UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

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

OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended December 31, 20092010

OR

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

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

        OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-31721

AXIS CAPITAL HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

BERMUDA

(State or other jurisdiction of incorporation or organization)

98-0395986

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

92 Pitts Bay Road, Pembroke, Bermuda HM 08

(Address of principal executive offices and zip code)

(441) 496-2600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

                                 Title of each class                                

 

            Name of each exchange on which registered   ��            

Common shares, par value $0.0125 per share

7.25% Series A preferred shares

 

New York Stock Exchange

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨x

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

Large accelerated filer  x

 Accelerated filer  ¨

Non-accelerated filer  ¨  (Do not check if a smaller reporting company)

 Smaller reporting company  ¨

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2009,2010, was approximately $3.5$3.4 billion.

At February 16, 2010,14, 2011, there were outstanding 131,930,239117,399,320 common shares, $0.0125 par value per share, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the annual meeting of shareholders to be held on May 6, 20105, 2011 are incorporated by reference in Part III of this Form 10-K.


AXIS CAPITAL HOLDINGS LIMITED

TABLE OF CONTENTS

 

     Page
 PART I  

Item 1.

 

Business

 2

Item 1A.

 

Risk Factors

  2628

Item 1B.

 

Unresolved Staff Comments

  4144

Item 2.

 

Properties

  4244

Item 3.

 

Legal Proceedings

  42

Item 4.

44
  

Submission of Matters to a Vote of Security Holders

42
 PART II  

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  4345

Item 6.

 

Selected Financial Data

  4446

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  4547

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  116112

Item 8.

 

Financial Statements and Supplementary Data

  120116

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial DisclosureDisclosures

  185174

Item 9A.

 

Controls and Procedures

  185174

Item 9B.

 

Other Information

  187176
 PART III  

Item 10.

 

Directors, Executive Officers and Corporate Governance

  187176

Item 11.

 

Executive Compensation

  187176

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  187176

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  187176

Item 14.

 

Principal Accountant Fees and Services

  187176
 PART IV  

Item 15.

 

Exhibits and Financial Statement Schedules

  188177


Cautionary Statement Regarding Forward-lookingForward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may,” “should,” “could,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,”“may”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend.”“intend”. Forward-looking statements contained in this report may include information regarding our estimates of losses related to catastrophes and other large losses, measurements of potential losses in the fair value of our investment portfolio and derivative contracts, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity prices, credit spreads and foreign currency rates. Forward-looking statements only reflect our expectations and are not guarantees of performance.

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

 

the occurrence of natural and man-made disasters,

 

actual claims exceeding our loss reserves,

 

general economic, capital and credit market conditions, and the persistence of the recent financial crisis,

 

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

 

the effects of emerging claims and coverage issues,

 

the failure of our cedants to adequately evaluate risks,

 

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

 

the loss of one or more key executives,

 

a decline in our ratings with rating agencies,

 

loss of business provided to us by our major brokers,

 

changes in accounting policies or practices,

 

changes in governmental regulations,

 

increased competition,

 

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

 

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

 

  

the other matters set forth under Item 1A,‘Risk Factors’ and Item 7,‘Management’s Discussion and Analysis of Financial ConditionsCondition and Results of Operations’ included in this report.

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

PART I

 

 

ITEM  1. BUSINESS

ITEM 1.BUSINESS

 

 

As used in this report, references to “we,” “us,” “our” or the “Company” refer to the consolidated operations of AXIS Capital Holdings Limited (“AXIS Capital”) and its direct and indirect subsidiaries and branches, including AXIS Specialty Limited (“AXIS Specialty Bermuda”), AXIS Specialty Limited (Singapore Branch), AXIS Specialty Europe Limited (“AXIS Specialty Europe”), AXIS Specialty London, AXIS Specialty Australia, AXIS Specialty Insurance Company (“AXIS Specialty U.S.”), AXIS Re Limited (“AXIS Re Ltd.”), AXIS Reinsurance Company (“AXIS Re U.S.”), AXIS Reinsurance Company (Canadian Branch), AXIS Surplus Insurance Company (“AXIS Surplus”), AXIS Insurance Company (“AXIS Insurance Co.”) and, AXIS Re Europe, AXIS Specialty Finance LLC (“AXIS Specialty Finance”) and Dexta Corporation Pty Ltd (“Dexta”) unless the context suggests otherwise. Tabular dollars are in thousands. Amounts in tables may not reconcile due to rounding differences.

 

 

GENERAL

AXIS Capital is the Bermuda-based holding company for the AXIS Group of Companies. AXIS CapitalCompanies and was incorporated on December 9, 2002. AXIS Specialty Bermuda commenced operations on November 20, 2001. AXIS Specialty Bermuda and its subsidiaries became wholly owned subsidiaries of AXIS Capital pursuant to an exchange offer consummated on December 31, 2002. Through our various operating subsidiaries and branches, and with primary operating locations in Bermuda, the United States and Europe, we provide a broad range of insurance and reinsurance products to insureds and reinsureds worldwide operations with primary locations in Bermuda, the United States and Europe.clients worldwide. Our business consists of two distinct global underwriting platforms, AXIS Insurance and AXIS Re.

During 2007, we purchased the assets of the Media Professional Division (“Media Pro”) of MPI Insurance Agency, Inc., an Aon Group, Inc. subsidiary. Media Pro was a full-service managing general underwriter with operations in the U.S., Canada and the U.K. We were the exclusive carrier for several of Media Pro’s programs for the priorpreceding two years and this purchase gave us the renewal rights to their broader professional lines portfolio.

During 2008, as part of our long-term strategy of global expansion, we established new underwriting branches in Singapore, Australia and Canada.

During 2009, we purchased Dexta, Corporation Pty Ltd (“Dexta”), an underwriting agency with a distribution network in Australia. Since 2005, we haveWe had been providing professional indemnity, directors and officers liability and information technology liability insurance coverages as a direct offshore foreign insurer in Australia through Dexta.Dexta since 2005. Effective January 1, 2009, the insurance coverages previously underwritten through Dexta arewere underwritten directly by AXIS Specialty Australia.

Also in 2009,During 2010, we established a new AXIS Global Accident & Health line of business within our insurance segment which, assegment. We offer a range of January 2010, provides domesticinsurance products in the U.S., U.K. and internationalEuropean markets, including business travel accident, corporate personal accident, accident and sickness and other specialty health coverages for employer groups, affinity groups and the customers of financial institutions. We also offer accident and specialty health reinsurance coverage on a global basis from our Dublin, London and Princeton, New Jersey offices. Reinsurance is available on a quota share, excess of loss and aggregate excess of loss basis. Coverages underwritten will include corporate personal accident and business travel accident products, association/affinity programs, student accident and catastrophic health products. We also expect to offer through this line of business U.S. insurance products including personal accident, business travel accident, student accident and sickness and special risks, including youth activities, day care and non-profit groups. These products will be offered to employer/employee and affinity groups as well as financial institutions, including banks, credit card issuers and credit unions.

 

OUR BUSINESS STRATEGY

Our long-term business strategy focuses on utilizing our management’s extensive expertise, experience and long-standing market relationships to identify and underwrite attractively priced risks while delivering insurance and reinsurance solutions to our customers. Our underwriters worldwide are focused on constructing a portfolio of risks that effectively utilizes our capital while optimizing the risk-reward characteristics of the portfolio. We exercise disciplined underwriting practices and manage a diverse book of business while seeking to maximize our profitability and generate superior returns on equity. To afford ourselves ample opportunity to construct a portfolio diversified by product and geography that meets our profitability and return objectives, we have implemented organic growth strategies in key markets worldwide. Risk management is a strategic priority embedded in our culture and our Risk Management department continues to monitor, review and refine our enterprise risk management framework.

The markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, as defined by availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been impacted by several factors, including industry losses, catastrophes, changes in legal and regulatory guidelines, investment results and the ratings and financial strength of competitors.

Our near-term strategies conform to our long-term objectives but also reflect changes and opportunities within the global marketplace. The following is anAn overview of the insurance and reinsurance market since our first full year of operations in 2002,over the past five years is presented below, together with a discussion as to how we have evolved during this period. The following table shows gross

Gross premiums written in each of our segments over the last five years:years is presented in the following table:

 

  
Year ended December 31,  2009  2008  2007  2006  2005     2010     2009     2008     2007     2006 
                      

Insurance

  $  1,775,590  $  1,841,934  $  2,039,214  $  2,070,467  $  1,875,017         $1,916,116     $1,775,590     $1,841,934     $2,039,214     $2,070,467 

Reinsurance

   1,811,705   1,548,454   1,550,876   1,538,569   1,518,868       1,834,420      1,811,705      1,548,454      1,550,876      1,538,569 
                                              

Total

  $3,587,295  $3,390,388  $3,590,090  $3,609,036  $3,393,885      $ 3,750,536     $ 3,587,295     $ 3,390,388     $ 3,590,090     $ 3,609,036 
                                              
                                    ��       

We were established in late 2001 to take advantage of the significant imbalance that had been created between the demand for insurance and reinsurance and the supply of capacity from adequately capitalized insurers and reinsurers. Pricing and deductibles were increasing dramatically and policy terms and coverages tightening across many specialist lines of business. In a short period of time following our formation, we were able to assemble a diverse portfolio of specialist insurance risks. We also established a property reinsurance portfolio largely comprising worldwide catastrophe exposure. Since our inception, we have focused our efforts on identifying and recruiting talented specialist underwriters and diligently building our infrastructure to access and analyze risks for our global portfolio and to deliver service of the highest quality to our clients.

During 2003, we were able to further diversify our global business by adding select underwriting teams and infrastructure in the U.S. and in Europe. Specifically, we established a meaningful presence in the wholesale insurance market in the U.S., which allowed us to quickly take advantage of favorable market conditions. We also entered the professional lines insurance business through a renewal rights transaction and simultaneous recruitment of an underwriting team from Kemper. The shortage of capacity for U.S. professional lines reinsurance business served as an opportunity for further diversification of our global treaty reinsurance business and establishment of a local presence in the U.S. reinsurance marketplace. By the end of 2003, we had also established a local presence in the Continental European reinsurance marketplace, allowing us to diversify into

other traditional European treaty reinsurance business including motor liability and credit and bond. The establishment and growth of our U.S. and European reinsurance underwriting operations contributed to significant premium growth in our reinsurance segment during 2004 and 2005.

