~~As at~~At December 31, ~~2006,~~2007, the net contractual amount of these foreign currency forward contracts was ~~$2.5~~$45 million ~~(2005: $27.1~~(2006: $3 million; ~~2004: $30.0~~2005: $27 million) with a negligible unrealized loss in each of the three years. During ~~2006, the Company~~2007, we recorded realized and unrealized losses on mortgage-backed securities that were accounted for as derivatives of ~~$2.8~~$1 million ~~(2005: $0.4~~(2006: $3 million; ~~2004: $0.3 million gain)~~2005: negligible). At December 31, 2007 and 2006, ~~and 2005, the Company~~we did not hold any mortgage-backed securities in ~~its~~our investment portfolio that are accounted for as derivatives.

b) ~~Foreign Currency Derivatives~~

b)	Foreign Currency Derivatives

During ~~2006, the Company~~2007, we recorded realized and unrealized gains of ~~$6.4~~$1 million ~~(2005: $4.9 million; 2004: $nil)~~(2006: $6 million loss; 2005: $5 million gain) on foreign currency forward contracts used to manage foreign currency exposures in the balance sheet. At December 31, ~~2006,~~2007, the net contractual amount of these foreign currency forward contracts was ~~$9.7~~$122 million ~~(2005: $59.9~~(2006: $10 million) with an unrealized ~~loss~~gain of ~~$0.9~~$2 million ~~(2005: $0.7~~(2006: $1 million loss; 2005: $1 million gain).

c)	Insurance & Reinsurance Contracts

On September 26, 2007, following the sale of the Note (see Note 5 (b)), we entered into an insurance contract with the buyer whereby we agreed to indemnify the buyer in the event of non payment on the principal of its investment in a newly issued $400 million asset-backed note. This security has a 10 year term with the full principal amount due at maturity and is collateralized by a portfolio of life settlement contracts and cash held by the same SPE as disclosed in Note 5 (b). Through our insurance contract, we hold an implicit variable interest in the SPE; but management has determined that we are not its primary beneficiary. We have recorded the insurance contract as a derivative contract.

~~c) Insurance & Reinsurance Contracts~~AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

8.	Derivative Instruments (Continued)

As there is no active market for this contract, we engaged an independent consultant to assist us in calculating its fair value. The independent consultant developed our valuation model that incorporated all of the significant cash flows relating to the insurance contract. It includes the cash flows relating to the assets supporting the $400 million note, namely life settlement contracts, cash and hedging instruments, as well as associated expenses. The estimated loss payment and risk margin, net of our contractual insurance premiums, were discounted using a risk free yield curve. We exercised significant judgment in deriving this fair value. At December 31, 2007, we recorded a fair value of $16 million for the derivative contract and it was included in other liabilities in our Consolidated Balance Sheets. The change in fair value of the derivative was solely due to collection of insurance premiums and accordingly, there was no income or loss derived from this contract in 2007. At December 31, 2007, our maximum exposure to a loss was $400 million on an undiscounted basis.

During 2006, ~~the Company~~we entered into a ~~$100.0~~$100 million Total Return Swap Facility (the “Facility”) with a financial institution for the purpose of accessing and isolating natural peril exposures embedded in capital market instruments. ~~The Company~~We utilized half of the Facility to enter into a ~~$50.0~~$50 million catastrophe-related total return swap transaction, which was collateralized by a lien over a portfolio of the Company’s investment grade securities. ~~The Company received~~During 2007, we earned contract payments, net of the Facility fee, in exchange for assuming losses from qualifying earthquake loss events. ~~The total return swap~~This income was ~~marked-to-market with the change~~included in ~~estimated fair value reported as~~ other insurance related income (loss) in the Consolidated

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

9. ~~Derivative Instruments (Continued)~~

Statements of Operations. At December 31, 2007 and 2006, the fair value of the total return swap was ~~$0.2 million. The quarterly net contract payments, including the Facility fee, are included in other insurance related income (loss).~~negligible. The Facility will terminate on September 15, 2009.

During 2005, ~~the Company~~we terminated all existing reinsurance contracts that were accounted for as derivatives. The change in fair value of these contracts resulted in a net loss of ~~$5.9 million during 2005 and a net gain of $11.3 million in 2004.~~$6 million.

~~10.~~ ~~Debt and Financing Arrangements~~

9.	Debt and Financing Arrangements

a) ~~Senior Notes~~

a)	Senior Notes

On November 15, 2004, ~~the Company~~we issued ~~$500.0~~$500 million of senior unsecured debt (“Senior Notes”) at an issue price of 99.785%, generating net proceeds of ~~$495.7~~$496 million. The Senior Notes bear interest at a rate of 5.75%, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2005. Unless previously redeemed, the Senior Notes will mature on December 1, 2014. ~~The Company~~We may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption ~~price, however, the Company has no current intentions of calling the~~price. The Senior ~~Notes. The Senior~~

Notes indenture contains 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. ~~The Company was~~We were in compliance with all the covenants contained in the Senior Notes indenture at December 31, ~~2006~~2007 and ~~2005. The fair value of the Senior Notes at December 31, 2006 was $496.2 million (2005: $498.5 million).~~2006.

Interest expense on our Senior Notes includes interest payable, amortization of the offering discount and amortization of debt offering expenses. The offering discount and debt offering expenses are amortized over the period of time during which the Senior Notes are outstanding. ~~During 2006,~~In each of the ~~Company~~last three years, we incurred interest expense for the Senior Notes of ~~$28.7 million (2005: $28.7 million).~~$29 million.

b) ~~Credit Facilities~~

b)	Credit Facilities

~~As at~~At December 31, ~~2006, the Company~~2007, we had a $1.5 billion credit facility agreement with a syndicate of lenders. The credit agreement is an unsecured five-year facility that allows ~~the Company and its operating subsidiaries~~us to issue letters of credit up to the full amount of the facility and to borrow up to $500 million for general corporate purposes, with total usage not to exceed $1.5 billion. The credit facility will expire on August 25, 2010. On September 26, 2007, we amended the facility to modify certain definitions in order to permit dividend payments on existing and future preferred and hybrid securities notwithstanding certain events of default. All other terms and conditions remain unchanged.

The credit agreement contains various loan covenants, including limitations on the incurrence of future indebtedness, future liens, fundamental changes, investments and certain transactions with affiliates. The facility ~~also~~ requires that ~~the Company~~we maintain 1) a minimum consolidated net worth of $2.0 billion plus (A) 25% of consolidated net income (if positive) of AXIS Capital for each semi-annual fiscal period ending on or after December 31, 2005 plus (B) an amount equal to 25% of the net cash proceeds received by AXIS Capital from the issuance of its capital stock during each such semi-annual fiscal period; and 2) a ~~minimum~~maximum debt to total capitalization ratio 0.35:1.0. ~~The Company was~~

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

9.	Debt and Financing Arrangements (Continued)

We were in compliance with all covenants at December 31, ~~2006~~2007 and ~~2005.~~2006. At December 31, ~~2006, the Company~~2007, we had letters of

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~10.~~ ~~Debt and Financing Arrangements (Continued)~~

credit outstanding of ~~$365.0~~$306 million ~~(2005: $685.1~~(2006: $365 million) ~~outstanding.~~. There was no debt outstanding under the credit facility at December 31, ~~2006~~2007 and ~~2005.~~2006.

~~11.~~ ~~Commitments and Contingencies~~

10.

Commitments and Contingencies

a) ~~Concentrations of Credit Risk~~

a)	Concentrations of Credit Risk

Financial instruments that potentially subject ~~the Company~~us to concentrations of credit risk consist principally of investments and reinsurance recoverable balances. ~~The~~Our investment portfolio is managed by external ~~advisors~~investment managers in accordance with ~~prudent standards of diversification.~~our investment guidelines. Specific provisions limit the allowable holdings of a single issue and issuers. ~~The Company~~Within our fixed income portfolio, we attempt to limit our credit exposure by purchasing fixed income investments rated BBB or higher. In addition, we limit our exposure to any single corporate issuer to 5% or less of our portfolio for securities rated A- or above and 3% or less of our portfolio for securities rated between BBB and BBB+. At December 31, 2007, we did not have an aggregate exposure ~~in a~~to any single ~~entity,~~issuer of 10% or more of our shareholders’ equity, other than inwith respect to U.S. ~~Government~~government and ~~U.S. Government~~ agency ~~securities, of more than 10.0% of shareholders’ equity at December 31, 2006 and 2005.~~ securities.

Concentration of credit risk with respect to reinsurance recoverable balances is limited due to the number of reinsurers used on ~~the Company’s~~our reinsurance programs. At December 31, ~~2006,~~2007, the top ten reinsurers accounted for ~~58.2%~~62% of reinsurance balances recoverable, one of which accounted for ~~12.8%~~16% of ~~reinsurance balances recoverable.~~this balance. Of the ~~58.2%~~62%, ~~30.2~~55 percentage points are with reinsurers rated A+ ~~by A.M. Best, 16.5 percentage points are~~, with ~~reinsurers~~the remainder rated A, by ~~A.M. Best and 11.5 percentage points are with reinsurers rated A- by A.M.~~A.M Best.

b) ~~Brokers~~

Brokers

~~The Company produces its~~We produce our business through brokers and direct relationships with insurance companies. During ~~2006,~~2007, three brokers accounted for ~~52.1% (2005: 52.1%~~50% (2006: 52%; ~~2004: 58.9%~~2005: 52%) of ~~the~~our total gross premiums ~~written by the Company.~~written. Marsh, Inc. (including its subsidiary Guy Carpenter and Company) accounted for ~~24.5% (2005: 28.0%~~24% (2006: 25%; ~~2004: 30.2%~~2005: 28%), Aon Corporation for ~~17.3% (2005: 15.7%~~16% (2006: 17%; ~~2004: 19.3%~~2005: 16%) and Willis Group Holdings Ltd. for ~~10.3% (2005: 8.4%~~10% (2006: 10%; ~~2004: 9.4%~~2005: 8%). No other broker and no one insured or reinsured accounted for more than 10% of our gross premiums written in ~~each~~any of the last three years.

c) ~~Lease Commitments~~

c)	Lease Commitments

~~The Company and its subsidiaries~~We lease office space in the countries in which ~~they~~we operate under operating leases which expire at various dates. ~~The Company renews~~We renew and ~~enters~~enter into new leases in the ordinary course of business as required. ~~Total~~During 2007, total rent expense with respect to these operating leases ~~during 2006~~ was ~~$10.2~~$12 million ~~(2005: $7.9~~(2006: $10 million: ~~2004: $7.1~~2005: $8 million). Future minimum lease payments under ~~the~~our leases are expected to be as follows:

(in thousands)

2007

$
18,343

2008

10,558

2009

9,991

2010

9,663

2011

10,104

Later years

26,720

Total minimum future lease commitments

$
85,379



2008	$	12,026
2009		12,857
2010		12,325
2011		12,207
2012		11,981
Later years		30,147

Total minimum future lease commitments	$	91,543

~~103~~

d)	Investment Commitment

During September 2007, we made an investment commitment of $75 million in an alternative investment fund, of which $36 million was still outstanding at December 31, 2007. We expect to fund this remaining commitment during 2008.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

~~11.~~ ~~Commitments and Contingencies (Continued)~~

10.	Commitments and Contingencies (Continued)

~~d) Investment Commitments~~

e)	Reinsurance Purchase Commitment

During 2006, the Company made certain commitments with respect to an additional investment in an alternative investment fund. At December 31, 2006, the total outstanding investment commitment was $19.4 million (2005: nil) which the Company funded during January 2007.

~~e) Reinsurance Purchase Commitment~~

~~During 2006, the Company~~2007, we purchased reinsurance coverage for ~~its U.S.~~our insurance ~~property line~~lines of business. The minimum reinsurance premiums are contractually due on a quarterly basis in advance. Accordingly at December 31, ~~2006, the Company has~~2007, we have an outstanding reinsurance purchase commitment of ~~$47.1 million (2005: nil).~~$52 million.

f) ~~Legal Proceedings~~

f)	Legal Proceedings

Except as noted below, ~~the Company is~~we are not a party to any material legal proceedings. From time to time, ~~the Company is~~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 ~~the Company~~us in the ordinary course of insurance or reinsurance operations. In ~~the~~our opinion, ~~of management,~~ the eventual outcome of these legal proceedings is not expected to have a material adverse effect on ~~the Company’s~~our financial condition or results of operations.

In 2005, a putative class action lawsuit was filed against ~~the~~our U.S. insurance subsidiaries. In re Insurance Brokerage Antitrust Litigation was filed on August 1,15, 2005 in the United States District Court for the District of New Jersey and includes as defendants numerous insurance brokers and insurance companies. 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 ~~court~~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, which are pending before~~dismiss. On April 15, 2007, the ~~court. Management believes~~District Court dismissed without prejudice plaintiffs’ complaint, as amended, and granted plaintiffs 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. On September 28, 2007, the District Court dismissed with prejudice plaintiffs’ antitrust and RICO claims and declined to exercise supplemental jurisdiction over plaintiffs’ remaining state law claims. On October 10, 2007, plaintiffs filed a notice of appeal of all adverse orders and decisions to the United States Court of Appeals for the Third Circuit. We believe that the lawsuit is completely without merit and ~~the Company continues~~we continue to vigorously defend the filed action.

~~g) Dividends for Common Shares and Preferred Shares~~

g)	Dividends for Common Shares and Preferred Shares

On December ~~7, 2006~~6, 2007 the Board of Directors declared a dividend of ~~$0.165~~$0.185 per common share to shareholders of record at December 31, ~~2006~~2007 and payable on January ~~16, 2007.~~15, 2008. Additionally, the Board of Directors declared a dividend of ~~$0.45~~$0.453125 per Series A 7.25% Preferred share and a dividend of ~~$1.88~~$1.875 per Series B 7.5% Preferred share. The Series A Preferred share dividend is payable on January ~~16, 2007,~~15, 2008, to shareholders of record at December 31, ~~2006~~2007 and the Series B Preferred share dividend is payable on March ~~1, 2007~~3, 2008 to shareholders of record at February 15, ~~2007.~~2008.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

~~11.~~ ~~Commitments and Contingencies (Continued)~~

~~h) Life Premiums Commitment~~

In connection with the life settlement contracts portfolio, the Company is committed to pay estimated life insurance premiums of $636.6 million over the life of the underlying contracts, of which the Company expects to pay $59.2 million during 2007.

~~12.~~ ~~Earnings Per Common Share~~

11.