Since these early years of substantial growth, we have continued to establish our position in the global insurance and reinsurance marketplace. This has been against the backdrop of a softening market cycle throughout many of our property and liability lines of business, with increased competition, surplus underwriting capacity and deteriorating rates, terms and conditions all having an impact on our ability to write business. Despite this, our strong diversity by product and geography, has allowed us to effectively reallocate underwriting capacity around our business operations as we see market conditions change and business opportunities arise, allowing us to maintain a relatively stable level of gross premiums written during this period.

Within our reinsurance segment, although market conditions have not been particularly conducive to premium growth in recent years, including a trend of greater risk and retention appetite in the industry, conditions have generally been better than the primary market which has provided us with an opportunity to achieve greater market penetration in the U.S. and European reinsurance markets over this period. Further, market conditions improved across several lines of business during 2009, which, along with specific growth opportunities, allowed us to expand the segment this year.

Within our insurance segment, market conditions have been increasingly competitive for several years, with surplus capacity and pricerate deterioration prevalent across most of our portfolio. As a result, we have reduced our participation in certain business in recent years. TheThese trends explain the decline in gross premiums written for the segment following their 2006 and 2007 highs. However, the impact of thisthese trends has been partially offset by specific, targeted growth opportunities. This has includedopportunities, including our expansion into the Canadian and Australian markets. The expansion of our professional lines business, both through the purchase of the Media Pro business in 2007 as well as new business opportunities arising during 2008 and 2009 in the aftermath of the financial market crisis.crisis, is an example of another targeted growth opportunity. In recent years,addition, we saw certain opportunities to write new business in the U.S. property market during 2010. We have also added underwriting expertise to our credit and political risk team in recent years and established a branch in Singapore, which has provided us with access to a broader range of distribution channels. This has allowed us to provide more products which are not as closely correlated to the property and liability cycle, in particular, emerging market sovereign and corporate credit. Our ability and appetite to write this business, however, was negatively impacted inhas been reduced since the latter part of 2008 and throughout 2009 bydue to the effectsimpact of the global financial crisis. In 2009,During 2010, we established acontinued to invest in the development of our new Global Accident & Health business.

In our reinsurance segment, market conditions have not been conducive to premium growth in recent years amidst a trend of greater risk and Health line of business within our insurance segment, which effective January 2010, provides corporate personal accidentretention appetite in the industry. However, conditions have generally been better than the primary market and business travel coverage as well as specialty and catastrophe health and ancillary property and casualty coverage. We intendthis provided us with an opportunity to initially grow this businessachieve greater market penetration in the U.S. and European reinsurance markets over this period. Specific market opportunities, including dislocation in the European trade credit and bond reinsurance market and expandour entry into the Latin American surety business allowed us to increase our premium base during 2009. Growth in our Latin American business continued during 2010 and we increased our participation in select European Canadian, Australian and Asian markets over time.motor reinsurance markets.

During 2007, we createdWe established a new Ceded Reinsurance Unit to coordinateduring 2007, which coordinates our reinsurance purchasing activities and has allowed us to improve efficiency and consistency and to take advantage of new opportunities in the marketplace. In recent years, we have expandedWe made certain changes to optimize our ceded reinsurance coverage, particularly forprograms on renewal during 2010, including an increase in our attachment points on our property excess of loss program and a reduction in cession rates on our professional lines quota share program. We believe these adjustments provide for an improved balance between risk and casualty insurance business. This strategy has allowed us to reducereward and take into consideration improvements in our overall net retentions relative to previous years and therefore deliver more value through an improvement in our risk/rewardcapital position.

Our use of technology allows us to maintain a low-cost infrastructure and efficient underwriting operations. In addition, we believe our technological capabilities provide us with competitive advantages as we seek to improve our relationships with our customers, provide enhanced levels of customer service and optimize our internal decision making process. During 2009, we implemented additional levels of back-up across our core processing systems, communication networks and databases to mitigate the disruption to fundamental business processing. We also expanded our usability of remote application technologies (i.e., remote access, web applications), video conferencing and geographically dispersed data synchronization to meet the demands of a more mobile and dispersed workforce.

We continue to strengthen our enterprise risk management framework, having created a separate Risk Management department during 2008. We value the strategic significance of an effective risk management structure, particularly in today’s complex environment. Our ERM practices are currently evaluated as “Strong” by Standard & Poor’s (“S&P”).

 

 

SEGMENT INFORMATION

Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Re and thereforeRe. Therefore we have determined that we havehad two reportable segments, insurance and reinsurance. Except for goodwill and intangible assets, we do not allocate our assets by segment as we evaluate the underwriting results of each segment separately from the results of our investment portfolio. Financial data relating to our segments is included in Note 3 to our Consolidated Financial Statements presented under Item 8 and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Item 7.

Insurance Segment

Lines of Business and Distribution

Our insurance segment operates through offices in Bermuda, the United States, Canada, Europe, Australia and Singapore and offers specialty insurance products to a variety of niche markets on a worldwide basis. The following are the lines of business in our insurance segment:

 

  

Property:Property: provides physical loss or damage, business interruption and machinery breakdown coverage for virtually all types of property, including commercial buildings, residential premises, construction projects and onshore energy installations. This line of business consists of both primary and excess risks, some of which are catastrophe-exposed.

 

  

Marine:Marine: provides coverage for traditional marine classes, including offshore energy, cargo, liability, recreational marine, fine art, specie, hull and war. Offshore energy coverages include physical damage, business interruption, operators extra expense and liability coverage for all aspects of offshore upstream energy, from exploration and construction through the operation and distribution phases.

 

  

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

 

  

Aviation:Aviation: provides hull and liability and specific war coverage primarily for passenger airlines but also for cargo operations, general aviation operations, airports, aviation authorities, security firms and product manufacturers.

  

Credit and political risk:provides credit and political risk insurance products for banks and corporations. Coverage is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events. The credit insurance coverage is primarily for lenders seeking to mitigate the risk of non-payment from their borrowers in emerging markets. For the credit insurance contracts, it is necessary for the buyer of the insurance (most often a bank) to hold an insured asset (most often an underlying loan) in order to claim compensation under the insurance contract. The traditional political risk coverage provides protection against sovereign actions that result in the impairment of cross-border investments for banks and major corporations (known as “CEND” coverages).

 

  

Professional lines:lines: provides coverage for directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity and other financial insurance related coverages for commercial enterprises, financial institutions and not-for-profit organizations. This business is predominantly written on a claims-made basis.

 

  

Liability: primarily targets primary and low/mid-level excess and umbrella commercial liability risks in the U.S. excess and surplus lines markets. Target industry sectors include construction, manufacturing, transportation and trucking and other services.

 

  

Other: commencing in 2010, primarily consistsrelates to our Global Accident & Health business and includes accidental death and sickness insurance for employer and affinity groups, financial institutions, schools and colleges, as well as accident reinsurance for catastrophic events on a quota share and/or excess of loss basis, with aggregate and/or per person deductibles. In prior years, our underwriting in this line of business primarily related to employee medical coverage for self-insured, small and medium sizedmedium-sized employers, for losses in excess of a given retention.

We produce business primarily through wholesale and retail brokers worldwide. Some of our insurance products are also distributed through managing general agents and underwriters. In the U.S., we have the ability to write business on an admitted basis using forms and rates as filed with state insurance regulators and on a non-admitted, basis, or surplus lines, basis withproviding flexibility in forms and rates, as these are not filed with state regulators. Having non-admitted carrierscapability in ourthe U.S. group of companies provides the pricing flexibility needed to write non-standard coverage.coverages. Substantially all of our insurance business is written subject to aggregate limits, in addition to event limits.

Gross premiums written by broker, shown individually where premiums arewere 10% or more of the total in any of the last three years, were as follows:

 

  
Year ended December 31,  2009  2008  2007   2010   2009   2008 
              

Marsh

  $309,278  17%  $262,417  14%  $264,964  13%       $363,454    19%    $309,278    17%    $262,417    14%  

Aon

   270,658  15%   237,993  13%   259,929  13%     303,264    16%     270,658    15%     237,993    13%  

Willis

   150,197  9%   156,887  9%   202,531  10%  

Other brokers

   803,183  45%   953,852  52%   1,056,163  52%     1,025,092    53%     953,380    54%     1,110,739    61%  

Managing general agencies and underwriters

   242,274  14%   230,785  12%   255,627  12%     224,306    12%     242,274    14%     230,785    12%  
                                           

Total

  $  1,775,590  100%  $  1,841,934  100%  $  2,039,214  100%    $ 1,916,116    100%    $ 1,775,590    100%    $ 1,841,934    100%  
                                           
                                      

No major customer accounted for more than 10% of the gross premiums written in the insurance segment.

Competitive Environment

We operate in highly competitive markets. In our insurance segment, where competition is focused on price as well as availability, service and other considerations, we compete with U.S. based companies with global insurance operations, as well as non U.S.non-U.S. global carriers and indigenous companies in regional and local markets. We believe we achieve a competitive advantage through a strong capital position and the strategic and operational linking of our practices, which allows us to design insurance programs on a global basis in alignment with the global needs of many of our clients.

Reinsurance Segment

Lines of Business and Distribution

Our reinsurance segment operates through offices based in Bermuda, New York, Zurich and Singapore. We focus on writing business on an excess of loss basis, where possible, whereby we typically provide an indemnification to the reinsured entity for a portion of losses both individually and in the aggregate, on policies in excess of a specified individual or aggregate loss deductible. ForWe also write business written on a proportional basis, we receivereceiving an agreed percentage of the premium and are liableaccepting liability for the same percentage of incurred losses. Reinsurance may be written on a portfolio/treatyportfolio (i.e. treaty) basis or on an individual risk/facultativerisk (i.e. facultative) basis. The majority of our business is written on a treaty basis and primarily offered to us byproduced through reinsurance brokers worldwide.

Our reinsurance segment provides non-life reinsurance to insurance companies on a worldwide basis. The following are the lines of business in our reinsurance segment:

 

  

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

 

  

Property: includes reinsurance written on both a proportional and a per risk excess of loss basis and covers underlying personal lines and commercial property exposures. Here the primary reason for the product is not simply to protect against catastrophic perils, however they are normally included with limitations.

 

  

Professional Liability: covers directors’ and officers’ liability, employment practices liability, medical malpractice, lawyers’ and accountants’ liability, environmental liability and miscellaneous errors and omissions insurance risks. The underlying business is predominantly written on a claims-made basis. Business is written on both a proportional and excess of loss basis.

 

  

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

  

Motor: provides coverage to cedants for motor liability and, to a lesser degree, property damage losses arising out of any one occurrence. The occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence.

 

  

Liability: provides coverage to insurers of standard casualty business, excess and surplus casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, although workers compensation and auto liability are also written.

 

  

Engineering: provides coverage for all types of construction risks and risks associated with erection, testing and commissioning of machinery and plants during the construction stage. This line of business also includes coverage for losses arising from operational failures of machinery, plant and equipment and electronic equipment as well as business interruption.

 

  

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

Gross premiums written by broker, shown individually where premiums arewere 10% or more of the total in any of the last three years, were as follows:

 

  
Year ended December 31,  2009  2008  2007   2010   2009   2008 
              

Aon

  $677,810  37%  $536,435  35%  $506,198  33%       $622,703    34%    $677,810    37%    $536,435    35%  

Marsh

   496,900  27%   507,257  33%   550,036  35%     547,470    30%     496,900    27%     507,257    33%  

Willis

   404,428  22%   253,647  16%   190,603  12%     305,474    16%     322,512    18%     253,647    16%  

Other brokers

   62,944  4%   145,834  9%   194,224  13%     198,779    11%     144,860    8%     145,834    9%  

Direct

   169,623  10%   105,281  7%   109,815  7%     159,994    9%     169,623    10%     105,281    7%  
                                           

Total

  $  1,811,705  100%  $  1,548,454  100%  $  1,550,876  100%    $ 1,834,420    100%    $ 1,811,705    100%    $ 1,548,454    100%  
                                           
                                      

No major customer accounted for more than 10% of the gross premiums written in the reinsurance segment.

Competitive Environment

In our reinsurance segment where competition tends to be focused on availability, service, financial strength and increasingly price, we compete with major U.S. and non-U.S. reinsurers as well as reinsurance departments of numerous multi-line insurance organizations. We believe that we achieve a competitive advantage through our strong capital position, as well as our technical expertise that allows us to respond quickly to customer needs and provide quality and innovative underwriting solutions. In addition, our customers highly value our exemplary service strong capitalization and financial strength ratings.

 

 

REINSURANCE PROTECTION

Our Ceded Reinsurance Unit coordinates the purchase of treaty and facultative reinsurance to reduce our exposure to large losses or a seriessignificant losses. Substantially all of large losses. Allour ceded reinsurance is purchased to cover business written in our insurance segment. Our Reinsurance Purchasing Group, comprising senior management, pre-approves all treaty reinsurance purchases and ourestablishes facultative reinsurance strategies are pre-approved by our Reinsurance Purchasing Group, which consists of senior management.strategies. Facultative reinsurance provides coverage for all or a portion of the insurance provided bylosses incurred for a single policy and we separately negotiate each policy reinsured is individually negotiated.facultative contract. Treaty reinsurance provides coverage for a specified type or category of risks. Our treaty reinsurance agreements may be on an excess of loss or proportional basis. Excess of loss covers provide a contractually set amount of covercoverage after an excess pointa specified loss amount has been reached. This excess pointspecified loss amount can be based on the size of an

industry loss or on a fixed monetaryCompany-specific incurred loss amount. These covers can be purchased on a package policy basis, which provide us with cover for a number of lines of business within one contract. ProportionalIn contrast, proportional covers provide us with a proportional amountspecified percentage of coverage from the first dollar of loss. All of these reinsurance covers provide for recovery ofus the right to recover a portion of our losses and loss expenses from reinsurers. We remain liable for the original claimHowever, to the extent that our reinsurers do not meet their obligations under these agreements.

agreements due to solvency issues, contractual disputes or other reason, we remain liable.

 

 

RESERVE FOR UNPAID LOSSES AND LOSS EXPENSES

We establish reserves for losses and loss expenses that arise from our insurance and reinsurance products. These reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss expenses for insured or reinsured claims that have occurred at or before the balance sheet date, whether already known or not yet reported. Our loss reserves are established based upon our estimate of the total cost of claims that were reported to us but not yet paid (“case reserves”), and the anticipated cost of claims incurred but not yet reported to us (“IBNR”).

The table below shows the development of our loss reserves since inception. To illustrate an understanding of the information in this table, following is an example using reserves established at December 31, 2005.

The top lines of the table show for successive balance sheet dates the gross and net unpaid losses and loss expenses recorded at or prior to each balance sheet date. It can be seen that at December 31, 2005, a reserve of $3,270 million, net of reinsurance had beenwas established.

The lower part of the table presents the net amounts paid as of periods subsequent to the balance sheet date. Hence in the year ended December 31, 2006, net payments of $880 million were made from the December 31, 2005 reserve balance. By the end of 2009,2010, cumulative net payments against the December 31, 2005 net reserves were $1,771$1,873 million.

The upper part of the table shows the revised estimate of the net liabilities originally recorded as of the end of subsequent years. With the benefit of actual loss emergence over the intervening period, the net liabilities incurred as of December 31, 2005, are now estimated to be $2,529$2,430 million, rather than the original estimate of $3,270 million. Of the cumulative redundancy of $741$840 million recognized in the fourfive years since December 31, 2005, $217 million was identified and recorded in 2006, $115 million in 2007, $188 million in 2008, and $221 million in 2009.2009 and the remaining $99 million in 2010.

Importantly, the cumulative deficiency or redundancy for different balance sheet dates is not independent and therefore, should not be added together. In 2009,2010, we have revised our estimate of the December 31, 2005, liabilities from $2,750$2,529 million to $2,529$2,430 million. This favorable development of $221$99 million will also be included in each column to the right of December 31, 2005, to recognize that there was also reserve redundancy in the reserves established at December 31, 2006, 2007, 2008 and 2008.2009.

 Year ended December 31,  Year ended December 31, 
     2001     2002 2003 2004 2005 2006 2007 2008 2009  2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

Gross reserve for losses and loss expenses

 $  963 $  215,934   $  992,846   $  2,404,560   $  4,743,338   $  5,015,113   $  5,587,311   $  6,244,783   $  6,564,133  
           

Gross reserves for losses and loss expenses

 $ 963  $ 215,934  $992,846  $2,404,560  $4,743,338  $5,015,113  $5,587,311  $6,244,783  $6,564,133  $7,032,375 

Reinsurance recoverable

  -  (1,703  (124,899  (564,314  (1,473,241  (1,310,904  (1,297,539  (1,314,551  (1,381,058  -        (1,703  (124,899  (564,314  (1,473,241  (1,310,904  (1,297,539  (1,314,551  (1,381,058   (1,540,633
                                                        

Net losses and loss expenses reserve

  963  214,231    867,947    1,840,246      3,270,097    3,704,209    4,289,772    4,930,232    5,183,075    963   214,231   867,947   1,840,246   3,270,097   3,704,209   4,289,772   4,930,232   5,183,075   5,491,742 
 

Net reserves reestimated as of:

                     

1 Year later

 $165 $158,443   $686,235   $1,457,250   $3,053,561   $3,367,232   $3,913,485   $4,507,061     $165  $158,443  $686,235  $1,457,250  $3,053,561  $3,367,232  $3,913,485  $4,507,061  $4,870,020   

2 Years later

  165  141,290    539,110    1,179,851    2,938,734    3,076,025    3,533,313       165   141,290   539,110   1,179,851   2,938,734   3,076,025   3,533,313   4,235,219    

3 Years later

  165  109,711    434,221    1,080,083    2,750,476    2,773,158        165   109,711   434,221   1,080,083   2,750,476   2,773,158   3,281,011     

4 Years later

  196  97,981    386,029    962,910    2,529,259         196   97,981   386,029   962,910   2,529,259   2,576,226      

5 Years later

  196  96,864    347,544    889,190          196   96,864   347,544   889,190   2,429,724       

6 Years later

  196  96,179    326,729           196   96,179   326,729   863,225        

7 Years later

  196  92,517            196   92,517   315,548         

8 Years later

  196           196   89,664          
 

9 Years later

  196           

Cumulative redundancy

 $767 $121,714   $541,218   $951,056   $740,838   $931,051   $756,459   $423,171     $767  $124,567  $552,399  $977,021  $840,373  $1,127,983  $1,008,761  $695,013  $313,055   
 

Cumulative net paid losses

          

Cumulative net paid losses as of:

           

1 Year later

 $15 $47,838   $108,547   $291,695   $880,120   $636,266   $615,717   $982,036     $15  $47,838  $108,547  $291,695  $880,120  $636,266  $615,717  $982,036  $1,042,890   

2 Years later

  125  56,781    169,853    432,963    1,292,738    999,280    1,147,990       125   56,781   169,853   432,963   1,292,738   999,280   1,147,990   1,539,713    

3 Years later

  165  66,569    202,136    511,325    1,500,652    1,355,821        165   66,569   202,136   511,325   1,500,652   1,355,821   1,461,494     

4 Years later

  165  63,835    221,644    574,874    1,771,039         165   63,835   221,644   574,874   1,771,039   1,513,350      

5 Years later

  165  72,323    245,978    615,920          165   72,323   245,978   615,920   1,873,052       

6 Years later

  165  80,099    254,676           165   80,099   254,676   650,110        

7 Years later

  165  81,130            165   81,130   263,412         

8 Years later

  165           165   83,276          
 

Impact of unrealized foreign exchange movements:

 $- $961   $3,240   $4,664   $(13,329 $23,581   $28,588   $(133,345 $82,018  
 

Gross reserve for losses and loss expenses re-estimated

 $196 $111,420   $439,930   $1,434,178   $3,922,252   $3,961,497   $4,669,039   $5,771,504    

9 Years later

  165           

Impact of unrealized foreign exchange movements

 $-       $961  $3,240  $4,664  $(13,329 $23,581  $28,588  $(133,345 $82,018  $(25,282

Gross reserve for losses and loss expenses reestimated

 $196  $111,802  $432,968  $ 1,408,878  $3,824,079  $3,749,555  $4,400,378  $5,489,700  $6,263,426   

Reinsurance recoverable

  -  (18,903  (113,201  (544,988  (1,392,993  (1,188,339  (1,135,726  (1,264,443    -        (22,138   (117,420  (545,653   (1,394,355   (1,173,329   (1,119,367   (1,254,481   (1,393,406  
                                                      

Net losses and loss expenses reserve re-estimated

  196  92,517    326,729    889,190    2,529,259    2,773,158    3,533,313    4,507,061    
 

Net losses and loss expenses reserve reestimated

  196   89,664   315,548   863,225   2,429,724   2,576,226   3,281,011   4,235,219   4,870,020   

Cumulative redundancy on gross reserve

 $767 $104,514   $552,916   $970,382   $821,086   $1,053,616   $918,272   $473,279     $ 767  $ 104,132  $559,878  $995,682  $919,259  $1,265,558  $1,186,933  $755,083  $300,707   
                                        

The table above also shows the impact of foreign exchange rate movements. Movements in foreign exchange rates between periods result in variations in our net loss reserves, as the U.S. dollar, our reporting currency, strengthens or weakens against underlying currencies. For example, forduring the year ended December 31, 2009,2010 the weakeningstrengthening of the U.S. dollar, primarily against the Euro and Sterling, largely resulted in an $82a $25 million increasedecrease in our net loss reserves established prior to or during 2009. We generally hold investments in the same currency as our net reserves, with the intent of matching the impact of foreign exchange movements on our assets and liabilities.

Conditions and trends that affected the development of liabilities in the past may not necessarily occur in the future. Accordingly, it may be inappropriate to anticipate future redundancies or deficiencies based on historical experience. The key issues and considerations involved in establishing our estimate of our loss reserves is discussed in more detail within the ‘Critical AccountingEstimates – Reserve for Losses and Loss Expenses’ section of Item 7. For additional information regarding the key underlying movements in our loss reserves in the last three years, refer to the ‘Group Underwriting Results – Loss RatioGroup – Underwriting Expenses’ section of Item 7.

 

CASH AND INVESTMENTS

We seek to balance the investment portfolios’ objectives of (1) increasing book value with (2) the generation of relatively stable investment income, while providing sufficient liquidity to meet our claims and other obligations. Liquidity needs arising from potential claims are of primary importance and are considered in asset class participation and the asset allocation process. Intermediate maturity investment grade fixed income securities have duration characteristics similar to our expected claim payouts and are therefore central to our investment portfolio’s asset allocation. At December 31, 2009,2010, the duration of our fixed maturities portfolio was approximately 3 years, which approximates the estimated duration of our net insurance liabilities.

To diversify risk and optimize the growth in our book value, we may invest in other asset classes such as equity securities, high yield securities and alternative investments (e.g. hedge funds) which provide higher potential total rates of return. Such investmentsindividual investment classes involve varying degrees of risk, including the potential for more volatile returns and reduced liquidity. However, as part of a balanced portfolio, they also provide diversification from interest rate and credit risk.

With regard to our investment portfolio, we utilize third party investment managers for security selection and trade execution functions, subject to our guidelines and objectives for each asset class. This enables us to actively manage our investment portfolio with access to top talents specializing in various products and markets. We select the managers based on various criteria including investment style, track record, performance and corporate governance. Additionally, we monitor approved investment asset classes for each subsidiary through analysis of our operating environment, including expected volatility of cash flows, overall capital position, regulatory and rating agency considerations. The Finance Committee of our Board of Directors approves our overall group asset allocation targets and investment policy and guidelines to ensure that they are consistent with our overall goals, strategies and objectives. We also have an Investment Committee, comprising senior management, which oversees the implementation of our investment strategy.

For additional information regarding the investment portfolio refer to the ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cash and Investments’ section under Item 7 and Note 5 Investments to our Consolidated Financial Statements presented under Item 8.

Refer to‘Risk and Capital Management’ for details relating to the management of our investment risk.

RISK AND CAPITAL MANAGEMENT

 

 

ENTERPRISE RISK MANAGEMENTMission and Objectives of Risk Management

OVERVIEW

The mission of Enterprise Risk Management (“ERM”)

ERM at AXIS is our group-wide framework for identifying, managing, reportingto promptly identify, measure, report and responding tomonitor risks that could affect the achievement of our strategic, operational and financial objectives. TheThis includes adjusting the risk profile in line with the Group’s stated risk tolerance to respond to new threats and opportunities in order to optimize returns.

Our major ERM objectives of our ERM framework are to:

 

Protect our capital base and earnings by monitoring that risks are not taken beyond the most efficient deploymentGroup’s risk tolerance;

Promote a sound culture of capital

Monitor risk-taking within the Company against our risk-taking appetite;risk awareness and disciplined and informed risk taking;

 

Enhance value creation and contribute to an optimal risk-return profile;profile by providing the basis for efficient capital deployment; and

 

Support our group-wide decision making process by providing reliable and timely risk information.

Risk LandscapeManagement Framework

WithinIn order to achieve our ERMmission and objectives, the Group relies on its risk management framework. At the heart of the risk management framework we distinguish betweenis a robust governance process with clear responsibilities for taking, managing, monitoring and reporting risks. We articulate the following sources of risk:

Insuranceroles and responsibilities for risk management throughout the organization, from the inherent uncertainty as to the occurrence, amount and timing of insurance liabilities transferred to us through the underwriting process.

Credit – the risk of incurring financial loss due to diminished creditworthiness of our counterparties.

Investment – risk of potential losses in our investment portfolio as a result of market risks, as well as risk inherent in individual securities.

Operational – risks associated with our people, processes and systems, including external events.

Funding and liquidity – the risk that we are unable to meet our short-term financial obligations or raise funds to finance our commitments at an affordable cost. For further review of our liquidity and capital management refer to the ‘Liquidity and Capital Resources’ section of Item 7.

Risk Governance

The Risk Committee of our Board of Directors (“Board”) oversees, onand the basis of proposals from management, the creation of a framework for the management of risk. The framework, ultimately approved by the Board, includes our risk management methodologies, standards, tolerances, and risk strategies. Our Risk Committee also assesses whether management is addressing risk issues in a timely and appropriate manner.

Our Risk Management Committee, comprising our Chief Executive Officer Chief Financial Officer, Chiefto our businesses and functional areas, thus embedding risk management in the business.

To support the governance process, the Group relies on documented policies and guidelines. Our Risk OfficerStandards specify our principles, risk appetite and tolerances for managing individual and aggregate risks. We also have procedures to approve exceptions to risk limits and procedures for the timely referral of risk issues to senior management from bothand the Board of Directors.

Our comprehensive qualitative and quantitative risk reporting framework provides transparency and early warning indicators to senior management with regard to our insurance and reinsurance segments and operations, is responsible for maintaining ouroverall risk standardsprofile as well as monitoring aggregations,to whether our profile is within our established risk tolerancestolerances. For example, risk dashboards and emerging risks. The Risk Management Committee acts as an interface between our Risk Committeelimit consumption reports are regularly prepared, communicated and management, whomonitored.

Various governance and control functions coordinate to help ensure that objectives are responsible for managing our business within defined risk tolerances.being achieved, risks are identified and appropriately managed and internal controls are in place and operating effectively.

Our Risk Management department oversees risk taking activities throughout the group, providing guidance and support for risk management practices. The Risk Management department is also responsible for assessing the combined impact of all risks and reporting on the group’s risk position by class of risk, segment of business, legal entity and group.

Our risk governance structure is complemented by our Internal Audit department. Internal Audit is an independent, objective assurance function that assesses the adequacy and effectiveness of our internal control systems. Internal audit also coordinates risk-based audits and compliance reviews and other specific initiativesAlso paramount to evaluate and address risk within targeted areas of our business.

Our risk management philosophy, framework and practices have provided us with stability during volatile times and we continuously seek to refine and update our approach. Regular, clear and open communication has helped us to build a consistent risk management culture across our diverse organization.

Risk Appetite

Our basis for accepting risk is determined by our risk appetite, as approved by our Board. Our risk appetite is a function of our capital, profitability and stakeholder expectations of the types of risk we hold within our business. The Risk Committee regularly reviews our risk profile to ensure alignment with our risk appetite.

Our risk appetite primarily reflects our tolerance for risk from our overall underwriting portfolio, including individual events (natural peril or non natural peril catastrophes), and from our investment portfolio. In addition, we specifically focus on the relationship between combinations of different risks to assess the potential for reduction in our profitability and capital base. Ensuring that our capital is sufficient to take advantage of market opportunities even in stressed market conditions is of key importance.

An element of our ERMmanagement framework is our economic capital model. Utilizing this modeling framework provides us with a holistic view of the capital we put at risk in any year by allowing us to understand the relative interaction between all of the risks impacting us. This integrated approach recognizes that a single risk factor can affect different sub-portfolios and that different risk factors can have different mutual dependencies. The economic capital model is used to support, inform and improve decision making across the Group. We are constantly reviewing and improving our economic capital model as our business, risk landscape and external environment continue to evolve.

Our basis for accepting risk is determined by our risk appetite, as approved by our Board. Our risk appetite is a function of our capital, profitability and stakeholder expectations of the types of risk we hold within our business.

External Perspectives

Various external stakeholders, among them regulators, rating agencies, investors and accounting bodies, are placing increasing emphasis on the importance of sound risk management in our industry.

New and emerging regulatory regimes, such as Solvency II in the European Union, emphasize a risk-based and economic approach, based on comprehensive quantitative and qualitative assessments and reports.