Earnings Per Common Share

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

At and for year ended December 31

2006

2005

2004

(in thousands)

Basic earnings per common share

Net income available to common shareholders

$
925,765

$
90,061

$
494,998

Weighted average common shares outstanding

149,745

143,226

152,554

Basic earnings per common share

$
6.18

$
0.63

$
3.24

Diluted earnings per common share

Net income available to common shareholders

$
925,765

$
90,061

$
494,998

Weighted average common shares outstanding

149,745

143,226

152,554

Share equivalents

Warrants

11,725

10,939

10,361

Options

2,016

2,052

2,174

Restricted stock

908

1,307

787

Weighted average common shares outstanding—diluted

164,394

157,524

165,876

Diluted earnings per common share

$
5.63

$
0.57

$
2.98



At and year ended December 31,	2007		2006		2005
Basic earnings per common share
Net income available to common shareholders	$	1,055,243	$	925,765	$	90,061

Weighted average common shares outstanding		147,524		149,745		143,226

Basic earnings per common share	$	7.15	$	6.18	$	0.63

Diluted earnings per common share
Net income available to common shareholders	$	1,055,243	$	925,765	$	90,061

Weighted average common shares outstanding		147,524		149,745		143,226
Share equivalents:
Warrants		13,055		11,725		10,939
Options		2,385		2,016		2,052
Restricted stock		1,551		908		1,307

Weighted average common shares outstanding—diluted		164,515		164,394		157,524

Diluted earnings per common share	$	6.41	$	5.63	$	0.57

The ~~following securities,~~number of antidilutive common share equivalents that ~~would result in the issuance of common shares,~~ were not included in the above computation of diluted earnings per common share ~~because the effect would be antidilutive:~~was: 2007: nil, 2006: 881,980 and 2005: ~~1,106,499 and 2004: 1,664,500.~~1,106,499.

12.

~~13.~~Shareholders’ Equity

a)	Common Shares

Authorized share capital

~~a) Common Shares~~

~~The~~Our authorized share capital is 800,000,000 common shares, par value of $0.0125 per share. ~~The following table is a summary of changes in common shares issued and outstanding:~~

At and for year ended December 31

2006

2005

2004

(in thousands)

Issued and outstanding shares, beginning of period

148,831

152,737

152,455

Shares issued

1,162

8,877

282

Shares repurchased

(11
)
(12,783
)
—

Issued and outstanding shares, end of period

149,982

148,831

152,737

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~13.~~ ~~Shareholders’ Equity (Continued)~~

~~On November 21, 2005, the Company completed a common share offering of 6,800,000 shares at a price of $29.42 per share with aggregate net proceeds to the Company of $200.1 million.~~

On December 9, 2004, the Company announced that its Board had authorized the repurchase of up to $350.0 million of its common shares, and on February 16, 2005, the Company repurchased 12,783,094 common shares owned by initial investors at ~~the formation of the Company pursuant to its repurchase program. The average purchase price was $27.38 per common share and the aggregate price was $350.0 million.~~Repurchase plans

On March 14, 2005, the Company announced that its Board had authorized an additional repurchase of up to $150.0 million of its common shares under the Company’s share repurchase plan. No repurchases were effected under this authorization.

On December 7, 2006, ~~the Company~~we announced that ~~its~~our Board had authorized a renewal of ~~the Company’s~~our share repurchase plan with authorization to repurchase ~~up to~~ $400 million of ~~its~~our common shares. This ~~repurchase plan~~authorization will expire on December 31, 2008. During 2007, under this repurchase plan we repurchased 8,164,378 common shares for a total cost of $305 million, including 5,263,445 shares for $201 million from Trident II, L.P. and affiliated entities. On December 6, 2007, our Board approved a new share repurchase plan authorizing $400 million of share repurchases in addition to the $95 million remaining from the 2006 repurchase plan. This new authorization will expire on December 31, 2009. During 2007, we have repurchased 88,277 (2006: 10,923) common shares from employees for $3 million (2006: negligible) to satisfy withholding tax liabilities upon the vesting of restricted stock awards and the exercise of stock options. These share repurchases are excluded from our repurchase plans.

~~b) Series A and B Preferred Shares~~

b)	Series A and B Preferred Shares

On October 5, 2005, ~~the Company~~we issued ~~$250.0~~$250 million of 7.25% series A ~~preferred~~Preferred shares, par value $0.0125 per share, with a liquidation preference of $25.00 per share. ~~The Company~~We may redeem the shares on and after October 15, 2010 at a redemption price of $25.00 per share. Dividends on the series A ~~preferred~~Preferred shares are non-cumulative. Consequently, if the board of directors does not authorize and declare a dividend for any dividend period, holders of the series A ~~preferred~~Preferred shares will

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

12.	Shareholders’ Equity (Continued)

not be entitled to receive a dividend for such period, and such undeclared dividend will not accumulate and be payable. Holders of series A ~~preferred~~Preferred shares will be entitled to receive, only when, as and if declared by the board of directors, non-cumulative cash dividends from the original issue date, quarterly in arrears on the fifteenth day of January, April, July and October of each year, commencing on January 15, 2006, without accumulation of any undeclared dividends. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 7.25% of the liquidation preference per annum. For 2007 and 2006, the total dividends declared on series A Preferred share was $1.8125 per share.

On November 23, 2005, ~~the Company~~we issued ~~$250.0~~$250 million of 7.50% series B ~~preferred~~Preferred shares with a liquidation preference of $100.00 per share. ~~The Company~~We may redeem the shares on or after December 1, 2015 at a redemption price of $100.00 per share. Dividends on the series B ~~preferred~~Preferred shares if, as and when declared by our board of directors will be payable initially at a fixed rate per annum equal to 7.50% of the liquidation preference on the first day of March, June, September and December of each year, commencing on March 1, 2006, up to but not including December 1, 2015. Commencing on March 1, 2016, the dividend rate on the series B ~~preferred~~Preferred shares will be payable at a floating rate. During a floating rate period, the floating rate per annum will be reset quarterly at a rate equal to 3.4525% plus the 3-month LIBOR Rate. Dividends on the series B ~~preferred~~Preferred shares are non-cumulative. Consequently, if the board of directors does not declare a dividend for any dividend period, holders of the series B ~~preferred~~Preferred shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accumulate and will not be payable. For 2007 and 2006, the total dividends declared on series B Preferred share was $7.50 per share.

The holders of the series A and B ~~preferred~~Preferred shares will have no voting rights except as described below. Whenever dividends payable on the series A and B ~~preferred~~Preferred shares have not been declared by the board of directors and paid for an aggregate amount equivalent to six full quarterly dividends (whether or

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~13.~~ ~~Shareholders’ Equity (Continued)~~

not consecutive) on all of the series A and B ~~preferred~~Preferred shares or any class or series of parity stock then outstanding, the holders of the series A and B ~~preferred~~Preferred shares, together with the holders of each such class or series of parity stock, will have the right, voting together as a single class regardless of class or series, to elect two directors to ~~the Company’s~~our board of directors. ~~The Company~~We will use ~~its~~our best efforts to effectuate the election or appointment of these two directors. Whenever dividends on the series A and B ~~preferred~~Preferred shares and the parity stock then outstanding have been paid in full, or declared and sufficient funds have been set aside, for at least four dividend periods, the right of holders of the series A and B ~~preferred~~Preferred shares and the parity stock to be represented by directors will cease (but subject always to the same provision for the vesting of such rights in the case of any future suspension of payments in an amount equivalent to dividends for six full dividend periods whether or not consecutive), and the terms of office of the additional directors elected or appointed to the ~~board~~Board of ~~directors~~Directors will terminate.

~~c) Share Warrants~~

c)	Share Warrants

In connection with ~~its~~our formation, ~~the Company~~we issued warrants to founding shareholders which entitle them to purchase up to 12% of the aggregate number of outstanding shares at the date of issuance, calculated on a fully diluted basis, on the exercise date at a price of $12.50 per share. The warrants are subject to anti-dilution provisions that adjust in the event of dividends, distributions or stock adjustments. In the event of a dividend, a warrant holder may elect to take either an adjustment to both the exercise price and the number of shares issuable upon exercise of the warrants or to take a cash dividend that is paid upon exercise of the warrant. The anti-dilution provisions ensure that the holder is in the same position as if the warrant had been exercised immediately before the dividend, distribution or stock adjustment.

At December 31, ~~2006, 19,644,253~~2007, 19,651,329 common shares ~~(2005: 19,650,509; 2004: 19,619,152)~~(2006: 19,644,253; 2005: 19,650,509) would be issued pursuant to the warrants, if all warrants were exercised at an average price of ~~$12.44 (2005: $12.46; 2004: $12.48)~~$12.42 (2006: $12.44; 2005: $12.46). All warrants were exercisable on November 20, 2001. At December 31, ~~2006, the Company~~2007, we had accrued ~~$30.6~~$43 million ~~(2005: $19.8~~(2006: $31 million; 2005: $20 million) of cash dividends relating to the anti-dilution provision in respect of the warrants. The expiration date for the warrants is November 20, 2011.

The warrants were granted to the founding shareholders as an inducement to purchase our stock ~~in the Company~~ and therefore no compensation expense has been recorded in connection with the warrants. The fair value of the warrants at November 20, 2001 of ~~$65.1~~$65 million has been included in additional paid-in capital. This value ~~has been~~was calculated using the Black-Scholes option-pricing model. The three ~~main~~significant assumptions used were: risk-free interest rate of 5.1%; expected life of 7 years; and a dividend yield of nil.

~~14.~~ ~~Benefit Plans~~

~~(a) Employee Benefit Plans~~AXIS CAPITAL HOLDINGS LIMITED

~~1) Retirement Plans~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The Company provides~~DECEMBER 31, 2007, 2006 AND 2005

12.

Shareholders’ Equity (Continued)

d)	Treasury shares

Following our shareholders’ approval at the Annual General Meeting held in May 2007, we amended our bye-laws to permit common shares repurchased to be held in treasury. During 2007, of the total share repurchases disclosed above, 5,466,044 shares were held in treasury.

13.

Benefit Plans

We provide retirement benefits to eligible employees through various plans sponsored by ~~the Company.~~

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~us.

~~14.~~ ~~Benefit Plans (Continued)~~

(i)	Defined Contribution Plans

~~(i) Defined Contribution Plans~~

~~The Company has~~We have several defined contribution plans that are self directed. Generally, mutual funds are made available pursuant to which employees and ~~the Company~~we contribute a percentage of the employee’s gross salary into the plan each month. During ~~2006, the Company’s~~2007, our total contribution expenses ~~totaled $7.6~~were $10 million ~~(2005: $6.7 million; 2004: $6.0~~(2006: $8 million and 2005: $7 million).

~~(ii) Supplemental Executive Retirement Plans (“SERPs”)~~

(ii)	Supplemental Executive Retirement Plans (“SERPs”)

~~Effective January 1, 2004, the Company implemented~~We have SERPs for our two ~~executives. The SERP for Mr. Charman,~~senior executives: Chairman, Michael Butt, and President and Chief Executive Officer ~~and President,~~(CEO), John Charman. The SERP requires ~~the~~our Company to make annual payments ~~to Mr. Charman~~ upon ~~his retirement for a~~ period of 20 years. The benefits vest over a period of two years commencing in 2006. Commencing at age 56, Mr. Charman is entitled to an annual payment of $0.8 million compounded by 3% annually for each year commencing from inception. The SERP for Mr. Butt, Chairman, requires the Company to make annual payments to Mr. Butt upon his retirement for a period of 20 years for our CEO and 10 ~~years. The benefits vest over a period of two~~ years ~~commencing in 2006. Commencing at age 66, Mr. Butt is entitled to an annual payment of $0.3 million compounded by 3% annually~~ for ~~each year commencing from inception.~~our Chairman. If either ~~Mr. Charman~~the CEO or ~~Mr. Butt~~Chairman dies, is ~~permanently~~ disabled or a change of control of the Company occurs, the remaining benefits under ~~his~~their respective plan are payable by the Company in a lump sum. ~~The benefits received under~~At December 31, 2007, the ~~SERPs will be reduced by the benefits received by the executives under the Company’s Bermuda retirement plan. Effective May 12, 2006, the SERP for Mr. Butt~~total lump sum contingently payable to our CEO and Chairman was ~~amended to delay by one year the timing of retirement benefits to be paid~~$22 million and ~~to increase the amount of retirement benefits by $0.1~~$3 million, ~~for the first five years of retirement. The measurement date of~~respectively. During 2007, the plan ~~was December 31, 2006. The plan~~ assets ~~are~~were invested in money market ~~funds.~~

~~The following table shows~~funds and the ~~components of~~ pension expense was $2 million (2006: $2 million and 2005: $3 million). At December 31, 2007, the ~~amounts included in the Company’s Consolidated Balance Sheets for the SERPs.~~

At and for Year ended December 31

     2006

     2005

     2004

(in thousands)

Components of pension expense

Amortization of prior service cost

$
2,250

$
2,146

$
2,146

Expected return on plan assets

(715
)

—

—

Interest cost

733

683

643

Pension expense

$
2,268

$
2,829

$
2,789

SERPs were fully funded.

The weighted-average assumptions used to determine our net periodic pension cost and benefit obligations were:

2006

2005

2004

Discount rate for the period

5.75
%
5.75
%
6.00
%
Expected return on plan assets

5.75
%
5.75
%
6.00
%
Rate of increase in future pensions

3.00
%
3.00
%
3.00
%

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~14.~~ ~~Benefit Plans (Continued)~~

(at and for year ended December 31, in thousands)

2006

2005

2004

Change in benefit obligation

Benefit obligation at beginning of period

$
12,439

$
11,371

$
10,728

Interest cost

733

683

643

Actuarial loss

—

385

—

Plan amendments

315

—

—

Benefit obligation at end of period

$
13,487

$
12,439

$
11,371

Change in plan assets

Fair value of plan assets at beginning of period

$
—

$
—

$
—

Employer contributions

12,840

—

—

Actual return on plan assets

615

—

—

Fair value of plan assets at end of period

$
13,455

$
—

$
—

Reconciliation of funded status

Fair value of plan assets

$
13,455

$
—

$
—

Benefit obligation

(13,487
)
(12,439
)
(11,371
)
Funded status

$
(32
)
$
(12,439
)
$
(11,371
)
Amounts recognized in accumulated other comprehensive loss

Unrecognized prior service cost

$
4,503

$
—

$
—

Unrecognized loss

484

—

—

Accrued benefit cost

$
4,987

$
—

$
—



Year ended December 31,	2007	2006	2005
Discount rate for the period	6.00%	5.75%	5.75%
Expected return on plan assets	5.75%	5.75%	5.75%
Rate of increase in future pensions	3.00%	3.00%	3.00%

14.