Rating agencies are increasingly interested in risk management as a factor in evaluating companies. Standard & Poor’s, a rating agency with a separate rating for ERM, confirmed our Group’s ERM rating as “strong” in 2010.

Investment risk, operational risk and emerging risk were upgraded from “adequate” to “strong”. After this latest review, AXIS Capital is now rated either “strong” or “excellent” in all of Standard & Poor’s dimensions for ERM.

We are involved in a number of international industry organizations engaged in advancing the regulatory dialogue pertaining to insurance and financial services. Collaboration with external partners also complements our internal management of emerging risks. An example of this collaboration is our participation on the climate change working group of the Geneva Association. The modelobjectives of the group is to identify and analyze issues that are of specific relevance to the insurance industry, such as the likely range of future claims costs, new business opportunities and scenario testing.

Risk Governance

The key elements of our governance framework, as it relates specifically to risk management, are described below.

Board of Directors level

The Board of Directors is ultimately responsible for the Group’s risk management framework. The Risk Committee of the Board serves as a focal point for this oversight. The Risk Committee assesses whether significant risk issues are being appropriately addressed by management in a timely manner.

The Risk Committee of the Board annually reviews and approves our Risk Standards. Additionally, it reviews the Group’s key risk exposures across major risk categories as well as risk and capacity limits and their usage on a quarterly basis. In terms of risk measurement, the Risk Committee reviews the critical principles and assumptions used in our economic capital model. The Finance Committee of the Board makes decisions about investments and market risk, while complying with the Group’s risk framework.

Group executive level

The Executive Committee oversees the Group’s performance with regard to risk management as well as control, strategic, financial and business policy issues of Group-wide relevance. This includes monitoring adherence to and further development of our risk management policies and procedures. The Executive Committee receives regular briefings and recommendations from the Risk Management Committee (“RMC”) on the Group’s risk profile and risk-related issues.

The RMC is a cross-functional body which includes, among others, the Group Chief Executive Officer, Chief Financial Officer and Chief Risk Officer. The RMC oversees the effective management of the Group’s overall risk profile, including risks related to insurance, financial, credit and operational risks as well as their interactions. The RMC acts as an interface between our Risk Committee and management, who are responsible for managing our business within defined risk tolerances.

The RMC reviews and formulates recommendations for, among other things, changes to the AXIS Risk Standards, the Group’s risk-based capital methodology and risk tolerance limits.

Group risk management

Below the oversight roles of the Board and Executive, we have several other layers of governance within our risk management framework. Management in each of our operating units is responsible in the first instance for both

the risks and returns of their decisions. Management is the ‘owner’ of risk management processes and is responsible for managing our business within defined risk tolerances.

The Group Risk department (“Group Risk”), led by the Group Chief Risk Officer (Group CRO), oversees risk taking activity throughout the Group and provides guidance and support for risk management practices. Group Risk is responsible for developing our risk management framework and overseeing adherence to the framework. Group Risk also develops methods and processes for identifying, assessing and monitoring risk across the Group based on systemic qualitative and quantitative analysis. Group Risk is further responsible for monitoring and reporting the accumulation of specific types of risk, including catastrophe exposures and aggregate credit risk. The Group CRO regularly updatedreports risk matters to reflectthe Group Chief Executive Officer, senior management committees and the Board.

Our global risk management network also includes Risk Officers within our underwriting segments and investment department. These local risk units, which have regular and close interaction with Group Risk, assist with embedding the risk management framework into our business.

Internal Audit, an independent, objective function provides assurance to the Board on the effectiveness of our risk management framework. This includes assurance that key business risks have been adequately identified and managed appropriately and that our system of internal control is operating effectively. Internal audit also coordinates risk-based audits, compliance reviews and other specific initiatives to evaluate and address risk within targeted areas of our business.

Our risk governance structure is further complemented by our Legal Department which seeks to mitigate legal and regulatory compliance risks.

Risk Landscape

Within our ERM framework, we distinguish between the following key sources of risk:

Strategic – the unintended risk that can result as a by-product of planning or executing a strategy;

Insurance – the inherent uncertainty as to the occurrence, amount and timing of insurance liabilities transferred to us through the underwriting process;

Credit – the risk of incurring financial loss due to diminished creditworthiness of our counterparties;

Investment – risk of potential losses in our investment portfolio as a result of market risks, as well as risk inherent in individual securities;

Operational– risks associated with our people, processes and systems, including external events; and

Liquidity– the risk that we are unable to meet our short-term financial obligations or raise funds to finance our commitments at an affordable cost.

Strategic Risk

Strategic risk is a type of business risk. It is the risk of change in value due to the inability to pursue an opportunity, implement appropriate business plans and strategies, make decisions, allocate resources, or adapt to changes in our business and the external environment.

Recognizing that

At AXIS, strategic decision making is supported by a strong risk management infrastructure and culture. What we learn about risk through our monitoring, reporting and control processes provides important feedback in extreme scenarios, manyterms of reevaluating our risks may interact to cause an impairment of our capital, our Board requires that the enterprise risk withinand, therefore, reevaluating our business strategy.

The pre-emptive management of emerging risks is managedembedded within the AXIS ERM framework. The Company has a systemic framework for identifying and evaluating risks that we face, as well as responding to preserve capital under such stress conditions. Our Board also recognizes that financial strength ratings areemerging threats.

In terms of underwriting strategy, the Group undertakes a key element of our competitive positioning and our ability to raise further capital. We actively manage and monitor our available capital againstdetailed annual business planning process, which is overseen by the capital required to operate at our targeted financial strength rating. We also review our available capital, both at a groupGroup Executive Committee and individual legal entity level, againstbusiness segment Boards. As part of this process, our economic capital model is used to generate risk adjusted returns by line of business from which the evolvingeffectiveness of alternative underwriting strategies can then be tested. The modeled returns are then reviewed and supplemented with management’s judgment and business experience and expertise. Our economic capital requirementsmodel allows us to use consistent risk measurement across the Group and assess whether changing business strategies remain in line with Group’s objectives and risk tolerances.

The Group Executive Committee approves material strategic decisions and establishes and monitors boundaries in which the segments operate. The Executive Committee has dedicated annual strategic planning meetings which include a review of the risk-based regulatory regimesshort and long-term underwriting strategies and plans of each segment.

With respect to investment strategy, as part of the Strategic Asset Allocation (SAA) process, different asset strategies are simulated, allowing for an evaluation of the ‘best’ portfolio based on both our reward goals and risk constraints. The Finance Committee of the Board approves the overall SAA and reviews investments guidelines to ensure these are consistent with the Company’s overall goals, strategies and objectives. The Investment Committee, which we are subject.

comprises senior management, oversees the implementation of the investment strategy.

MANAGING INSURANCE RISKSUnderwriting Risk

Overview

Since our inception in 2001, we have expanded our international underwriting presence, with offices in Bermuda, the U.S., Europe, Singapore, Canada and Australia. Our disciplined underwriting approach coupled with an extensive group wide peer review process has enabled us to manage this growth in a controlled and consistent manner. This, coupled with our focus on maintaining high levels of experience in our underwriting teams, has ensured that our risk profile aligns closely with our defined risk appetite. We emphasize quality of underwriting rather than volume of business or market share.

A critical element of our management of insurance risk is our rigorous peer review process which allows us to monitor market conditions and aggregations risk-by-risk, at the highest levels within the Company. Underwriting is also conducted in accordance with other rigorous protocols, including underwriting guidelines which provide a framework for consistent pricing and risk analysis and ensuring alignment to our risk appetite. There are well defined escalation processes in place, which, for certain business, require approval by the Group CRO and/or RMC.

Another key component of our mitigation of insurance risk is the purchase of reinsurance. The business that we accept is not always fully retained; but instead portions may be reinsured. We have a centralized Reinsurance Purchasing Group, which coordinates our reinsurance purchasing as part of our overall risk management strategy.

We also have significant audit coverage across our underwriting segments, including Management Initiated Audits (“MIAs”). MIAs are audits of underwriting files performed by teams independent of those who originated the transactions, the purpose of which is to test the robustness of the Company’s underwriting and operating processes and to recognize any early indicators of future trends in our operational risk.

Modeling natural peril catastrophes

Natural peril catastrophic risk is our largest aggregate exposure. In managing this risk, we are concerned with both the loss of capital due to a single event and the loss of capital that would occur from multiple (but perhaps small events) in any year. Natural catastrophes such as earthquakes, storms and floods represent a challenge for risk management due to their accumulation potential and occurrence volatility.

We use multiple commercial vendor models to price and accumulate risks. These models cover the major peril regions where we face potential exposure. In our reinsurance segment, we have also developed an internal proprietary application which allows us to track the results from various models for both pricing and aggregation purposes. Modeling allows us to simulate many hypothetical loss scenarios to supplement our experienced underwriting judgment. We centrally oversee our modeling for consistency in approach and form a global perspective on our group-wide accumulations. We regularly refine our modeling methodology and have a governance process in place to review changes in vendor models.

We impose limits on natural peril catastrophe risk exposure at the group level. Based on our current tolerance, we are not willing to lose more than 25% of our prior year-end capitalcommon equity for a modeled single occurrence 1-in-250 year return period probable maximum net loss. We also impose these limits on probable maximum losses in any one zone from a single event. A zone is a geographical area in which insurance risks are considered to be correlated to a single catastrophe event. Our executive management receives regular reports on our group-wide total natural peril exposures by peril and territoryzone to ensure active monitoring of our risk positions.

The table below shows our net modeled loss exposuresestimates to the corresponding peak natural peril catastrophe territories.territories at January 1, 2011 and 2010. We have developed these loss estimates using vendormultiple commercially available catastrophe models and our own assessments for non vendornon-vendor modeled exposures. These estimates include assumptions regarding the location, size and magnitude of an event, the frequency of events, the construction type and damageability of propertya property’s susceptibility to damage in a zone, and the cost of rebuilding property in a zone.

(in millions of U.S. dollars)

 

Zone

    Perils    50 Year
Return
Period
    100 Year
Return
Period
    250 Year
Return
Period
 
  

U.S.

    Hurricane    $  692.9    $  958.5    $  1,292.3     

California

    Earthquake     391.4     671.7     968.0  

Europe

    Windstorm     432.9     679.4     945.5  

Japan

    Earthquake     234.5     325.6     595.9  

Japan

    Windstorm     91.1     137.0     150.8  
                         

The following table provides our estimateterritory. Loss estimates for non-U.S. territories will be subject to foreign exchange rates, although we may mitigate this currency variability from a financial statement point of industry losses for the corresponding scenarios above:

(in billions of U.S. dollars)

 

Zone

    Perils    50 Year
Return
Period
    100 Year
Return
Period
    250 Year
Return
Period
 

U.S.

    Hurricane    $  78.1    $  121.1    $  194.6     

California

    Earthquake     16.3     27.9     50.0  

Europe

    Windstorm     21.2     30.3     44.0  

Japan

    Earthquake     14.7     20.8     37.8  

Japan

    Windstorm     15.3     20.8     33.8  
                         

The returnview. Return period refers to the frequency with which losses of a given amount or greater are expected to occur.

At January 1,

(in millions of U.S. dollars)

  2011   2010 
Territory  Peril  50 Year
Return
Period
   100 Year
Return
Period
   250 Year
Return
Period
   50 Year
Return
Period
   100 Year
Return
Period
   250 Year
Return
Period
 
                

U.S.

  Hurricane  $ 796   $ 1,085   $ 1,459   $ 693   $ 959   $ 1,292 

California

  Earthquake   471    722    1,128    391    672    968 

Europe

  Windstorm   326    441    646    433    679    946 

Japan

  Earthquake   203    316    663    235    326    596 

Japan

  Windstorm   88    150    178    91    137    151 
                                  

The following table provides our estimate of industry exposures for the corresponding scenarios above:

At January 1,

(in billions of U.S. dollars)

  2011   2010 
Territory  Peril  50 Year
Return
Period
   100 Year
Return
Period
   250 Year
Return
Period
   50 Year
Return
Period
   100 Year
Return
Period
   250 Year
Return
Period
 
                

U.S.

  Hurricane  $ 83   $ 125   $ 204   $ 78   $ 121   $ 195 

California

  Earthquake   18    31    55    16    28    50 

Europe

  Windstorm   16    21    29    21    30    44 

Japan

  Earthquake   20    28    51    15    21    38 

Japan

  Windstorm   20    27    45    15    21    34 
                                  

The figures take into account the fact that an event may trigger claims in a number of lines of business. For instance, our U.S. hurricane modeling includes, among other things, the estimated pre-tax impact to our financial results arising from our catastrophe, property, engineering, energy, marine and aviation lines of business. As indicated in the table above, our modeled single occurrence 1-in-100 year return period U.S. hurricane probable maximum loss, net of reinsurance, is approximately $959 million$1.1 billion (or 17%19% of shareholders’ equity at December 31, 2009)2010). According to our modeling, there is a one percent chance that on an annual basis, our losses incurred in any single U.S. hurricane event could be in excess of $959 million.$1.1 billion. Conversely, there is a 99% chance that on an annual basis, the loss from a single U.S. hurricane will fall below $959 million.$1.1 billion. We estimate that, an event that gave rise to such hypothetical loss levels, at this return period, would cause industry losses of approximately $121$125 billion, resulting in an estimated market share of insured losses for us of 0.8%around 1%.

Our probable maximum loss to U.S. hurricane increased during 2010 primarily due to a reduction in the reinsurance protection we purchase within our insurance segment. The decrease in our European wind probable maximum loss during the year largely relates to changes in the vendor models we use.

Managing risks from man-made catastrophes

Similar to our management of natural peril catastrophe exposures, we also take a similar focused and analytical approach to our management of man-made catastrophes. Man-made catastrophes, which include such risks as train collisions, airplane crashes, hotel fires or terrorism, are harder to model in terms of assumptions regarding intensity and frequency. For these risks we couple the vendor models (where available) with our bespoke modeling and underwriting judgment and expertise. This allows us to take advantage of business opportunities relating to man-made catastrophe exposures particularly where we can measure and limit the risk sufficiently as well as obtain risk-adequate pricing.

As an example of our approach, our assessment of terrorism risk is based on a mixture of qualitative and quantitative data (e.g. for estimating property damage, business interruption, mortality and morbidity subsequent to an attack of a predefined magnitude), which we use to control, limit and manage our aggregate terrorism exposure. We use vendor modeling and bespoke modeling tools to measure accumulations around potential terrorism accumulation zones on a deterministic and probabilistic basis. We supplement the results of our modeling with underwriting judgment.

Managing reserving risk

Our prudentloss reserving process demands data quality and reliability and requires a quantitative and qualitative review of both our overall reserves and individual large claims. Within a structured control framework, real-time claims information is communicated on a regular basis throughout our organization, including to senior management, to provide an increased awareness regarding the losses that have taken place throughout the insurance markets. The detailed and analytical reserving approach that follows is designed to absorb and understand the latest information on our reported and unreported claims, to recognize the resultant exposure as quickly as possible, no matter how large, and above all else, to make appropriate and realistic provisions in our financial statements. We have well established policies for determining carried reserves, which we endeavor to apply consistently over time.

Reserving for long-tail lines of business, and in particular liability business represents the most significant reserving risk for us. When loss trends prove to be higher than those underlying our reserving assumptions, the risk is greater because of a stacking-up effect: for liabilitylong-tail business, we carry reserves to cover claims arising from several years of underwriting activity and these reserves are likely to be adversely affected by unfavorable loss trends. We manage and mitigate reserving risk on liabilitylong-tail business in a variety of ways. First, we limit the amount of liabilitylong-tail business we write in line with maintaining a well balanced and diversified global portfolio of business. In 2009,2010, our long-tail net premiums written on(namely liability businessand motor business) represented less than 20%15% of our consolidated total. We purchase extensive reinsurance on the liability business written in our insurance segment to reduce our net positions.

Additionally, our underwriters and actuaries Secondly, we follow a disciplined underwriting process that utilizes all available data and information, including industry trends. Our underwriting guidelines within eachWe also limit the amount of occurrence-based business stipulate detailed pricing information required from clients, including historical premium development, historical loss experience, targeted loss ratio and exposure rate information. Our underwriters and pricing actuaries supplement this with data purchased externally. In our reinsurance segment,that we also conduct an extensive program of cedant underwriting and claims audits which allow us to better inform our underwriting and reserving decisions. We employ contract wording specialists, who, along with our legal department and underwriters, are involved in contract wording reviews. These reviews help us clarify contract wording and reflect the understanding of our underwriters. These reviews are particularly important when new clauses or changes in clauses are proposed. We have established prudent reserving policies for determining carried reserves. These policies are systemic and we endeavor to apply them consistently over time.

write.

Managing claims handling risk

In accepting risk, we are committing to the payment of claims and therefore these risks must be understood and controlled. We have claims teams located throughout our main operating locations.underwriting segments. Our claim teams include a diverse group of experienced professionals, including claims adjusters and attorneys. We also use approved external service providers, such as independent adjusters and appraisers, surveyors, accountants, investigators and specialist attorneys, as appropriate.

We maintain claims handling guidelines and claims reporting control and escalation procedures in all our claims units. To ensure that claims are handled and reported in accordance with these guidelines, all large claims matters are reviewed during weekly claims meetings. The minutes from each meeting also are circulated to our underwriters, senior management and others involved in the reserving process. To maintain communication between underwriting and claims teams, claims personnel regularly report at underwriting meetings and frequently attend client meetings.

AXIS fosters a strong culture of review among its claims teams. This includes Management Initiated Audits, whereby senior claims handlers from other claims units audit a sample of claims files in other claims units. The process is designed to ensure consistency between the claims units and to develop group wide best practices.

When we receive notice of a claim, regardless of size, it is recorded within our underwriting and claims system. To assist with the reporting of significant claims, we have also developed a large claims information database, or LCID. The database is primarily used to produce “flash reports” for significant events and potential insurance or reinsurance losses, regardless of whether we have exposure. The system allows a direct notification to be promptly communicated to underwriters and senior management worldwide. Similarly, for natural peril catastrophes, we have developed a catastrophe database that allows for the gathering, blending and reporting of loss information as it develops from early modeled results to fully adjusted and paid losses.

MANAGING CREDIT RISKSCredit Risk

Credit risk represents the risk of incurring financial loss due to diminished creditworthiness (eroding credit rating and, ultimately, default) among our third party counterparties, related to, but not limited to, cash and cash equivalents, investments, premium receivables, unpaid reinsurance recoverable balances and derivatives. Additionally, we have credit risk exposure within our underwriting portfolios. Our most significant exposures to credit risk are discussed further below.

We monitor and control the aggregation of credit risk on a group-wide basis by assigning limits on maximum credit exposures by single obligors and groups, industry sector, country, region or other inter-dependencies. Limits are based on a variety of factors including the prevailing economic environment and the nature of the underlying credit exposures. The credit risk reporting process is supported by our Group Credit Risk Exposure Database, which contains relevant information on counterparty details and credit risk exposures. It is accessible by all key practitioners in the Group, thus providing essential transparency to allow for the implementation of active exposure management strategies. We also license third party databases to provide a real-time view of credit exposures.

Credit risk relating to our fixed maturities

With our fixed maturity investment portfolio, which represents approximately $10 billion or 63%64% of our total assets, we are exposed to potential losses arising from the diminished creditworthiness of issuers of bonds as well as third party counterparties such as custodians. We limit such credit risk through diversification, and issuer exposure limitation graded by ratings.

Specifically, we manage our credit exposure by limiting the purchase of fixed maturitiesratings and, with respect to investment grade securities. In addition, excludingcustodians, through contractual and other legal remedies. Excluding U.S. governmentTreasury and agencyAgency securities, we limit our concentration of credit risk to any single corporate issuer to 2% or less of our fixed maturities portfolio for securities rated A- or above and 1% or less of our fixed maturities portfolio for securities rated between BBB and BBB+.

below A-.