Stock Compensation Plans

~~At December 31, 2006~~In May 2007, our shareholders approved the ~~following benefit payments are expected to be paid in the years indicated:~~

Expected Payments

(in thousands)

2007

$
—

2008

—

2009

807

2010

1,162

2011

1,194

2012-2016

6,209

Total

$
9,372

2) ~~Long Term Equity Compensation Plan~~

~~The Company has adopted a~~AXIS Capital Holdings Limited 2007 Long-Term Equity Compensation Plan (“~~LTEC”~~2007 Plan”) ~~that~~. The 2007 Plan provides for, among other things, the grant of restricted stock awards and units, non-qualified ~~stock options,~~and incentive stock options, ~~stock appreciation rights, restricted stock~~and other equity-based awards ~~performance share~~to our employees and ~~performance unit awards and share purchase rights.~~directors. The maximum number of our common shares ~~with respect to which awards~~that may be ~~granted~~delivered under our 2007 Plan is 5,000,000. As a result of the ~~plan is 14,855,192,~~adoption of ~~which 1,200,000~~the 2007 Plan, the 2003 Long-Term Equity Compensation and 2003 Directors Long-Term Equity Compensation Plan were terminated (“2003 Plans”), except that all related outstanding awards will remain in effect. All stock compensation plans are ~~available for issuance pursuant to share purchase rights and the remainder of which are available for issuance under all other awards. The plan is~~ administered by the Compensation Committee of ~~the~~our Board of Directors.

Over the years we have issued stock options, restricted stocks, and phantom stock units to our employees and directors but none of these awards were subject to performance and market conditions. At December 31, 2007, 4,963,500 million equity-based awards remain available for grant under the 2007 Plan. Subsequent to December 31, 2007, we granted 29,201 common shares and phantom stock units to our directors on January 15, 2008, at a fair value of $38.92 per share and 1,558,150 restricted shares to our employees on February 4, 2008, at a fair value of $39.20 per share.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

~~14.~~ ~~Benefit Plans (Continued)~~

14.

Stock Compensation Plans (Continued)

~~(i)~~ ~~Options~~

(i)	Stock options

~~Options~~We have granted stock options under ~~LTEC plan~~the 2003 Plans. These options generally become exercisable over a three-year annual vesting period and expire 10 ~~years after the date of grant and generally vest ratably on an annual basis over three~~ years from the date of grant. ~~Exercise prices are established at~~We have determined the fair value of ~~the Company’s common shares at the date of grant, based on the closing price of the Company’s shares on the New York Stock Exchange. Upon exercise, new shares are issued by the Company.~~

During 2006, the Company expensed $4.3 million (2005: $5.2 million; 2004: $3.0 million) related to the grant of options and realized a tax benefit of $1.3 million (2005: $1.7 million; 2004: $0.5 million). At December 31, 2006, there was $0.9 million of unrecognized compensation cost related to options which is expected to be recognized over the weighted average period of one year. The total intrinsic value of options exercised during 2006 was $11.0 million (2005: $10.3 million; 2004: $0.6 million) and the Company received proceeds of $17.1 million (2005: $8.6 million; 2004: $0.7 million). The total intrinsic value of options vested at December 31, 2006, was $70.2 million (2005: $69.9 million; 2004: $55.2 million). The fair value of options granted during 2006 was $0.1 million (2005: $6.7million; 2004: $7.3 million).

~~The fair value of~~ each stock option grant ~~is estimated on~~at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

2006

2005

2004

Weighted average assumptions used:

Expected Life

0.3 years

7.0 years

7.0 years

Risk-free interest rate

4.6
%
4.2
%
4.4
%
Expected volatility

20.0
%
21.9
%
23.0
%
Dividend yield

1.7
%
2.5
%
1.9
%



	2007	2006	2005
Expected term of the option	—	0.3 years	7.0 years
Risk-free interest rate	—	4.6%	4.2%
Expected volatility	—	20.0%	21.9%
Dividend yield	—	1.7%	2.5%

~~The grants~~We have not issued stock options under the 2007 Plan. We also have not issued stock options in 2006 ~~reflect modifications to grants made in prior years to an employee~~except for 23,334 modified stock options pursuant to a severance agreement. ~~The earlier grants were~~Under FAS No. 123(R), modified stock options are deemed cancelled and new grants issued at the new terms.

~~The Company has~~ We have elected to use the simplified method of calculating the expected life of the options, which is the average of the vesting period and the expiry period. The weighted-average fair value of stock options granted per share for 2007 was nil (2006: $4.48; 2005: $5.55).

The following is a summary of stock options ~~granted under the LTEC~~as of December 31, 2007, and related ~~activity:~~activity for the year ended:

At and for the year ended December 31

2006

2005

2004

Number of
Shares

Weighted
Average
Exercise
Price

Number of
Shares

Weighted
Average
Exercise
Price

Number of
Shares

Weighted
Average
Exercise
Price

Outstanding—beginning of period

6,054,464

$
18.84

5,622,181

$
16.38

4,623,512

$
13.33

Granted

23,334

27.30

1,269,834

28.01

1,079,000

29.48

Exercised

(905,146
)

18.90

(653,881
)

13.13

(52,997
)

13.76

Forfeited

(105,668
)

28.75

(183,670
)

27.18

(27,334
)

22.71

Outstanding—end of period

5,066,984

$
18.66

6,054,464

$
18.84

5,622,181

$
16.38


	Number of Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value* (‘000s)
Outstanding—beginning of year	5,146,984	$	18.75
Granted	-		-
Exercised	(330,368)		22.72
Forfeited	(7,000)		28.02

Outstanding - end of year	4,809,616	$	18.46	5.45 years	$	98,610


Options exercisable at end of year	4,506,782	$	17.83	5.35 years	$	95,288

* The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the December 31, 2007, and the exercisable price, multiplied by the number of in-the-money-options) that would have been received by the stock option holders had all stock option holders exercised their stock options on December 31, 2007.

The total intrinsic value of stock options exercised during 2007 was $5 million (2006: $11 million; 2005: $10 million) and we received proceeds of $8 million (2006: $17 million; 2005: $9 million). During 2007, we expensed $1 million (2006: $4 million; 2005: $5 million) related to stock options and recorded $1 million of tax benefits thereon (2006: $1 million; 2005: $2 million). At December 31, 2007, there was no remaining unrecognized compensation cost related to stock options and we anticipate all outstanding stock options will vest.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

~~14.~~ ~~Benefit Plans (Continued)~~

14.

Stock Compensation Plans (Continued)

The following table summarizes information about ~~the Company’s~~our stock options ~~for options granted under the LTEC and~~ ~~outstanding as of~~at December 31, ~~2006:~~2007:

Options Outstanding

Options Exercisable

Range of Exercise prices

Number of
Options

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life

Number of
Options

Weighted
Average
Exercise
Price

$12.50-$13.75

2,583,147

$
12.55

5.11

2,583,147

$
12.55

$13.76-$15.00

599,000

14.50

5.95

599,000

14.50

$15.01-$16.25

53,334

16.25

6.42

53,334

16.25

$16.26-$25.65

59,000

25.54

6.83

39,334

25.54

$25.66-$29.62

1,772,503

28.81

7.40

899,885

29.09



	Options Outstanding				Options Exercisable

Range of Exercise Prices	Number of Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Number of Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
$12.50 – $13.75………………	2,512,112	$	12.54	4.82	2,512,112	$	12.54	4.82
$13.76 – $15.00………………	582,000		14.50	4.95	582,000		14.50	4.95
$15.01 – $16.25………………	29,334		16.25	6.22	29,334		16.25	6.22
$16.26 – $25.65………………	40,000		25.50	5.58	40,000		25.50	5.58
$25.66 – $29.62………………	1,646,170		28.78	6.58	1,343,336		28.95	6.48

	4,809,616	$	18.46	5.45	4,506,782	$	17.83	5.35

~~(ii) Restricted Stock~~

(ii)	Restricted stock

We have granted restricted stock under both our 2003 Plans and the 2007 Plan. The ~~fair value~~nature and general terms of these plans are materially consistent. For employees, restricted ~~share grants is determined using the closing price of the Company’s shares on the New York Stock Exchange on the day of the grant, with~~stock grants generally ~~vesting~~cliff vest three years after the date of grant or upon the employee’s earlier retirement, death, permanent disability or a change in control of the Company. Restricted shares are entitled to vote and to receive dividends but may not be transferred during the period of restriction and are forfeited if the employee’s employment terminates prior to vesting. Compensation cost equivalent to the estimated fair value at the date of grant for the number of shares expected to fully vest is amortized over a three-year vesting period. At December 31, 2006, there was $29.4 million of unrecognized compensation cost related to these awards which is expected to be recognized over the weighted average period of 1.4 years. The total fair value of shares vested during 2006 was $3.1 million (2005: $25.7 million; 2004: $4.2 million). During 2006, the Company expensed $20.9 million (2005: $20.0 million; 2004: $14.1 million) in respect ofFor directors, restricted stock ~~and recorded tax benefits thereon of $3.3 million (2005: $4.7 million; 2004: $1.9 million).~~

~~The following is a summary of restricted stock granted under the LTEC and related activity:~~

At and for year ended December 31

2006

2005

2004

Number of
Shares

Weighted
Average
Grant
Date Fair
Value

Number of
Shares

Weighted
Average
Grant
Date Fair
Value

Number of
Shares

Weighted
Average
Grant
Date Fair
Value

Nonvested—beginning of period

1,175,750

$
28.40

2,126,700

$
17.36

1,879,800

$
13.32

Granted

1,295,250

31.01

898,750

28.35

550,500

29.61

Vested

(115,000
)

27.12

(1,723,300
)

14.91

(294,000
)

14.25

Forfeited

(127,500
)

28.85

(126,400
)

26.18

(9,600
)

23.95

Nonvested—end of period

2,228,500

$
29.95

1,175,750

$
28.40

2,126,700

$
17.36

~~The~~ grants in 2006 include modifications to grants made in prior years in relation to an employee pursuant to a severance agreement. The earlier grants were deemed forfeited and new grants issued at the new terms.

~~111~~

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~14.~~ ~~Benefit Plans (Continued)~~

The Company receives a tax deduction for certain vested restricted stocks and exercised stock options. The Consolidated Statements of Cash Flows in 2006 include excess tax benefits of $0.4 million (2005: 2.9 million; 2004: nil) on exercise of stock options and restricted stock vests as a financing cash flow.

~~(b)~~ ~~Director Benefit Plans~~

~~(1)~~ ~~2003 Directors Long-Term Equity Compensation Plan~~

The Company has adopted a Directors Long-Term Equity Compensation Plan (“DLTECP”) that provides for the grant of non-qualified stock options and stock awards (restricted and unrestricted) to non-employee directors of the Company. The maximum number of common shares with respect to which awards may be granted under the plan is 1,200,000. The plan is administered by the Compensation Committee of the Board of Directors.

~~(i)~~ ~~Options~~

~~Options granted under the plan generally expire 10 years after the date of grant and~~ generally vest ratably on an annual basis over three years from the date of grant. Exercise prices are established at the fair value of the Company’s common shares at the date of grant, based on the closing price of the Company’s shares on the New York Stock Exchange. Upon exercise, new shares are issued by the Company.

During 2006, the Company expensed $0.2 million (2005: $0.2 million; 2004: $0.1million) related to the grant of options. At December 31, 2006, there was a negligible amount of unrecognized compensation cost related to options which is expected to be recognized over the weighted average period of 1 year. The total intrinsic value of options exercised during 2006 was $0.09 million (2005: $nil; 2004: $nil) and the Company received proceeds of $0.3 million (2005: $nil; 2004: $nil) and realized no tax benefit. The total intrinsic value of options vested at December 31, 2006, was $0.5 million (2005: $0.3 million; 2004: $0.1 million). There were no option grants during 2006, and the fair value of options granted during 2005 and 2004 was $0.3 million. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2005 and 2004, respectively: risk free interest rates of 4.2% and 4.4%, respectively, expected life of 7 years, a dividend yield of 2.5% and 1.9%, respectively, and an expected volatility of 22% and 23%, respectively. The Company has elected to use the simplified method of calculating the expected life of the options, which is the average of the vesting period and the expiry period.

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~14.~~ ~~Benefit Plans (Continued)~~

~~The following is a summary of stock options granted under the DLTECP and related activity:~~

At and for year ended December 31

2006

2005

2004

Number of
Shares

Weighted
Average
Exercise
Price

Number of
Shares

Weighted
Average
Exercise
Price

Number of
Shares

Weighted
Average
Exercise
Price

Outstanding—beginning of period

120,000

$
25.19

72,000

$
23.68

32,000

$
16.25

Granted

—

—

48,000

27.45

40,000

29.62

Exercised

(13,332
)

23.84

—

—

—

—

Forfeited

(26,668
)

27.20

—

—

—

—

Outstanding—end of period

80,000

$
24.74

120,000

$
25.19

72,000

$
23.68

~~The following table summarizes information about the Company’s stock options granted under the DLTECP and for options outstanding as of December 31, 2006:~~

~~(ii)~~ ~~Restricted Stock~~

~~The fair value of restricted share grants is determined using the closing price of the Company’s shares on the New York Stock Exchange on the day of the grant, with grants generally vesting~~ six months after the date of grant or upon the director’s earlier retirement, death, permanent disability or a change in control of the Company. Restricted shares are entitled to vote and to receive dividends but may not be transferred during the period of restriction and are forfeited if the ~~director resigns~~employee’s employment terminates prior to vesting. ~~Compensation cost equivalent to~~

We have determined the ~~estimated~~ fair value atof restricted share grants using the ~~date~~closing price of ~~grant~~our shares on the New York Stock Exchange on the day of the grant. The following table provides a reconciliation of the beginning and ending balance of unvested restricted stock for the ~~number of shares expected to fully vest is amortized over a six-month vesting period. As of~~year ended December 31, ~~2006, there was no unrecognized compensation cost~~ ~~related~~2007:


	Number of Shares	Weighted Average Grant Date Fair Value
Nonvested restricted stock - beginning of year	2,228,500	$	29.95
Granted	1,596,400		33.02
Vested	(449,900)		29.68
Forfeited	(63,250)		31.30

Nonvested restricted stock—end of year	3,311,750	$	31.44

During 2007, we granted 1,596,400 restricted shares (2006: 1,299,332; 2005: 900,934) to ~~these awards.~~our employees and directors, with a weighted average grant-date fair value per share of $33.02 (2006: $31.01; 2005: $28.35). The ~~Company recorded expenses of $0.1 million or less in each of the years under 2006, 2005 and 2004, representing the~~ total fair value of shares ~~vesting~~vested during 2007 was $13 million (2006: $3 million; 2005: $26 million). During 2007, we expensed $34 million (2006: $21 million; 2005: $20 million) in respect of restricted stock, and recorded tax benefits thereon of $6 million (2006: $3 million; 2005: $5 million). At December 31, 2007, there was $47 million of unrecognized compensation cost related to restricted stock awards, which is expected to be recognized over the ~~period.~~weighted average period of 1.4 years. The grants in 2006 include 145,000 of modified grants issued pursuant to a severance agreement.