Credit risk relating to reinsurance recoverable assets

Within our reinsurance purchasing activities, we are exposed to the credit risk of a reinsurer failing to meet its obligations under our reinsurance contracts. To help mitigate this, all of our reinsurance purchasing is subject to financial security requirements specified by our Reinsurance Security Committee. This committee,Committee, comprising senior management personnel, maintains a list of approved reinsurers, performs credit risk assessments for existing and potential counterparties,new reinsurers, regularly monitors approved reinsurers with consideration for events which may have a material impact on their creditworthiness, recommends counterparty tolerance levels for different types of ceded business and monitors concentrations of credit risk. This assessment considers a wholewide range of individual attributes, including a thorough review of the counterparty’s financial strength, industry position and other qualitative factors.

We regularly monitor counterparty credit quality and exposures, with special monitoring of those cases that merit close attention. It is generally our Reinsurance Security Committee’s policy to require reinsurers which do not meet our counterparty security requirements to provide adequate collateral. We further mitigate credit risk by diversifying our exposure by counterparty. We also maintain a provision for uncollectible balances; see Item 7 ‘Critical Accounting Estimates - Reinsurance Recoverable’ for further information.

Credit risk relating to our underwriting portfolio

In our insurance segment, we provide credit insurance primarily for lenders (financial institutions) seeking to mitigate the risk of non-payment from their borrowers primarily in emerging markets. This product has complemented our more traditional political risk insurance business in recent years. For the credit insurance contracts, it is necessary for the buyer of the insurance, most often a bank, to hold an insured asset, most often an underlying loan, in order to claim compensation under the insurance contract. The vast majority of the credit insurance provided is for single-name illiquid risks, primarily in the form of senior secured bank loans that can be individually analyzed and underwritten. As part of this underwriting process, our rigorousan evaluation of credit-worthiness and reputation of the obligor is critical and forms the cornerstone of the underwriting process. We prefergenerally require that our clients retain a significant share of each transaction that we insure. A key element to our underwriting analysis is the assessment of recovery in the event of default and, accordingly, the strength of the collateral and the enforceability of rights to the collateral are paramount. We avoid insurance for structured finance products

defined by pools of risks and insurance for synthetic products that would expose us to mark-to-market losses. We also seek to avoid terms in our credit insurance contracts which introduce liquidity risk, most notably, in the form of a collateralization requirement upon a ratings downgrade. We also provide protection against sovereign default or sovereign actions that result in impairment of cross-border investments for banks and corporations. Our contracts generally include warranties, representations, exclusions and waiting periods. Under most of our policies, a loss payment is made in the event the debtor failed to pay our client when payment is due subject to a waiting period of up to 180 days.

In our reinsurance segment, we provide reinsurance of credit and bond insurers exposed to the risks of financial loss arising from non-payment of trade receivables covered by a policy (credit insurance) or non-performance (bonding). ThisOur credit exposure ininsurance exposures are concentrated primarily within Western European economies, while our reinsurance segment relatesbond exposures are concentrated primarily to exposures arising inwithin Latin American and Western economies, although in 2009 we also began writing surety business in the U.S. and Latin America.European economies. Our insureds are generally able to reduce or cancel limits under whole-turnover credit insurance at any time without prior notice. This enables our insureds to act quickly to specific distressed credits and therefore the potential loss exposures can be significantly reduced.

Credit risk aggregation

We monitor and control the aggregation of credit risk on a group-wide basis by assigning limits on maximum credit exposures by single obligors and groups, industry sector, country, region or other inter-dependencies. Limits are based on a variety of factors including the prevailing economic environment and the nature of the underlying credit exposures. The credit risk reporting process is supported by our Group Credit Risk Exposure Database, which contains relevant information on counterparty details and credit risk exposures. The database is accessible by management throughout the Group, thus providing essential transparency to allow for the implementation of active exposure management strategies. We also license third party databases to provide credit risk assessments.

Credit risk aggregation is also managed through minimizing overlaps in underwriting, financing and investing activities. For example, as per the investment guidelines (for fixed maturity investments), the Company is not permitted to invest in P&C companies and there are limitations on emerging market investments (due to emerging market exposure within the underwriting portfolios).

MANAGING INVESTMENT RISKSInvestment Risk

Investment risk encompasses the risk of loss in our investment portfolio as a result of market risks, as well as risks inherent in individual securities. Market risks represent the adverse impact on our cash and investments resulting from fluctuations in interest rates (inclusive of credit spreads), equity prices and foreign currency rates.

We manage the risks in our investment portfolio in a number of ways. To maintain diversification and avoid aggregation of risks, we place limits on asset class and individual security exposures. We monitor compliance with these limits on an ongoing basis. Further, except for the use of leverage within our investment in medium term notes, our investment policy and guidelines do not permit the use of leverage in any of our fixed maturity portfolios. We also manage the duration of our investment portfolio to approximate the anticipated duration of our re/insurance liabilities, so that changes in interest rates have approximately offsetting economic value impacts on our assets and liabilities.

Additionally, we manage foreign currency risk by seeking to match our estimated insurance and reinsurance liabilities payable in foreign currencies with assets, including cash and investments that are denominated in such currencies. When necessary, we may also use derivatives, such as forward contracts and currency options, to economically hedge portions of our un-matched foreign currency exposures.

We regularly stress test our investment portfolio using historical and hypothetical scenarios to analyze the impact of unusual market conditions and to ensure potential investment losses remain within our risk appetite.

MANAGING OPERATIONAL RISKSOperational Risk

Operational risk represents the risk of financial loss as a result of inadequate processes, system failures, human error or external events. Operational risks include for example, employee or third party fraud,We have specific processes and systems in place to focus continuously on high priority operational matters such as information security, managing business interruptions, inaccurate processing of transactions, IT failures, the loss of key employees without appropriate successorscontinuity, and non-compliance with reporting obligations.combating fraud. We maintain an operational loss-event database which helps us better monitor and analyze potential operational risk and identify any potential trends within the business.

We manage transaction type operational risks on a regular basis through the application of strong process controls throughout our business. In testing these controls, we supplement the work of our internal audit team, with regular management initiated audits (“MIAs”). These are audits completed within all of our business segments by teams independent of the professionals who originated the transactions under audit. The MIAs allow us to test the robustness of our underwriting and operating processes to ensure that we have early indicators for any future trends in our operational risk.claim MIAs (as described above).

For enterprise-wide risks, such as business continuity, IT and human capital, we continue to review ourA key risks, and focus our efforts accordingly. One such focustask is keeping our business continuity plans up-to-date, with an emphasis on recovery from unexpected events such as a natural catastrophe and possibility of a pandemic. During 2009,2010, we continued to review our Business Continuity Planning procedures through cyclical planned tests, all of which were completed satisfactorily.

With respect to IT risk, the dependency of our core processes on IT is rapidly increasing, with corresponding implications for risk. It is therefore important that we ensure the availability of applications and the integrity and security of critical data. During 2009,2010, we implemented additional levelsdata synchronization architecture across our multi-regional data centers to enhance the availability of back-up across our core processing systems, communication networks, and databases to mitigate the disruption to fundamental business processing.databases. We also expanded our usabilityintrusion prevention monitoring, anti-malware capability, email resilience, and security of remote application technologies (i.e., remote access, web applications), video conferencing,mobile devices, applications, and geographically dispersed data synchronization to meet the demands of a more mobileversatile and dispersed workforce.

Our use of third party vendors exposes us to a number of increased operational risks, including the risk of security breaches, fraud, non-compliance with laws and regulations or internal guidelines and inadequate service. We manage material third party vendor risk, by, among other things, performing a thorough risk assessment on potential large vendors, reviewing a vendor’s financial stability, ability to provide ongoing service, business continuity planning and its scalability (up or down). We also allocate appropriateIn 2010, we introduced the AXIS Global Outsourcing Policy to help ensure the consistent management of outsourcing arrangements across the Group.

Liquidity Risk

Liquidity risk is the risk that the Group does not have sufficient liquid financial resources to meet its obligations when they fall due, or would have to incur excessive costs to do so. Our policy is to maintain adequate liquidity and contingent liquidity to meet our liquidity needs under both normal and stressed conditions. To achieve this, we assess, monitor and manage our liquidity needs on an ongoing basis.

We maintain sufficient cash and cash equivalents to meet expected outflows. In addition, we maintain internal liquidity sources that cover the Group’s potential liquidity needs, including under stressed conditions. The Group takes into account the amount, permanence of availability and speed of accessibility of the sources. We centrally maintain committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and lines of credit.

As part of our liquidity risk management, we also place limits on the maximum percentage of cash and investments which may be in a restricted form as well as limits on the percentage of our investment portfolio that is not readily realizable.

For further information on our management of liquidity, refer to the ‘Liquidity and Capital Resources’ section of Item 7.

Capital Management

Our economic capital model plays a significant third party relationshipsrole in solvency management and providecapital allocation. Our aim is to ensure that the necessary oversight.AXIS Group is adequately capitalized at all times, even following significant adverse events, and that all operating entities meet their respective capital requirements. In addition, we employ a number of value-based metrics to support business decision making which explicitly recognizes risk capital and the cost of capital.

In managing our capital position, we also consider additional external requirements of regulators and rating agencies. While capital requirements imposed by regulators constitute a binding constraint, meeting rating agencies’ capital requirements forms a strategic business objective for us. Regulators and rating agencies impose minimum capital rules on the level of both the AXIS Group’s operating entities and on the AXIS Group as a whole.

Ensuring that our capital is sufficient to take advantage of market opportunities even in stressed market conditions is of key importance. One of our overarching objectives therefore is to ensure that we maintain “opportunistic” capital in excess of the greater of our Regulatory Capital, Aspiration Rating Agency Capital and Economic Capital requirements. The optimum level of opportunistic capital depends on a number of factors, including management’s view of the risks and opportunities arising from our business operations. Our capital and solvency position is monitored and reported on a regular basis.

We have a set of measures and tools available to us to manage capital within our defined constraints and tolerances. Such measures are used as and when required and include cash dividends, share buy-backs, issuances of shares or debt and purchase of reinsurance.