During 2007, we realized additional tax benefits for certain vested restricted stocks and exercised stock options of $1 million (2006: negligible; 2005: $3 million). These excess tax benefits are included in our cash flows from financing activities in the Consolidated Statements of Cash Flows.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

~~14.~~ ~~Benefit Plans (Continued)~~

~~The following is a summary of restricted stock granted under the DLTECP and related activity:~~

At and for year ended December 31

2006

2005

2004

Number of
Shares

Weighted
Average
Grant
Date Fair
Value

Number of
Shares

Weighted
Average
Grant
Date Fair
Value

Number of
Shares

Weighted
Average
Grant
Date Fair
Value

Nonvested—beginning of period

—

$
—

—

$
—

—

$
—

Granted

4,082

31.85

2,184

27.45

1,350

29.62

Vested

(4,082
)

31.85

(2,184
)

27.45

(1,350
)

29.62

Nonvested—end of period

—

$
—

—

$
—

—

$
—

14.	Stock Compensation Plans (Continued)

In addition, our directors may elect to receive their fees in common shares rather than cash. ~~As at~~At December 31, ~~2006, 44,834 (2005: 40,235; 2004: 32,625)~~2007, a cumulative total of 52,816 (2006: 44,834; 2005: 40,235) common shares had been granted under the ~~plan~~2003 Plans in lieu of fees. All awards are made at the fair value of the common shares at the time of the grant.

~~(2)~~ ~~2004 Directors Deferred Compensation Plan~~

(iii)

Phantom stock units

~~The Company has~~We have an unfunded nonqualified deferred compensation plan for our directors that allows participating directors to elect (i) the amount, if any, of cash or stock as fees for services to be deferred and (ii) the form in which payment is to be made. Directors who choose to defer fees otherwise payable in shares are credited a number of phantom stock units equal in amount to the number of shares of stock deferred. In the event a cash dividend is declared on the stock, the portion of the participant’s deferral account denominated in phantom share units is credited with additional phantom share units (or portions thereof). Directors who choose to defer fees otherwise payable in cash are credited with interest on their cash deferral at a rate for the year of deferral that is 100 basis points above the 12-month LIBOR rate for deposits of U.S. dollars. Generally, benefits are paid upon termination of service as a director. In 2007, we issued 10,331 (2006: 10,324; 2005: 10,360) phantom stock units in lieu of: a) annual cash retainer, b) annual restricted stock grant, c) board and committee fees, and d) cash dividends declared on our common stock. At December 31, ~~2006, 35,656 (2005: 30,267; 2004: 23,235)~~2007, we had 53,463 (2006: 45,805; 2005 38,068) phantom ~~share~~stock units had been issued under the plan in lieu of fees, 1,997 (2005: 1,144; 2004: nil) had been issued in lieu of dividends, and 10,739 (2005: 6,657; 2004: 4,473) had been issued in lieu of restricted shares.outstanding.

~~15.~~ ~~Related Party Transactions~~

15.

Related Party Transactions

The transactions listed below are classified as related party transactions as each counterparty had or has had either a direct or indirect shareholding in ~~the Company~~us or has been a board member during any period covered by the financial statements.

~~In 2005, the Company began investing in various CLOs.~~ The collateral manager of four of ~~these investments was~~our CLO’s is Blackstone Debt Advisors L.P., who is entitled to management fees payable by the collateralized obligations in the ordinary course of business. ~~The Company invested~~We also have investments in ~~a fund of~~three hedge funds and in a ~~distressed debt~~credit fund that isare managed by Blackstone Alternative Asset Management, LP, who is entitled to management fees in the ordinary course of business. During ~~2006,~~2007, total management fees to the Blackstone Group was ~~$2.8~~$4 million ~~(2005: $1.2~~(2006: $2 million).

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~15.~~ ~~Related Party Transactions (Continued)~~

~~The Company~~ We pay Marsh & McLennan Companies, Inc (“Marsh”) brokerage and commissions, which vary based on the amount of business produced. In addition, ~~the Company pays~~we pay fees to Marsh relating to accounting and human resources consulting services and the placement of insurance. Effective May 2005, Marsh ceased to be a related party. ~~The Company~~We incurred brokerage fees and commissions during 2005 ~~and 2004~~ of ~~$92.1 million and $109.0 million, respectively.~~$92 million.

~~16.~~ ~~Taxation~~

16.

Taxation

Under current Bermuda law, ~~the Company is~~we are not required to pay any taxes in Bermuda on its income or capital gains.

~~The Company has~~ We have received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, ~~the Company~~we will be exempt from taxation in Bermuda until March 2016.

~~The Company’s~~Our U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the U.S. Internal Revenue Code and Regulation. Should the U.S. subsidiaries pay a dividend to ~~the Company,~~AXIS Capital, withholding taxes will apply. ~~The Company~~Our U.S. subsidiaries are not under examination but remain subject to examination in the U.S. for tax years 2004-2007.

We also ~~has~~have operating subsidiaries and branch operations in Ireland, the United Kingdom, Singapore, and Switzerland ~~and is~~which are subject to the relevant taxes in those jurisdictions. 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 2003-2007.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

16.

Taxation (Continued)

The ~~Company’s net deferred tax assets and net current tax liabilities are included in other assets and other liabilities respectively, in the Consolidated Balance Sheets.~~

~~Income~~following table provides an analysis of our income tax expense and net ~~income~~ tax ~~assets were as follows:~~assets:

Year ended December 31

2006

2005

2004

(in thousands)

Current income tax expense (benefit)

United States

$
44,074

$
33,569

$
12,880

Europe

9,782

(1,436
)
6,083

Deferred income tax expense (benefit)

United States

(19,702
)
(27,351
)
(13,659
)
Europe

(312
)
1,285

136

Total income tax expense

$
33,842

$
6,067

$
5,440

Net current tax liabilities

$
(2,615
)
$
(6,367
)
$
(3,607
)
Net deferred tax assets

70,123

50,874

21,647

Net tax assets

$
67,508

$
44,507

$
18,040

~~115~~

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~16.~~ ~~Taxation (Continued)~~



Year ended December 31,	2007		2006		2005
Current income tax expense (benefit)
United States	$	38,090	$	44,074	$	33,569
Europe		15,398		9,782		(1,436)
Deferred income tax expense (benefit)
United States		(11,966)		(19,702)		(27,351)
Europe		(31)		(312)		1,285

Total income tax expense	$	41,491	$	33,842	$	6,067


Net current tax receivables (liabilities)	$	3,640	$	(2,615)	$	(6,367)
Net deferred tax assets		79,725		70,124		50,874

Net tax assets	$	83,365	$	67,509	$	44,507

Deferred income taxes reflect the tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. ~~Significant~~The significant components of ~~the~~our net deferred tax asset (liability) were as follows:

At December 31

2006

2005

(in thousands)

Deferred tax assets:

Discounting of loss reserves

$
35,713

$
26,239

Unearned premiums

48,837

41,050

Accruals not currently deductible

18,602

9,210

Other deferred tax assets

10,235

8,407

Deferred tax assets before valuation allowance

113,387

84,906

Valuation allowance

(6,647
)
(5,774
)
Deferred tax assets net of valuation allowance

106,740

79,132

Deferred tax liabilities:

Deferred acquisition costs

(33,216
)
(25,794
)
Other deferred tax liabilities

(3,400
)
(2,464
)
Deferred tax liabilities

(36,616
)
(28,258
)
Net deferred tax assets

$
70,124

$
50,874



At December 31,	2007		2006
Deferred tax assets:
Discounting of loss reserves	$	48,947	$	35,713
Unearned premiums		32,444		48,837
Accruals not currently deductible		23,195		18,602
Other deferred tax assets		4,941		10,235

Deferred tax assets before valuation allowance		109,527		113,387

Valuation allowance		—		(6,647)


Deferred tax assets net of valuation allowance		109,527		106,740


Deferred tax liabilities:
Deferred acquisition costs		(23,585)		(33,216)
Other deferred tax liabilities		(6,217)		(3,400)

Deferred tax liabilities		(29,802)		(36,616)

Net deferred tax assets	$	79,725	$	70,124

The valuation allowance ~~relates~~in 2006 related to net unrealized losses on ~~the Company’s~~our fixed maturity investments and U.S. capital loss ~~carry forwards~~carryforwards of ~~$8.0 million ($3.8 million expire in 2010 and $4.2 million expire in 2011). The Company believes~~$8 million. We believed it iswas necessary to establish a valuation allowance of ~~$6.6~~$7 million against the deferred tax assets arising from capital loss ~~carry forwards~~carryforwards of ~~$1.1~~$1 million and net unrealized losses of ~~$5.5~~$6 million due to insufficient positive evidence regarding the reversal of these losses. The establishment of the valuation allowance relating to net unrealized losses of ~~$5.5~~$6 million was recorded as a component of other comprehensive income, at December 31, 2006, consistent with the treatment of the net unrealized losses.

At December 31, 2007, we determined that a valuation allowance for the deferred tax assets arising from capital loss carryforwards of $10 million ($4 million expire in 2010, $4 million expire in 2011 and $2 million expire in 2012) was not necessary due to sufficient unrealized gains in the investment portfolio which could be used to realize the capital loss carryforwards.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

16.	Taxation (Continued)

The reduction of the valuation allowance for the capital loss carryforwards was recorded in the deferred tax benefit. In addition, the investment portfolio within taxable jurisdictions, was in a net unrealized gain position at December 31, 2007, resulting in a deferred tax liability and eliminating the deferred tax asset and related valuation allowance for unrealized losses. The elimination of the valuation allowance related to net unrealized losses has been recorded as a component of other comprehensive ~~income consistent with the treatment of the net unrealized losses.~~ income.

Although realization is not assured, management believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized.

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER~~ There were no unrecognized tax benefits at December 31, ~~2006, 2005 AND 2004~~

~~16.~~ ~~Taxation (Continued)~~2007 and 2006.

The following table is a reconciliation of the actual income tax rate to the amount computed by applying the effective tax rate of 0% under Bermuda law to income before income taxes:

Year ended December 31

2006

2005

2004

($ in thousands)

Income before income taxes

$
996,901

$
100,507

$
500,438

Reconciliation of effective tax rate (% of income before income taxes)

Expected tax rate

0.0
%
0.0
%
0.0
%
Foreign taxes at local expected rates:

United States

2.9
%
8.7
%
0.7
%
Europe

0.8
%
(0.3
)%
1.0
%
Net tax exempt income

(0.7
)%
(1.4
)%
(0.1
)%
Other

0.4
%
(1.0
)%
(0.5
)%
Actual tax rate

3.4
%
6.0
%
1.1
%



Year ended December 31,	2007		2006		2005
Income before income taxes	$	1,133,509	$	996,901	$	100,507

Reconciliation of effective tax rate (% of income before income taxes)
Expected tax rate		0.0%		0.0%		0.0%
Foreign taxes at local expected rates:
United States		3.0%		2.9%		8.7%
Europe		1.1%		0.8%		(0.3%)
Net tax exempt income		(0.6%)		(0.7%)		(1.4%)
Other		0.2%		0.4%		(1.0%)

Actual tax rate		3.7%		3.4%		6.0%

~~17.~~ ~~Statutory Financial Information~~

17.

Statutory Financial Information

~~The Company’s~~Our insurance and reinsurance operations are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate, including Bermuda, Ireland and the United States. These regulations include certain restrictions on the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities. ~~At December 31, 2006 the maximum amount of distributions our subsidiaries could pay to AXIS Capital was approximately $1.4 billion.~~

The unaudited statutory capital and surplus, for ~~the~~our principal operating subsidiaries ~~of the Company~~ at December 31, 2007 and 2006 was as ~~follows. The comparative figures at December 31, 2005 are the combined audited figures submitted to the regulators.~~follows:

At December 31

Bermuda

Ireland

United States

2006

2005

2006

2005

2006

2005

(in thousands)

Required statutory capital and surplus

$
1,098,344

$
881,627

$
174,656

$
60,580

$
191,867

$
179,355

Actual statutory capital and surplus

$
3,554,805

$
2,860,576

$
735,963

$
697,707

$
901,128

$
753,746


	Bermuda				Ireland				United States
At December 31,	2007		2006		2007		2006		2007		2006
Required statutory capital and surplus	$	1,188,044	$	1,098,344	$	165,965	$	174,656	$	216,495	$	191,867
Actual statutory capital and surplus	$	4,018,421	$	3,554,805	$	765,119	$	735,963	$	992,176	$	901,128

~~The Company’s~~Our U.S. operations required statutory capital and surplus is determined using risk based capital tests, which is the threshold that constitutes the authorized control level. If a company falls below the control level, the commissioner is authorized to take whatever regulatory actions considered necessary to protect policyholders and creditors. The maximum ~~dividends~~dividend that may be paid by ~~the Company’s~~our U.S. insurance ~~operations are~~subsidiaries is restricted by the regulatory requirements of the domiciliary states. Generally, the maximum dividend that may be paid by each of ~~the Company’s~~our U.S. insurance ~~entities without prior~~

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~DECEMBER 31, 2006, 2005 AND 2004~~

~~17.~~ ~~Statutory Financial Information (Continued)~~

~~regulatory approval~~subsidiaries is limited to unassigned surplus (statutory equivalent of retained earnings) and cannot exceed 10% of total statutory capital and surplus. At December 31, ~~2006,~~2007, the maximum dividend that ~~the Company’s~~our U.S. insurance operations could pay without regulatory approval was approximately ~~$16.1million.~~$71 million.

~~There are no other statutory restrictions on~~

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

17.	Statutory Financial Information (Continued)

Under the Insurance Act 1978, amendments thereto and Related Regulations of Bermuda, our Bermuda subsidiary, AXIS Specialty Bermuda is restricted as to the payment of dividends ~~from retained earnings~~for amounts greater than 25% of the ~~Company’s Bermudian or Irish subsidiaries as applicable~~prior year’s statutory capital and surplus whereby a signed affidavit by at least two members of the Board of Directors attesting that a dividend in excess of this amount would not cause the company to fail to meet its relevant margins is required. At December 31, 2007, the maximum dividend AXIS Specialty Bermuda could pay, without a signed affidavit, having met minimum levels of statutory capital and surplus requirements, ~~have been~~was approximately $1.0 billion.

Our Irish subsidiaries are restricted from declaring dividends only out of “profits available for distribution”, which represents accumulated realized profits less its accumulated realized losses. Such profits may not include profits previously realized either by distribution or capitalization and such losses do not include amounts previously written-off in a reduction or reorganization of capital. At December 31, 2007, the maximum dividends our Irish subsidiaries could pay, without prior approval, having met minimum levels of statutory capital and ~~all regulatory~~surplus requirements, ~~and licensing rules complied with.~~was approximately $57 million.

Total statutory net income of our operating subsidiaries was ~~$980.3~~$1,137 million, ~~$100.7~~$980 million and ~~$425.5~~$101 million for 2007, 2006, ~~2005~~ and ~~2004,~~2005, respectively. The difference between statutory financial statements and statements prepared in accordance with U.S. GAAP vary by jurisdiction; however, the primary difference is that statutory financial statements do not reflect deferred ~~policy~~ acquisition costs, certain net deferred tax assets, goodwill and intangible assets, unrealized appreciation on debt securities or certain unauthorized reinsurance recoverables.

~~18.~~~~Fair Values of Financial Instruments~~

18.

Fair Values of Financial Instruments

~~The Company uses~~We use various financial instruments in the normal course of ~~its~~our business. Fair values of these financial instruments are based on quoted market prices, if available, estimates of fair values of similar instruments or our estimates of fair values determined by the Company. See Notes 2 (b) and (h) for further information on the methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments.

values. The carrying amounts and fair values of ~~the Company’s~~our financial instruments ~~at December 31, 2006 and 2005:~~were as follows:

Year ended December 31

2006

2005

Carrying

Carrying

Fair Value

Value

Fair Value

Value

(in thousands)

Financial assets:

Cash and cash equivalents

$
1,989,287

$
1,989,287

$
1,280,990

$
1,280,990

Fixed maturity investments available for sale

6,532,723

6,532,723

6,012,425

6,012,425

Other investments

1,130,664

1,130,664

409,504

409,504

Securities lending collateral

794,149

794,149

998,349

998,349

Financial liabilities:

Securities lending payable

791,744

791,744

995,287

995,287

Liability under repurchase agreement

400,000

400,000

—

—

Senior notes

496,215

499,144

498,500

499,046


	2007				2006
At December 31,	Fair Value		Carrying Value		Fair Value		Carrying Value
Financial assets:
Cash and cash equivalents	$	1,332,921	$	1,332,921	$	1,989,287	$	1,989,287
Fixed maturity investments available for sale		8,331,666		8,331,666		6,532,723		6,532,723
Other investments		645,987		645,987		1,130,664		1,130,664
Securities lending collateral		865,256		865,256		794,149		794,149

Financial liabilities:
Securities lending payable		863,906		863,906		791,744		791,744
Senior notes		501,815		499,261		496,215		499,144
Derivative liability⁽¹⁾		16,346		16,346		-		-
Liability under repurchase agreement		-		-		400,000		400,000

(1)	Included in other liabilities on our Consolidated Balance Sheets.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~(Continued)~~

DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

~~19.~~ ~~Subsequent Event~~

~~Strategic Segment Reorganization~~

On January 17, 2007, the Company announced a strategic reorganization to further strengthen the global operations of AXIS Insurance. As a result, AXIS Insurance will have the following four divisions managed across all geographic locations: Specialty Lines, Professional Lines, Capital Risk Solutions and AXIS Select Markets.

~~20.~~ ~~Condensed Quarterly Financial Data (unaudited)~~

2006

Quarters ended

Mar 31

Jun 30

Sep 30

Dec 31

(in thousands, except per share data)

Gross premiums written

$
1,164,740

$
995,380

$
734,910

$
714,006

Net premiums earned

633,594

679,099

692,780

688,797

Net income available to common shareholders

195,185

223,400

226,222

280,958

Comprehensive income

148,376

200,285

347,354

304,708

Earnings per common share—basic

$
1.31

$
1.49

$
1.51

$
1.87

Earnings per common share—diluted

$
1.19

$
1.37

$
1.37

$
1.69

2005

Quarters ended

Mar 31

Jun 30

Sep 30

Dec 31

(in thousands, except per share data)

Gross premiums written

$
1,198,699

$
767,293

$
794,571

$
633,322

Net premiums earned

625,590

624,413

616,814

686,866

Net income (loss) available to common shareholders

151,799

172,845

(468,075
)
233,492

Comprehensive income (loss)

89,490

221,984

(522,626
)
214,839

Earnings per common share—basic

$
1.04

$
1.23

$
(3.32
)
$
1.61

Earnings per common share—diluted

$
0.95

$
1.13

$
(3.32
)
$
1.47

19.

Condensed Quarterly Financial Data - Unaudited

The following tables summarize our quarterly financial data:


	2007
	Quarters ended
	Mar 31		Jun 30		Sep 30		Dec 31
Gross premiums written	$	1,302,622	$	959,378	$	755,224	$	572,865
Net premiums earned		685,304		693,941		685,845		669,320
Net income available to common shareholders		227,579		251,590		269,975		306,100
Comprehensive income		259,296		176,248		357,336		366,444
Earnings per common share - basic	$	1.51	$	1.69	$	1.84	$	2.13
Earnings per common share - diluted	$	1.37	$	1.51	$	1.65	$	1.89

~~119~~


	2006
	Quarters ended
	Mar 31		Jun 30		Sep 30		Dec 31
Gross premiums written	$	1,164,740	$	995,380	$	734,910	$	714,006
Net premiums earned		633,594		679,099		692,780		688,797
Net income available to common shareholders		195,185		223,400		226,222		280,958
Comprehensive income		148,376		200,285		347,354		304,708
Earnings per common share - basic	$	1.31	$	1.49	$	1.51	$	1.87
Earnings per common share - diluted	$	1.19	$	1.37	$	1.37	$	1.69

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure 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 ~~the Company’s~~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 December 31, ~~2006.~~2007. Based upon that evaluation, ~~the Company’s~~our Chief Executive Officer and Chief Financial Officer concluded that ~~the Company’s~~our disclosure controls and procedures are effective to ensure that information required to be disclosed by ~~the Company~~us in reports that ~~it files~~we file or ~~submits~~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~~.disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Company’s management has performed an assessment, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of ~~the Company’s~~our internal control over financial reporting as of December 31, ~~2006.~~2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based upon that assessment, the Company’s management believes that, as of December 31, ~~2006, the Company’s~~2007, our internal control over financial reporting is effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

~~The Company’s~~Our independent registered public accounting firm has issued an audit report on our assessment of the ~~Company’s~~our internal control over financial reporting. This report appears below.

All internal control systems, no matter how well designed, have inherent limitations. As a result, even those internal control systems determined to be effective can provide only reasonable assurance with respect to financial reporting and the preparation of financial statements.

Changes in Internal Control Over Financial Reporting

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 quarter ended December 31, ~~2006.~~2007. Based upon that evaluation there were no changes in ~~its~~our internal control over financial reporting that occurred during the quarter ended December 31, ~~2006~~2007 that have materially affected, or reasonably likely to materially affect, ~~the Company’s~~our internal control over financial reporting.

Attestation Report of the Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

AXIS Capital Holdings Limited

We have audited ~~management’s assessment, included in~~ the ~~accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that~~internal control over financial reporting of AXIS Capital Holdings Limited and subsidiaries (the “Company”) ~~maintained effective internal control over financial reporting~~ as of December 31, ~~2006,~~2007, based on criteria established in Internal ~~Control—~~Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial ~~reporting.~~reporting, included in the accompanying Management’s Annual Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on ~~management’s assessment and an opinion on the effectiveness of~~ the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, ~~evaluating management’s assessment,~~assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our ~~opinions.~~opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2006,~~2007, based on the criteria established in Internal ~~Control—~~Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, ~~2006~~2007 of the Company and our report dated February ~~28, 2007~~25, 2008 expressed an unqualified opinion on those financial statements and financial statement schedules.

/s/ Deloitte & Touche
~~Hamilton, Bermuda~~
~~February 28, 2007~~

~~122~~Hamilton, Bermuda

February 25, 2008

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference from a definitive proxy statement that will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year ended December 31, ~~2006~~2007 pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT ~~SCHEDULES, AND REPORTS ON FORM 8-K~~SCHEDULES.

(a) Financial Statements, Financial Statement Schedules and Exhibits.

1. ~~Financial Statements~~

1.	Financial Statements

Included in Part II—See Item 8 of this report.

2. ~~Financial Statement Schedules~~

2.	Financial Statement Schedules


Report of Independent Registered Public Accounting Firm
Schedule II	—	—	Condensed Financial Information of Registrant
Schedule III	—	—	Supplementary Insurance Information
Schedule IV	—	—	Supplementary Reinsurance Information

Schedules I, V and VI have been omitted as the information is provided in Item 8, Consolidated Financial Statements, or in the above schedules.

3. ~~Exhibits~~

Exhibits


Exhibit Number	Description of Document
~~1.1~~		Underwriting Agreement, dated February 15, 2006, by and among the Company, Banc of America Securities LLC, as underwriter and the selling shareholders named in Schedule I thereto (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on February 21, 2006).
~~1.2~~ 3.1	Underwriting Agreement, dated December 12, 2006, by and among the Company, Citigroup Global Markets Inc., as underwriter and the selling shareholders named in Schedule I thereto (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on December 12, 2006).
~~3.1~~	Certificate of Incorporation and Memorandum of Association of AXIS Capital Holdings Limited (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) ~~(No.~~(No. 333-103620) filed on April 16, 2003).
3.2	Amended and Restated Bye-laws of AXIS Capital ~~(Incorporated~~Holdings Limited (incorporated by reference to Exhibit ~~3.2~~4.2 to the Company’s ~~Annual Report~~Registration Statement on Form ~~10-K~~S-8 filed on ~~March 1, 2005)~~May 16, 2007).
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	Amended and Restated Series A Warrant for the Purchase of Common Shares (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2003).
4.3	Senior Indenture between AXIS Capital Holdings Limited and The Bank of New York, as trustee, dated as of November 15, 2004 (incorporated by reference to Exhibit 4.1 to the Company’s ~~current report~~Current Report on Form 8-K filed on November 15, 2004).
4.4	First Supplemental Indenture between AXIS Capital Holdings Limited and The Bank of New York, as trustee, dated as of November 15, 2004 (incorporated by reference to Exhibit 4.2 to the Company’s ~~current report~~Current Report on Form 8-K filed on November 15, 2004).
4.5	Certificate of Designations setting ~~from~~forth the specific rights, preferences, limitations and other terms of the Series A Preferred Shares (incorporated by reference to Exhibit 3.1 to the Company’s ~~current report~~Current Report on Form 8-K filed on October 4, 2005).
4.6	Certificate of Designations setting ~~from~~forth 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~~Current Report on ~~form~~Form 8-K filed on November 23, 2005).
10.1	Amended and Restated Shareholders Agreement dated December 31, 2002, among ~~the Registrant~~AXIS Capital Holdings Limited and each of the persons listed on Schedule A thereto (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 3) (No. 333-103620) filed on June 10, 2003).
10.2	Employment Agreement between John R. Charman and AXIS Specialty Limited dated as of December 15, 2003 (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.3	Amendment No. 1 to Employment Agreement between John R. Charman and AXIS Specialty Limited dated October 23, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 24, 2007).
10.4	Service Agreement between Michael A. Butt and AXIS Specialty Limited dated as of December 15, 2003 (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).

~~10.4~~ 10.5		Service Agreement between Michael E. Morrill and AXIS Specialty U.S. Services, Inc., dated as of February 26, 2003 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 5, 2004).
~~10.5~~ 10.6		Employment Agreement between Dennis B. Reding and AXIS Specialty U.S. Services, Inc. dated as of February 6, 2003 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on May 5, 2004).
~~10.6~~ 10.7		~~Employment Agreement between Andrew Cook and AXIS Specialty, dated as of December 10, 2001 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed on May 5, 2004).~~
~~10.7~~		Separation Agreement, effective as of April 2, 2006, between AXIS Specialty Limited and Andrew Cook (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 16, 2006).
~~10.8~~		Consulting Agreement, dated as of March 13, 2006, between AXIS Specialty Limited and Andrew Cook (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 16, 2006).
~~10.9~~		Employment Agreement between William A. Fischer and AXIS Specialty Limited dated as of November 26, 2001 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 5, 2004).
~~10.10~~ 10.8		Employment Agreement between John Gressier and AXIS Specialty ~~Ireland,~~Limited dated as of ~~November 21, 2002~~July 5, 2007 (incorporated by reference to Exhibit ~~10.9~~10.3 to the Company’s ~~Registration Statement~~Current Report on Form ~~S-1 (Amendment No. 3)(No. 333-103620)~~8-K filed on ~~June 10, 2003)~~July 6, 2007).
~~10.11~~ 10.9		Employment Agreement between Richard Strachan and AXIS Specialty ~~Ireland,~~Europe Limited dated as of November 21, 2002 (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (Amendment No. 3)(No. 333-103620) filed on June 10, 2003).
~~10.12~~ 10.10		Employment Agreement between John J. Murray and AXIS Specialty Limited dated as of October 15, 2004 (incorporated by reference to Exhibit 99.1 to the ~~Company~~Company’s Current Report on Form 8-K filed on October 19, 2004).
~~10.13~~ 10.11		Employment Agreement between Marshall F. Turner and AXIS Specialty U.S. Services, Inc. dated as of January 1, 2004 (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
~~10.14~~ 10.12		Employment Agreement between Karl Mayr and AXIS Re Limited dated as of November 12, 2003 (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report of Form 10-K for the year ended December 31, 2005).

~~10.15~~
10.13
Separation Agreement between AXIS Specialty U.S. Services, Inc. and Ms. Lorraine S. Mariano dated as of May 9, 2005 and amended on December 11, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 14, 2005).
~~10.16~~
Separation Agreement between AXIS Specialty Limited and Ms. Carol S. Rivers, dated as of February 17, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 23, 2006).
~~10.17~~
Form of Grant Letters for Carol S. Rivers under the 2003 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 23, 2006).
~~10.18~~
Credit Agreement dated August 25, 2005 among ~~the Company,~~AXIS Capital Holdings Limited, AXIS Specialty Limited, AXIS Re Limited, AXIS Specialty ~~Ireland~~Europe Limited, JP Morgan Chase Bank NA, as administrative agent and lender, and other lenders party thereto (incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on August 30, 2005).

~~10.19~~ 10.14		Amendment No. 1 to Credit Agreement dated as of September 26, 2007, among AXIS Capital Holdings Limited, the Subsidiary Credit Parties party thereto, designated Lenders thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 16, 2007).
10.15		2003 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit ~~14.5~~10.12 to the Company’s Registration Statement on Form S-1 (Amendment No. 2)(No. 333-103620) filed on May 17, 2003).
~~10.20~~ 10.16		2007 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed on May 16, 2007).
10.17		Form of Employee Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 16, 2007).
10.18		Form of Employee Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 16, 2007).
10.19		Form of Director Restricted Stock Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 16, 2007).
10.20		Form of Director Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 16, 2007).
10.21		2003 Directors Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-8 (No. 333-110228) filed on November 4, 2003).
~~10.21~~ 10.22		2003 Directors Deferred Compensation Plan, as amended and restated (incorporated by reference to Exhibit ~~10.14~~10.3 to the Company’s ~~Registration Statement~~Quarterly Report on Form ~~S-1 (Amendment No. 2) (No. 333-103620)~~10-Q filed on ~~May 19, 2003)~~October 30, 2007).
~~10.22~~ 10.23		AXIS Specialty U.S. Services, Inc. Supplemental Retirement ~~Plan~~ ~~(incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement of Form S-1 (Registration No. 333-113951) filed on April 6, 2004).~~ Plan.
~~10.23~~ 10.24		Supplemental Executive Retirement Agreement between AXIS Specialty Limited and Michael A. Butt, dated as of January 1, 2004 (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on May 5, 2004).
~~10.24~~ 10.25		First Amendment to Supplemental Executive Retirement Agreement, effective as of May 12, 2006, between AXIS Specialty Limited and Michael A. Butt (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 18, 2006).
~~10.25~~ 10.26		Amendment I to Amended and Restated Service Agreement, effective as of May 12, 2006, between AXIS Specialty Limited and Michael A. Butt (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 18, 2006).
~~10.26~~ 10.27		Supplemental Executive Retirement Agreement between AXIS Specialty Limited and John R. Charman as of January 1, 2004 (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed on May 5, 2004).
~~10.27~~ 10.28		~~2006 Directors Annual Compensation Program (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 14, 2005).~~
~~10.28~~		2004 Annual Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 14, 2004).
10.29		Employment Agreement dated September 8, 2006 between AXIS Capital Holdings Limited and Richard T. Gieryn, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 14, 2006).
10.30		Employment Agreement dated September 8, 2006 between AXIS Capital Holdings Limited and David B. Greenfield (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on September 14, 2006).
10.31		Employment Agreement dated September 8, 2006 between AXIS Capital Holdings Limited and Brian W. Goshen (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 14, 2006).
10.32		~~2006 Directors Annual Compensation Program, as amended (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on September 14, 2006).~~
~~10.33~~		Form of Grant Letter for certain employees of AXIS Specialty Europe Limited under the 2003 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 23, 2006).
12.1		Computation of ratio of earnings to fixed charges and preference dividends.
21.1		Subsidiaries of the registrant.
23.1		Consent of Deloitte & Touche.
24.1		Power of Attorney (included as part of signature pages hereto).
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.

~~127~~

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on February ~~28, 2007.~~25, 2008.


AXIS CAPITAL HOLDINGS LIMITED
By:	~~By:~~	/s/ jJOHNr. c R. CHARMAN
		John R. Charman
		Chief Executive Officer and President

POWER OF ATTORNEY

We, the undersigned directors and executive officers of AXIS Capital Holdings Limited, hereby severally constitute David B. Greenfield, John J. Murray and Richard T. Gieryn Jr., and each of them singly, as our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to the Annual Report on Form 10-K filed with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to any and all amendments to said Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February ~~28, 2007.~~25, 2008.


Signature	~~Signature~~				Title

/s/ ~~JOHN~~JOHN R. ~~CHARMAN~~CHARMAN John R. Charman		Chief Executive Officer, President and Director
~~John R. Charman~~				(Principal Executive Officer)
~~/s/ DAVID B. GREENFIELD~~			~~Chief Financial Officer~~
/s/ DAVID B. GREENFIELD David B. Greenfield		Chief Financial Officer (Principal Financial ~~and Acting~~Officer)

/s/ GORDON MCFADDEN Gordon McFadden		Controller (Principal Accounting Officer)

/s/ ~~GEOFFREY BELL~~GEOFFREY BELL Geoffrey Bell		Director
~~Geoffrey Bell~~
/s/ ~~MICHAEL~~MICHAEL A. ~~BUTT~~BUTT Michael A. Butt		Director
~~Michael A. Butt~~
/s/ ~~CHARLES~~CHARLES A. ~~DAVIS~~DAVIS Charles A. Davis		Director

~~Charles A. Davis~~/s/ ROBERT L. FRIEDMAN Robert L. Friedman		Director

Signature
Title
/s/  ~~ROBERT L. FRIEDMAN~~DONALD J. GREENE
Donald J. Greene
Director
~~Robert L. Friedman~~
/s/  ~~DONALD J. GREENE~~CHRISTOPHER V. GREETHAM
Christopher V. Greetham
Director
~~Donald J. Greene~~
/s/  ~~CHRISTOPHER V. GREETHAM~~JURGEN GRUPE
Jurgen Grupe
Director
~~Christopher V. Greetham~~/s/  MAURICE A. KEANE
Maurice A. Keane

~~/s/ JURGEN GRUPE~~		Director
~~Jurgen Grupe~~
/s/ ~~MAURICE A. KEANE~~SIR ANDREW LARGE Sir Andrew Large		Director
~~Maurice A. Keane~~
/s/ HENRY B. SMITH Henry B. Smith		Director
~~Sir Andrew Large~~
/s/ ~~HENRY B. SMITH~~		~~Director~~
~~Henry B. Smith~~
~~/s/ FRANK~~FRANK J. ~~TASCO~~TASCO		~~Director~~
Frank J. Tasco		Director

~~129~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

AXIS Capital Holdings Limited

We have audited the consolidated financial statements of AXIS Capital Holdings Limited and subsidiaries (the “Company”) as of December 31, ~~2006~~2007 and ~~2005,~~2006, and for each of the three years in the period ended December 31, ~~2006, management’s assessment of the effectiveness of~~2007, and the Company’s internal control over financial reporting as of December 31, ~~2006, and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006,~~2007, and have issued our reports thereon dated February ~~28, 2007;~~25, 2008; such consolidated financial statements and reports are included in this Form 10-K. Our audits also included the consolidated financial statement schedules of the Company listed in Item 15. These consolidated financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

~~/s/ DELOITTE & TOUCHE~~
~~Hamilton, Bermuda~~
~~February 28, 2007~~

/s/ Deloitte & Touche

~~130~~Hamilton, Bermuda

February 25, 2008

SCHEDULE II

~~AXIS CAPITAL HOLDINGS LIMITED~~
~~CONDENSED BALANCE SHEETS—PARENT COMPANY~~
~~AT DECEMBER 31, 2006 AND 2005~~

2006

2005

(in thousands)

Assets

Investments in subsidiaries on equity basis

$
5,297,038

$
4,253,794

Cash and cash equivalents

10,050

54,782

Other assets

3,982

3,469

Total assets

$
5,311,070

$
4,312,045

Liabilities

Intercompany payable

$
359,524

$
272,300

Debt

499,144

499,046

Other liabilities

39,755

28,348

Total liabilities

898,423

799,694

Shareholders’ Equity

Series A preferred shares

(issued and outstanding 2006: 10,000; 2005: 10,000)

$
125

$
125

Series B preferred shares

(issued and outstanding 2006: 2,500; 2005: 2,500)

31

31

Common shares

(issued and outstanding 2006: 149,982; 2005: 148,831)

1,875

1,861

Additional paid-in capital

2,429,250

2,386,200

Accumulated other comprehensive loss

(44,638
)
(77,798
)
Retained earnings

2,026,004

1,201,932

Total shareholders’ equity

4,412,647

3,512,351

Total liabilities and shareholders’ equity

$
5,311,070

$
4,312,045

~~SCHEDULE II (Continued)~~

AXIS CAPITAL HOLDINGS LIMITED

CONDENSED BALANCE SHEETS – PARENT COMPANY

AT DECEMBER 31, 2007 AND 2006

   2007    2006
Assets

Investments in subsidiaries on equity basis
     $ 5,973,189        $ 5,297,038
Cash and cash equivalents
   9,411      10,050
Other assets
   2,856      3,982

Total assets
     $ 5,985,456        $ 5,311,070

Liabilities

Intercompany payable
     $ 273,691        $ 359,524
Senior notes
   499,261      499,144
Dividends payable
   49,976      36,572
Other liabilities
   3,906      3,183

Total liabilities
   826,834      898,423

Shareholders’ Equity

Preferred shares - Series A and B
   500,000      500,000
Common shares (2007: 142,520; 2006: 149,982 shares issued)
   1,850      1,875
Additional paid-in capital
   1,869,810      1,929,406
Accumulated other comprehensive income (loss)
   22,668      (44,638)
Retained earnings
   2,968,900      2,026,004
Treasury shares, at cost (2007: 5,466; 2006: nil shares)
   (204,606)    -

Total shareholders’ equity
   5,158,622      4,412,647

Total liabilities and shareholders’ equity
     $   5,985,456        $   5,311,070

SCHEDULE II (Continued)
AXIS CAPITAL HOLDINGS LIMITED

CONDENSED STATEMENTS OF OPERATIONS ~~AND COMPREHENSIVE INCOME—~~– PARENT
COMPANY

YEARS ENDED DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

2006

2005

2004

(in thousands)

Revenues

Net investment income

$
934

$
1,754

$
506

Realized investment losses

—

(33
)
—

Total revenues

934

1,721

506

Expenses

General and administrative expenses

14,538

2,142

1,679

Interest expense and other financing costs

29,192

29,203

3,727

Total expenses

43,730

31,345

5,406

Loss before equity in net earnings of subsidiaries

(42,796
)
(29,624
)
(4,900
)
Equity in net earnings of subsidiaries

1,005,856

124,064

499,898

Net Income

963,060

94,440

494,998

Preferred share dividends

37,295

4,379

—

Net Income available to common shareholders

$
925,765

$
90,061

$
494,998

Net Income

$
963,060

$
94,440

$
494,998

Other comprehensive income, net of tax

Net loss on supplemental executive retirment plans (SERPs)

(484
)
—

—

Unrealized gains (losses) arising during the year

22,517

(72,211
)
(3,216
)
Adjustment for reclassification of investment net losses (gains) realized in net income

15,630

(18,542
)
(9,033
)
Comprehensive income

$
1,000,723

$
3,687

$
482,749


	2007		2006		2005
Revenues
Net investment income	$	660	$	934	$	1,754
Realized investment losses		-		-		(33)

Total revenues		660		934		1,721

Expenses
General and administrative expenses		30,444		14,538		2,142
Interest expense and other financing costs		29,210		29,192		29,203

Total expenses		59,654		43,730		31,345

Loss before equity in net earnings of subsidiaries		(58,994)		(42,796)		(29,624)
Equity in net earnings of subsidiaries		1,151,012		1,005,856		124,064

Net income		1,092,018		963,060		94,440
Preferred share dividends		36,775		37,295		4,379

Net income available to common shareholders	$	1,055,243	$	925,765	$	90,061

SCHEDULE II (Continued)

AXIS CAPITAL HOLDINGS LIMITED

CONDENSED STATEMENT OF CASH ~~FLOWS—~~FLOWS – PARENT COMPANY

YEARS ENDED DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

2006

2005

2004

(in thousands)

Cash flows from operating activities:

Net income

$
963,060

$
94,440

$
494,998

Equity in net earnings of subsidiaries

(1,005,856
)
(124,064
)
(499,898
)

(42,796
)
(29,624
)
(4,900
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Intercompany payable

87,224

394,847

(98,687
)
Other

25,543

23,602

21,016

Net cash provided by (used in) operating activities

69,971

388,825

(82,571
)
Cash flows from investing activities:

Dividends from subsidiary

225,000

20,926

20,000

Net sales and maturities (purchases) of available-for-sale securities

—

50,978

(50,788
)
Investment in subsidiaries

(229,228
)
(746,641
)
(254,000
)
Net cash provided used in investing activities

(4,228
)
(674,737
)
(284,788
)
Cash flows from financing activities:

Repurchase of shares

(335
)
(350,000
)
—

Issuance of common shares, net

17,856

204,046

(986
)
Issuance of preferred shares, net

(126
)
489,564

—

Issuance of debt, net

—

—

495,714

Dividends paid—common shareholders

(90,575
)
(82,777
)
(67,966
)
Dividends paid—preferred shareholders

(37,295
)
—

—

Net cash (used in) provided by financing activities

(110,475
)
260,833

426,762

(Decrease) increase in cash and cash equivalents

(44,732
)
(25,079
)
59,403

Cash and cash equivalents—beginning of year

54,782

79,861

20,458

Cash and cash equivalents—end of year

$
10,050

$
54,782

$
79,861

Supplemental disclosures of cash flow information:

Interest paid

$
28,750

$
30,051

$
—


	2007		2006		2005
Cash flows from operating activities:
Net income	$	1,092,018	$	963,060	$	94,440
Equity in net earnings of subsidiaries		(1,151,012)		(1,005,856)		(124,064)

		(58,994)		(42,796)		(29,624)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Intercompany payable		(85,833)		87,224		394,847
Other		26,501		25,543		23,602

Net cash (used in) provided by operating activities		(118,326)		69,971		388,825

Cash flows from investing activities:
Dividends from subsidiary		565,000		225,000		20,926
Net sales and maturities of available-for-sale securities		-		-		50,978
Investment in subsidiaries		(100)		(229,228)		(746,641)

Net cash provided by (used in) investing activities		564,900		(4,228)		(674,737)

Cash flows from financing activities:
Repurchase of common shares		(308,110)		(335)		(350,000)
Dividends paid - common shares		(111,226)		(90,575)		(82,777)
Dividends paid - preferred shares		(36,775)		(37,295)		-
Proceeds from issuance of common shares		8,898		17,856		204,046
Proceeds from issuance of preferred shares		-		(126)		489,564

Net cash (used in) provided by financing activities		(447,213)		(110,475)		260,833

Decrease in cash and cash equivalents		(639)		(44,732)		(25,079)
Cash and cash equivalents - beginning of year		10,050		54,782		79,861

Cash and cash equivalents - end of year	$	9,411	$	10,050	$	54,782

Supplemental disclosures of cash flow information:
Interest paid	$	28,750	$	28,750	$	30,051

~~133~~

SCHEDULE III

AXIS CAPITAL HOLDINGS LIMITED

SUPPLEMENTARY INSURANCE INFORMATION

At and year ended December 31, 2007


(in thousands)	Deferred Acquisition Costs		Reserve for Losses and Loss Expenses		Unearned Premiums		Net Premiums Earned		Net Investment Income (1)		Losses And Loss Expenses		Amortization of Deferred Acquisition Costs		Other Operating Expenses		Net Premiums Written
Insurance	$	114,015	$	3,333,743	$	1,434,079	$	1,208,440	$	—	$	534,264	$	126,423	$	175,810	$	1,326,647
Reinsurance		162,786		2,253,568		712,008		1,525,970		—		835,996		258,074		69,721		1,537,110
Corporate		—		—		—		—		482,873		—		—		109,453		—

Total	$	276,801	$	5,587,311	$	2,146,087	$	2,734,410	$	482,873	$	1,370,260	$	384,497	$	354,984	$	2,863,757

At and year ended December 31, 2006

(in thousands)

Deferred
Acquisition
Costs

Reserve For
Losses
And Loss
Expenses

Unearned
Premiums

Net
Premiums
Earned

Net
Investment
Income(1)

Losses
And
Loss
Expenses

Amortization
Of
Deferred
Acquisition
Costs

Other
Operating
Expenses

Net
Premiums
Written

Global Insurance

$
77,049

$
1,516,634

$
732,818

$
746,393

—

$
331,778

$
102,673

$
49,058

$
850,533

U.S. Insurance

25,471

1,655,112

583,709

559,367

—

304,906

49,329

106,858

609,866

Total Insurance

102,520

3,171,746

1,316,527

1,305,760

—

636,684

152,002

155,916

1,460,399

Reinsurance

149,279

1,843,367

699,029

1,388,510

—

789,171

234,957

53,658

1,528,780

Corporate

—

—

—

—

407,100

—

—

91,776

—

Total

$
251,799

$
5,015,113

$
2,015,556

$
2,694,270

$
407,100

$
1,425,855

$
386,959

$
301,350

$
2,989,179


(in thousands)	Deferred Acquisition Costs		Reserve for Losses and Loss Expenses		Unearned Premiums		Net Premiums Earned		Net Investment Income (1)		Losses And Loss Expenses		Amortization of Deferred Acquisition Costs		Other Operating Expenses		Net Premiums Written
Insurance	$	102,520	$	3,171,746	$	1,316,527	$	1,305,760	$	—	$	636,684	$	152,002	$	155,916	$	1,460,399
Reinsurance		149,279		1,843,367		699,029		1,388,510		—		789,171		234,957		53,658		1,528,780
Corporate		—		—		—		—		407,100		—		—		91,776		—

Total	$	251,799	$	5,015,113	$	2,015,556	$	2,694,270	$	407,100	$	1,425,855	$	386,959	$	301,350	$	2,989,179

At and year ended December 31, 2005

(in thousands)

Deferred
Acquisition
Costs

Reserve For
Losses
And Loss
Expenses

Unearned
Premiums

Net
Premiums
Earned

Net
Investment
Income(1)

Losses
And
Loss
Expenses

Amortization
Of
Deferred
Acquisition
Costs

Other
Operating
Expenses

Net
Premiums
Written

Global Insurance

$
62,065

$
1,500,652

$
657,264

$
748,015

—

$
492,667

$
97,938

$
36,794

$
649,703

U.S. Insurance

17,286

1,563,489

543,018

453,534

—

390,140

21,062

80,909

518,064

Total Insurance

79,351

3,064,141

1,200,282

1,201,549

—

882,807

119,000

117,703

1,167,767

Reinsurance

117,037

1,679,197

560,185

1,352,134

—

1,168,322

218,383

48,410

1,491,222

Corporate

—

—

—

—

256,712

—

—

79,176

—

Total

$
196,388

$
4,743,338

$
1,760,467

$
2,553,683

$
256,712

$
2,051,129

$
337,383

$
245,289

$
2,658,989


(in thousands)	Deferred Acquisition Costs		Reserve for Losses and Loss Expenses		Unearned Premiums		Net Premiums Earned		Net Investment Income (1)		Losses And Loss Expenses		Amortization of Deferred Acquisition Costs		Other Operating Expenses		Net Premiums Written
Insurance	$	79,351	$	3,064,141	$	1,200,282	$	1,201,549	$	—	$	882,807	$	119,000	$	117,703	$	1,167,767
Reinsurance		117,037		1,679,197		560,185		1,352,134		—		1,168,322		218,383		48,410		1,491,222
Corporate		—		—		—		—		256,712		—		—		79,176		—

Total	$	196,388	$	4,743,338	$	1,760,467	$	2,553,683	$	256,712	$	2,051,129	$	337,383	$	245,289	$	2,658,989

~~At and year ended December 31, 2004~~

(in thousands)

Deferred
Acquisition
Costs

Reserve For
Losses
And Loss
Expenses

Unearned
Premiums

Net
Premiums
Earned

Net
Investment
Income(1)

Losses
And
Loss
Expenses

Amortization
Of
Deferred
Acquisition
Costs

Other
Operating
Expenses

Net
Premiums
Written

Global Insurance

$
102,660

$
881,897

$
767,920

$
796,566

—

$
451,724

$
124,953

$
35,052

$
933,198

U.S. Insurance

14,642

760,596

447,087

349,287

—

234,746

10,779

71,482

430,087

Total Insurance

117,302

1,642,493

1,215,007

1,145,853

—

686,470

135,732

106,534

1,363,285

Reinsurance

93,780

762,067

429,764

882,544

—

559,774

144,836

41,662

1,060,388

Corporate

—

—

—

—

152,072

—

—

44,394

—

Total

$
211,082

$
2,404,560

$
1,644,771

$
2,028,397

$
152,072

$
1,246,244

$
280,568

$
192,590

$
2,423,673

~~(1)Investment income is not allocated to the Company’s segments as the invested assets are managed centrally.~~
(1) Investment income is not allocated to our segments as cash and investments are managed centrally.

~~134~~

SCHEDULE IV

AXIS CAPITAL HOLDINGS LIMITED

SUPPLEMENTARY REINSURANCE INFORMATION

YEARS ENDED DECEMBER 31, 2007, 2006 ~~2005~~ AND ~~2004~~2005

(in thousands)

DIRECT
GROSS
PREMIUM

CEDED TO
OTHER
COMPANIES

ASSUMED
FROM OTHER
COMPANIES

NET AMOUNT

PERCENTAGE OF
AMOUNT ASSUMED
TO NET

2006

$
1,648,740

$
619,857

$
1,960,296

$
2,989,179

65.6
%

2005

$
1,532,799

$
734,896

$
1,861,086

$
2,658,989

70.0
%

2004

$
1,460,784

$
589,638

$
1,551,527

$
2,422,673

64.0
%


(in thousands)	DIRECT GROSS PREMIUM		CEDED TO OTHER COMPANIES		ASSUMED FROM OTHER COMPANIES		NET AMOUNT		PERCENTAGE OF AMOUNT ASSUMED TO NET

2007	$	1,691,931	$	726,333	$	1,898,159	$	2,863,757	66.3%
2006	$	1,648,740	$	619,857	$	1,960,296	$	2,989,179	65.6%
2005	$	1,532,799	$	734,896	$	1,861,086	$	2,658,989	70.0%

~~135~~110


Title of each class		Name of each exchange on which registered
Common shares, par value $0.0125 per share		~~New York Stock Exchange~~
7.25% Series A preferred shares		New York Stock Exchange New York Stock Exchange


		Page
	PART I
Item 1.	~~PART I~~Business		2
Item 1.1A.	~~Business~~	4
~~Item 1A.~~	Risk Factors	29		15
Item 1B.	Unresolved Staff Comments	42		24
Item 2.	Properties	42		25
Item 3.	Legal Proceedings	42		25
Item 4.	Submission of Matters to a Vote of Security Holders	43 25
	PART II
Item 5.	~~PART II~~
~~Item 5.~~	Market for ~~the~~ Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	44		26
Item 6.	Selected Financial Data	45		27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47		28
Item 7A.	Quantitative and Qualitative ~~Disclosure~~Disclosures About Market Risk	69		57
Item 8.	Financial Statements and Supplementary Data	72		59
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~120~~		98
Item 9A.	Controls and Procedures	~~120~~		98
Item 9B.	Other Information	~~123~~ 100
	PART III
Item 10.	~~PART III~~
~~Item 10.~~	Directors, Executive Officers and Corporate Governance	~~123~~		100
Item 11.	Executive Compensation	~~123~~		100
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~123~~		100
Item 13.	Certain Relationships and Related Transactions and Director Independence	~~123~~		100
Item 14.	Principal Accountant Fees and Services	~~123~~ 100
	PART IV
Item 15.	~~PART IV~~
~~Item 15.~~	Exhibits and Financial Statement Schedules	~~123~~		100

	Year ended December 31
	2006				2005				2004
	(In thousands)
Marsh	$	340,976	16.5	%	$	385,489	20.6	%	$	533,037	27.8	%
Aon	311,138		15.0	%	256,729		13.7	%	337,293		17.6	%
Willis	224,842		10.9	%	189,702		10.1	%	221,757		11.6	%
Other brokers	915,437		44.2	%	798,065		42.6	%	719,598		37.4	%
Managing general agencies and underwriters, and direct	278,074		13.4	%	245,032		13.0	%	107,878		5.6	%
Total gross premiums written	$	2,070,467	100.0	%	$	1,875,017	100.0	%	$	1,919,563	100.0	%

	Year ended December 31
	2006				2005				2004
	(In thousands)
Marsh	$	548,016	35.6	%	$	566,440	37.3	%	$	376,245	34.4	%
Aon	313,766		20.4	%	274,418		18.1	%	245,743		22.5	%
Benfield	233,880		15.2	%	186,177		12.3	%	153,542		14.1	%
Other brokers	390,671		25.4	%	387,604		25.4	%	293,371		26.8	%
Managing general agencies and underwriters, and direct	52,236		3.4	%	104,229		6.9	%	23,847		2.2	%
Total gross premiums written	$	1,538,569	100.0	%	$	1,518,868	100.0	%	$	1,092,748	100.0	%


	Year ended December 31
	2001		2002			2003			2004			2005			2006			2007
Gross reserve for losses and loss expenses	$	963	$	215,934		$	992,846		$	2,404,560		$	4,743,338		$	5,015,113		$	5,587,311
Reinsurance recoverable		-		(1,703	)		(124,899	)		(596,299	)		(1,518,110	)		(1,359,154	)		(1,356,893	)

Net losses and loss expenses reserve		963		214,231			867,947			1,808,261			3,225,228			3,655,959			4,230,418
Net reserves reestimated as of:
1 Year later	$	165	$	158,443		$	686,235		$	1,425,265		$	3,008,692		$	3,318,982
2 Years later		165		141,290			539,110			1,147,866			2,893,865
3 Years later		165		109,711			434,221			1,048,098
4 Years later		196		97,981			386,029
5 Years later		196		96,864
6 Years later		196

Cumulative redundancy	$	767	$	117,367		$	481,918		$	760,163		$	331,363		$	336,977

Cumulative net paid losses
1 Year later	$	15	$	46,096		$	113,024		$	333,543		$	898,562		$	658,650
2 Years later		125		55,437			175,235			475,721			1,329,078
3 Years later		165		73,647			210,100			558,609
4 Years later		196		69,118			230,374
5 Years later		196		77,539
6 Years later		196

	Year ended December 31
	2001		2002			2003			2004			2005			2006
	(in thousands)
Gross reserve for losses and loss expenses	$	963	$	215,934		$	992,846		$	2,404,560		$	4,743,338		$	5,015,113
Reinsurance recoverable	—		(1,703		)	(124,899		)	(596,299		)	(1,518,110		)	(1,359,154		)
Net losses and loss expenses reserve	963		214,231			867,947			1,808,261			3,225,228			3,655,959
Net reserves reestimated as of:
1 Year later	$	165	$	158,443		$	686,235		$	1,425,265		$	3,008,692
2 Years later	165		141,290			539,110			1,147,866
3 Years later	165		109,711			434,221
4 Years later	196		97,981
5 Years later	196
Cumulative redundancy	767		116,250			433,726			660,395			216,536
Cumulative Net Paid Losses
1 Year later	$	15	$	46,096		$	113,024		$	333,543		$	898,562
2 Years later	125		55,437			175,235			475,721
3 Years later	165		73,647			210,100
4 Years later	196		69,118
5 Years later	196

	At December 31
	2006				2005
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
U.S. government and agency securities	$	1,190,700	$	1,177,911	$	1,589,640	$	1,572,411
Non U.S. government securities	146,847		153,258		143,534		137,496
Corporate debt securities	1,423,146		1,418,553		1,236,928		1,219,878
Mortgage-backed securities	2,896,362		2,868,578		2,466,324		2,433,649
Asset-backed securities	540,118		538,350		295,043		291,824
Municipals	377,076		376,073		359,529		357,167
Total Fixed Maturities	6,574,249		6,532,723		6,090,998		6,012,425
Cash at investment managers, net of unsettled trades	811,295		811,295		197,604		197,604
Total Invested Assets	7,385,544		7,344,018		6,288,602		6,210,029
Other cash and cash equivalents	1,115,807		1,115,807		1,083,310		1,083,310
Total Cash and Fixed Maturities	$	8,501,351	$	8,459,825	$	7,371,912	$	7,293,339
Other Investments			1,130,664				409,504
Total cash and invesments			$	9,590,489			$	7,702,843

	2006							2005
					Dividends							Dividends
	High		Low		Declared			High		Low		Declared
1st Quarter	$	32.21	$	28.95		$	0.15	$	29.32	$	26.21		$	0.15
2nd Quarter	$	30.92	$	25.82		$	0.15	$	28.42	$	25.23		$	0.15
3rd Quarter	$	35.21	$	27.73		$	0.15	$	31.00	$	25.49		$	0.15
4th Quarter	$	35.88	$	32.20		$	0.165	$	31.77	$	25.20		$	0.15

	At and for Year ended December 31
	2006			2005			2004			2003			2002
	(in thousands, except per share amounts)
Selected Statement of Operations Data:
Gross premiums written	$	3,609,036		$	3,393,885		$	3,012,311		$	2,273,645		$	1,108,003
Net premiums earned	2,694,270			2,553,683			2,028,397			1,436,230			536,850
Net investment income	407,100			256,712			152,072			73,961			71,287
Net realized investment (losses) gains	(25,702		)	(16,912		)	13,634			22,567			26,070
Net losses and loss expenses	1,425,855			2,051,129			1,246,244			734,019			229,265
Acquisition costs	386,959			337,383			280,568			186,297			91,200
General and administrative expenses	268,396			212,842			187,305			136,526			57,610
Interest expense	32,954			32,447			5,285			1,478			1,414
Preferred share dividends	37,295			4,379			—			—			—
Net income available to common shareholders	$	925,765		$	90,061		$	494,998		$	532,350		$	265,119
Per Common Share Data:
Basic earnings per common share	$	6.18		$	0.63		$	3.24		$	3.69		$	1.96
Diluted earnings per common share	5.63			0.57			2.98			3.42			1.91
Cash dividends per common share	0.615			0.60			0.50			0.14			0.00
Basic weighted average common shares outstanding	149,745			143,226			152,554			144,263			135,442
Diluted weighted average common shares outstanding	164,394			157,524			165,876			155,691			138,481
Operating Ratios:
Net loss and loss expense ratio(1)	52.9		%	80.3		%	61.4		%	51.1		%	42.7		%
Acquisition cost ratio(2)	14.4		%	13.2		%	13.8		%	13.0		%	17.0		%
General and administrative expense ratio(3)	10.0		%	8.3		%	9.2		%	9.5		%	10.7		%
Combined ratio(4)	77.3		%	101.8		%	84.4		%	73.6		%	70.4		%
Selected Balance Sheet Data:
Investments at fair value	$	7,663,387		$	6,421,929		$	5,399,689		$	3,385,576		$	1,702,990
Cash and cash equivalents	1,989,287			1,280,990			632,329			605,175			729,296
Reinsurance recoverable balances	1,359,154			1,518,110			596,299			124,899			1,703
Total assets	13,665,287			11,925,976			9,038,285			5,172,273			2,948,321
Reserve for losses and loss expenses	5,015,113			4,743,338			2,404,560			992,846			215,934
Unearned premium	2,015,556			1,760,467			1,644,771			1,143,447			555,962
Debt	499,144			499,046			498,938			—			—
Total shareholders’ equity	4,412,647			3,512,351			3,238,064			2,817,148			1,961,033
Book value per common share(5)	$	26.09		$	20.23		$	21.20		$	18.48		$	14.19

	Gross
	2006						2005						2004
	Written		Earned		%		Written		Earned		%		Written		Earned		%
	(in thousands)
Global Insurance	$	958,251	$	885,348	26.4	%	$	861,098	$	971,548	29.6	%	$	1,095,328	$	913,382	36.4	%
U.S. Insurance	1,112,216		1,070,619		31.9	%	1,013,919		918,271		28.0	%	824,235		689,037		27.4	%
Insurance total	2,070,467		1,955,967		58.3	%	1,875,017		1,889,819		57.6	%	1,919,563		1,602,419		63.8	%
Reinsuance	1,538,569		1,397,917		41.7	%	1,518,868		1,388,447		42.4	%	1,092,748		908,428		36.2	%
Total	$	3,609,036	$	3,353,884	100.0	%	$	3,393,885	$	3,278,266	100.0	%	$	3,012,311	$	2,510,847	100.0	%

	Net
	2006						2005						2004
	Written		Earned		%		Written		Earned		%		Written		Earned		%
	(in thousands)
Global Insurance	$	850,533	$	746,393	27.7	%	$	649,703	$	748,015	29.3	%	$	933,198	$	796,566	39.3	%
U.S. Insurance	609,866		559,367		20.8	%	518,064		453,534		17.8	%	430,087		349,287		17.2	%
Insurance total	1,460,399		1,305,760		48.5	%	1,167,767		1,201,549		47.1	%	1,363,285		1,145,853		56.5	%
Reinsuance	1,528,780		1,388,510		51.5	%	1,491,222		1,352,134		52.9	%	1,060,388		882,544		43.5	%
Total	$	2,989,179	$	2,694,270	100.0	%	$	2,658,989	$	2,553,683	100.0	%	$	2,423,673	$	2,028,397	100.0	%

	At December 31, 2006
			Less than		1-3		3-5		More than
	Total		1 year		years		years		5 years
	(in thousands)
Estimated gross loss payments	$	5,015,113	$	775,843	$	2,247,045	$	1,005,671	$	986,554
Senior notes (including interest payments)	727,604		28,750		57,500		57,500		583,854
Estimated life insurance premiums	636,638		59,184		142,645		122,129		312,680
Liability under repurchase agreement	400,000		400,000		—		—		—
Operating lease obligations	85,379		18,343		20,549		19,767		26,720
Reinsurance purchase commitments	47,137		47,137		—		—		—
Investment commitments	19,400		19,400		—		—		—
Total	$	6,931,271	$	1,348,657	$	2,467,739	$	1,205,067	$	1,909,808

Change in Average		Fair
	Life Expectancy	Values
		(in thousands)
-1 year			$	485,816
-0.5 year			$	430,127
0			$	377,767
+0.5 year			$	326,003
+ 1 year			$	277,257

	Interest Rate Shift in Basis Points
	-100			-50			0			+50			+100
	(in thousands)
Total Market Value	$	8,666,341		$	8,573,917		$	8,474,607		$	8,370,234		$	8,262,453
Market Value Change from Base	2.26		%	1.17		%	0.00		%	(1.23		)%	(2.57		)%
Change in Unrealized Value	$	191,734		$	99,310		$	—		$	(104,373	)	$	(212,154	)

	Year ended December 31, 2006
	Global			U.S.			Total
	Insurance			Insurance			Insurance			Reinsurance			Total
	(in thousands)
Gross premiums written	$	958,251		$	1,112,216		$	2,070,467		$	1,538,569		$	3,609,036
Ceded premiums	(107,718		)	(502,350		)	(610,068		)	(9,789		)	(619,857		)
Net premiums written	850,533			609,866			1,460,399			1,528,780			2,989,179
Gross premiums earned	885,348			1,070,619			1,955,967			1,397,917			3,353,884
Net premiums earned	746,393			559,367			1,305,760			1,388,510			2,694,270
Other insurance related income	—			1,758			1,758			1,135			2,893
Net losses and loss expenses	(331,778		)	(304,906		)	(636,684		)	(789,171		)	(1,425,855		)
Acquisition costs	(102,673		)	(49,329		)	(152,002		)	(234,957		)	(386,959		)
General and administrative expenses	(49,058		)	(106,858		)	(155,916		)	(53,658		)	(209,574		)
Underwriting income	$	262,884		$	100,032		$	362,916		$	311,859		674,775
Corporate:
Corporate expenses													(58,822		)
Net investment income													407,100
Net realized investment losses													(25,702		)
Foreign exchange gains													32,505
Interest expense													(32,954		)
Income before income taxes													$	996,902
Net loss and loss expense ratio	44.5		%	54.5		%	48.8		%	56.8		%	52.9		%
Acquisition cost ratio	13.8		%	8.8		%	11.6		%	16.9		%	14.4		%
General and administrative expense ratio	6.6		%	19.1		%	11.9		%	3.9		%	10.0		%
Combined ratio	64.9		%	82.4		%	72.3		%	77.6		%	77.3		%

	Year ended December 31, 2005
	Global			U.S.			Total
	Insurance			Insurance			Insurance			Reinsurance			Total
	(in thousands)
Gross premiums written	$	861,098		$	1,013,919		$	1,875,017		$	1,518,868		$	3,393,885
Ceded premiums	(211,395		)	(495,855		)	(707,250		)	(27,646		)	(734,896		)
Net premiums written	649,703			518,064			1,167,767			1,491,222			2,658,989
Gross premiums earned	971,548			918,271			1,889,819			1,388,447			3,278,266
Net premiums earned	748,015			453,534			1,201,549			1,352,134			2,553,683
Other insurance related (loss) income	(5,865		)	780			(5,085		)	—			(5,085		)
Net losses and loss expenses	(492,667		)	(390,140		)	(882,807		)	(1,168,322		)	(2,051,129		)
Acquisition costs	(97,908		)	(21,092		)	(119,000		)	(218,383		)	(337,383		)
General and administrative expenses	(36,794		)	(80,909		)	(117,703		)	(48,410		)	(166,113		)
Underwriting income (loss)	$	114,781		$	(37,827	)	$	76,954		$	(82,981	)	(6,027		)
Corporate:
Corporate expenses													(46,729		)
Net investment income													256,712
Net realized investment losses													(16,912		)
Foreign exchange losses													(54,090		)
Interest expense													(32,447		)
Income before income taxes													$	100,507
Net loss and loss expense ratio	65.9		%	86.0		%	73.5		%	86.4		%	80.3		%
Acquisition cost ratio	13.1		%	4.7		%	9.9		%	16.2		%	13.2		%
General and administrative expense ratio	4.9		%	17.8		%	9.8		%	3.6		%	8.3		%
Combined ratio	83.9		%	108.5		%	93.2		%	106.2		%	101.8		%

	Year ended December 31, 2004
	Global			U.S.			Total
	Insurance			Insurance			Insurance			Reinsurance			Total
	(in thousands)
Gross premiums written	$	1,095,328		$	824,235		$	1,919,563		$	1,092,748		$	3,012,311
Ceded premiums	(162,130		)	(394,148		)	(556,278		)	(32,360		)	(588,638		)
Net premiums written	933,198			430,087			1,363,285			1,060,388			2,423,673
Gross premiums earned	913,382			689,037			1,602,419			908,428			2,510,847
Net premiums earned	796,566			349,287			1,145,853			882,544			2,028,397
Other insurance related income	10,264			—			10,264			989			11,253
Net losses and loss expenses	(451,724		)	(234,746		)	(686,470		)	(559,774		)	(1,246,244		)
Acquisition costs	(124,953		)	(10,779		)	(135,732		)	(144,836		)	(280,568		)
General and administrative expenses	(35,052		)	(71,482		)	(106,534		)	(41,662		)	(148,196		)
Underwriting income	$	195,101		$	32,280		$	227,381		$	137,261		364,642
Corporate:
Corporate expenses													(39,109		)
Net investment income													152,072
Net realized investment gains													13,634
Foreign exchange gains													14,484
Interest expense													(5,285		)
Income before income taxes													$	500,438
Net loss and loss expense ratio	56.7		%	67.2		%	59.9		%	63.5		%	61.4		%
Acquisition cost ratio	15.7		%	3.1		%	11.8		%	16.4		%	13.8		%
General and administrative expense ratio	4.4		%	20.5		%	9.3		%	4.7		%	9.2		%
Combined ratio	76.8		%	90.8		%	81.0		%	84.6		%	84.4		%

				Intangible			Intangible
				assets with an			assets with a
	Goodwill			indefinite life			finite life				Total
	(in thousands)
Net balance at December 31, 2004		$	2,750		$	17,079		$	11,905		$	31,734
Additions		—			8,957			—			8,957
Amortization		—			—			(3,678		)	(3,678		)
Net balance at December 31, 2005		2,750			26,036			8,227			37,013
Additions		—			—			401			401
Reclassification on adoption of FAS 158		—			—			(4,571		)	(4,571		)
Amortization		—			—			(3,802		)	(3,802		)
Net balance at December 31, 2006		$	2,750		$	26,036		$	255		$	29,041
Gross balance		$	2,750		$	26,036		$	6,135		$	34,921
Accumulated amortization		—			—			(5,880		)	(5,880		)
Net balance		$	2,750		$	26,036		$	255		$	29,041

	At December 31, 2005
	12 months or greater						Less than 12 months						Total
	Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
Type of Investment	Value		Losses				Value		Losses				Value		Losses
	(in thousands)
U.S. government and agency securities	$	527,787		$	(10,823	)	$	746,012		$	(9,406	)	$	1,273,799		$	(20,229	)
Non-U.S. government securities	—			—			115,871			(6,196		)	115,871			(6,196		)
Corporate securities	258,287			(6,361		)	813,927			(14,314		)	1,072,214			(20,675		)
Mortgage-backed securities	309,808			(8,980		)	1,674,865			(27,262		)	1,984,673			(36,242		)
Asset-backed securities	107,636			(2,198		)	85,714			(1,217		)	193,350			(3,415		)
Municipals	55,720			(1,476		)	157,116			(1,356		)	212,836			(2,832		)
Total	$	1,259,238		$	(29,838	)	$	3,593,505		$	(59,751	)	$	4,852,743		$	(89,589	)

	Number of		Carrying		Life Insurance
Year	Contracts Realized		Value		Proceeds
			(in thousands)
2007		8	$	14,471		$	54,963
2008		10	21,326			71,615
2009		12	27,936			83,940
2010		13	34,298			93,043
2011		14	40,357			99,559
Later years		165	239,380			1,162,533
Total		222	$	377,768		$	1,565,653

	Year ended Decemeber 31
	Global			U.S.			Total
	Insurance			Insurance			Insurance			Reinsurance				Total
	(in thousands)
2006	$	(123,242	)	$	(44,291	)	$	(167,533	)		$	(49,003	)	$	(216,536	)
2005	$	(242,327	)	$	(26,416	)	$	(268,743	)		$	(114,253	)	$	(382,996	)
2004	$	(92,497	)	$	(14,302	)	$	(106,799	)		$	(74,913	)	$	(181,712	)

	Expected Payments
	(in thousands)
2007		$	—
2008		—
2009		807
2010		1,162
2011		1,194
2012-2016		6,209
Total		$	9,372

	Options Outstanding						Options Exercisable
Range of Exercise prices	Number of Options	Weighted Average Exercise Price			Weighted Average Remaining Contractual Life		Number of Options	Weighted Average Exercise Price
$12.50-$13.75	2,583,147		$	12.55		5.11	2,583,147		$	12.55
$13.76-$15.00	599,000		14.50			5.95	599,000		14.50
$15.01-$16.25	53,334		16.25			6.42	53,334		16.25
$16.26-$25.65	59,000		25.54			6.83	39,334		25.54
$25.66-$29.62	1,772,503		28.81			7.40	899,885		29.09

	At December 31
	Bermuda				Ireland				United States
	2006		2005		2006		2005		2006		2005
	(in thousands)
Required statutory capital and surplus	$	1,098,344	$	881,627	$	174,656	$	60,580	$	191,867	$	179,355
Actual statutory capital and surplus	$	3,554,805	$	2,860,576	$	735,963	$	697,707	$	901,128	$	753,746

	2005
	Quarters ended
	Mar 31		Jun 30		Sep 30			Dec 31
	(in thousands, except per share data)
Gross premiums written	$	1,198,699	$	767,293	$	794,571		$	633,322
Net premiums earned	625,590		624,413		616,814			686,866
Net income (loss) available to common shareholders	151,799		172,845		(468,075		)	233,492
Comprehensive income (loss)	89,490		221,984		(522,626		)	214,839
Earnings per common share—basic	$	1.04	$	1.23	$	(3.32	)	$	1.61
Earnings per common share—diluted	$	0.95	$	1.13	$	(3.32	)	$	1.47


~~10.15~~ 10.13		Separation Agreement between AXIS Specialty U.S. Services, Inc. and Ms. Lorraine S. Mariano dated as of May 9, 2005 and amended on December 11, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 14, 2005).
~~10.16~~		Separation Agreement between AXIS Specialty Limited and Ms. Carol S. Rivers, dated as of February 17, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 23, 2006).
~~10.17~~		Form of Grant Letters for Carol S. Rivers under the 2003 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 23, 2006).
~~10.18~~		Credit Agreement dated August 25, 2005 among ~~the Company,~~AXIS Capital Holdings Limited, AXIS Specialty Limited, AXIS Re Limited, AXIS Specialty ~~Ireland~~Europe Limited, JP Morgan Chase Bank NA, as administrative agent and lender, and other lenders party thereto (incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on August 30, 2005).


Signature		Title

/s/ ~~ROBERT L. FRIEDMAN~~DONALD J. GREENE Donald J. Greene		Director
~~Robert L. Friedman~~
/s/ ~~DONALD J. GREENE~~CHRISTOPHER V. GREETHAM Christopher V. Greetham		Director
~~Donald J. Greene~~
/s/ ~~CHRISTOPHER V. GREETHAM~~JURGEN GRUPE Jurgen Grupe		Director

~~Christopher V. Greetham~~/s/ MAURICE A. KEANE Maurice A. Keane