Economic capital adequacy

We use our proprietary economic capital model to determine a base economic capital requirement that captures the potential for severe, but rare, aggregate losses over a one-year time horizon. Although our economic capital requirement is based on extreme events, it can also be applied towards managing the risks resulting from reasonably possible smaller adverse events that could occur in the near-term, because the results allow us to analyze our exposure to each source of risk both separately and in aggregate. Our economic capital model is regularly updated to reflect changes in our business and the external environment.

Regulatory capital adequacy

In each country in which the Group operates, the local regulator specifies the minimum amount and type of capital that each of the regulated entities must hold in addition to their liabilities. The Group targets to hold, in addition to the minimum capital required to comply with the solvency requirements, an adequate buffer to ensure that each of its regulated subsidiaries meets the local capital requirements. Refer to Note 18 of the Consolidated Financial Statements, under Item 8 for further information.

Rating agency capital adequacy

Rating agencies apply their own models to evaluate the relationship between the required risk capital for a company or Group and its available capital resources. We maintain a continuous dialogue with rating agencies regarding the assessment of our capital adequacy. The financial strength ratings of the Group’s main operating entities are an important element of our competitive position. For further information on our financial strength refer to the ‘Liquidity and Capital Resources’ section in Item 7 of this report.

 

 

REGULATION

General

The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. In addition, many jurisdictions are currently evaluating changes to their regulation and AXIS is monitoring these potential developments. To the extent AXIS is aware of impending changes in regulation, we designate project teams to prepare the organization to comply on a timely basis with such anticipated changes. The following describes the current material regulations under which the Company operates.

Bermuda

As a holding company, AXIS Capital is not subject to Bermuda insurance regulations. Our operating subsidiary in Bermuda, AXIS Specialty Bermuda, is subject to the Insurance Act 1978 of Bermuda and related regulations, as amended (the “Insurance Act”). The Insurance Act provides that no person may carry on any insurance or reinsurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (“BMA”), under the Insurance Act. The Insurance Act imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements, and grants the BMA powers to supervise, investigate, require information and the production of documents and intervene in the affairs of insurance companies. Significant requirements include the appointment of an independent auditor, the appointment of a loss reserve specialist and the filing of the Annual Statutory Financial Return with the BMA.

In July 2008, the Insurance Amendment Act 2008 (the “Amendment Act”) was passed. Pursuant to the Amendment Act, a number of changes to the regulation of insurance business under the Insurance Act were implemented. The Amendment Act makes provision for the BMA to prescribe prudential standards in relation to enhanced capital requirements and capital and solvency returns that must be complied with by insurers and reinsurers. Insurers or reinsurers may adopt the Bermuda Solvency Capital Requirement (“BSCR”) or may seek approval from the BMA to utilize an internal model. The new requirements became effective for Class 4 companies, such as AXIS Specialty Bermuda, beginning with fiscal years ending on or after December 31, 2008.

AXIS Capital and AXIS Specialty Bermuda must comply with provisions of the Bermuda Companies Act 1981, as amended (the “Companies Act”), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

In August 2008, AXIS Specialty Bermuda established a Singapore Branch to transact insurance and reinsurance domestically and internationally. The branch is also regulated by the Monetary Authority of Singapore pursuant to The Insurance Act, is registered by the Accounting and Corporate Regulatory Authority (“ACRA”) as a foreign company in Singapore and regulated by ACRA pursuant to The Companies Act. Prior to establishing its Singapore branch, AXIS Specialty Bermuda had maintained a representative office in Singapore since 2004.

United States

U.S. Insurance Holding Company Regulation of AXIS Capital’s Insurance Subsidiaries

As members of an insurance holding company system, each of AXIS Capital’s U.S. insurer subsidiaries are subject to the insurance holding company system laws and regulations of the states in which they do business. These laws generally require each of the U.S. subsidiaries to register with its respective domestic state insurance department and to furnish financial and other information which may materially affect the operations, management or financial condition within the holding company system. All transactions within a holding company system must be fair and equitable. Notice to the insurance departments is required prior to the

consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system, and certain transactions may not be consummated without the department’s prior approval.

State Insurance Regulation

Our U.S. insurance subsidiaries also are subject to regulation and supervision by their respective states of domicile and by other jurisdictions in which they do business. The regulations generally are derived from statutes that delegate regulatory and supervisory powers to an insurance official. The regulatory framework varies from state to state, but generally relates to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital standards, material transactions between an insurer and its affiliates, the licensing of insurers, agents and brokers, restrictions on insurance policy terminations, the nature of and limitations on the amount of certain investments, limitations on the net amount of insurance of a single risk compared to the insurer’s surplus, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the financial condition and market conduct of insurance companies, the form and content of reports of financial condition required to be filed, and reserves for unearned premiums, losses, expenses and other obligations.

Our U.S. insurance subsidiaries are required to file detailed quarterly statutory financial statements with state insurance regulators in each of the states in which they conduct business. In addition, the U.S. insurance subsidiaries’ operations and accounts are subject to financial condition and market conduct examination at regular intervals by state regulators.

Regulators and rating agencies use statutory surplus as a measure to assess our U.S. subsidiaries’ ability to support business operations and pay dividends. Our U.S. insurance subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends that may be paid from earned surplus without prior approval from regulatory authorities. These restrictions differ by state, but generally are based on calculations using statutory surplus, statutory net income and investment income. In addition, many state regulators use the National Association of Insurance Commissioners promulgated risk-based capital requirements as a means of identifying insurance companies which may be undercapitalized.

Although the insurance industry generally is not directly regulated by the federal government, federal legislation and initiatives can affect the industry and our business. In November 2002,On July 21, 2010, the Terrorism Risk Insurance Act, (“TRIA”), was enacted. TRIA, amendedDodd-Frank Wall Street Reform and restated in 2005, established a temporary federal program that requires the U.S. and other insurers writing specified commercial property and casualty insurance policies in the U.S. to make available in some policies coverage for losses resulting from terrorists’ acts committed by foreign persons or interests in the U.S. or with respect to specified U.S. air carriers, vessels or missions abroad. In December 2007, the Terrorism Risk Insurance Revision and ExtensionConsumer Protection Act of 20072010 (“Dodd-Frank”) was enacted, which extendedsigned into law. Certain sections of that act pertain to the regulation and business of insurance. Specifically, the Federal Insurance Office was created (“FIO”).Initially the FIO will have limited authority and mainly collect information and report on the business of insurance to Congress. In addition, Dodd-Frank contained the Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”). NRRA attempts to coordinate the payment of surplus lines taxes, simplify the granting of alien insurers to become surplus lines authorized and coordinates the credit for certain reinsurance. Various sections of Dodd-Frank become effective over time and regulations have yet to be drafted for certain provisions. AXIS does not anticipate that Dodd-Frank will have any material provisions of TRIA for an additional seven years and expanded coverageeffect on its operations or finances this year, but AXIS will continue to include domestic acts of terrorism.

monitor its implementation.

Operations of AXIS Specialty Bermuda, AXIS Re Ltd., AXIS Re Europe, AXIS Specialty Europe, AXIS Specialty London and AXIS Specialty LondonAustralia

The insurance laws of each state of the United States and of many other countries regulate or prohibit the sale of insurance and reinsurance within their jurisdictions by insurers and reinsurers that are not admitted to do business within such jurisdictions, or conduct business pursuant to exemptions. AXIS Specialty Europe is eligible to write surplus lines business in 48 of the United States and the District of Columbia and has applied for authorization to write surplus lines business in Puerto Rico. AXIS Specialty Bermuda and AXIS Re Ltd. (including its branch AXIS Re Europe) are not licensed or eligible to write business in the United States. AXIS Specialty Bermuda, AXIS Specialty Europe and AXIS Re Ltd. do not maintain offices, solicit, advertise, underwrite, settle claims or conduct any insurance activities in any jurisdiction in the United States where the conduct of such activities would require these companies to be admitted or authorized.

In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the U.S. governing “credit for reinsurance” that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which are that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. Neither AXIS Specialty Bermuda, AXIS Specialty Europe nor AXIS Re Ltd. are licensed, accredited or approved in any state in the U.S. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited.

Our European legal entities will be subject to Solvency II regulation when the Directivedirective is implemented in Ireland in 2012.2013. Solvency II is a risk based capital regime that consolidates and modernizes European insurance and reinsurance regulation and supervision. Under Solvency II, European insurers and reinsurers will calculate capital in accordance with a new standard formula or approved internal model, implement a risk management framework and governance measures and fulfill enhanced disclosure requirements.

AXIS Reinsurance Company (Canadian Branch)

In September 2008, AXIS Reinsurance Company established a branch in Ontario, Canada (AXIS Reinsurance Company (Canadian Branch)). The branch was authorized by The Office of the Superintendent of Financial Institutions Canada (“OSFI”) to transact insurance and reinsurance. OSFI is the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.

Ireland

AXIS Specialty Europe

AXIS Specialty Europe is a non-life insurance limited liability company incorporated under the laws of Ireland and is authorized and regulated by the Irish Financial Services Regulatory AuthorityCentral Bank of Ireland (“IFR”CBI”) pursuant to the Insurance Acts 1909 to 2000, as amended, statutory instruments and the Central Bank and Financial Services Authority of Ireland Acts 2003 and 2004,1942 – 2010, as well as regulations relating to general insurance. AXIS Specialty Europe is authorized to conduct business in 1416 non-life insurance classes of business.

Ireland is a member of the European Economic Area, (“EEA”), which comprises each of the countries of the European Union, (“EU”), and Iceland, Lichtenstein and Norway. Ireland transposed the EU’s Third Non-Life Insurance Directive into Irish law. This directive introduced a single system for the authorization and financial supervision of non-life insurance companies by their home state. Under this system, AXIS Specialty Europe is permitted to provide insurance services to clients located in any other EEA member state (“Freedom of Services”), provided it has notified the IFRCBI and subject to compliance with any “general good” as may be established by other EEA member state regulator. AXIS Specialty Europe has notified the IFRCBI of its intention to provide insurance services from Ireland and the United Kingdom on a Freedom of Services basis in all 29 EEA countries.

The Third Non-Life Directive also permits AXIS Specialty Europe to carry on insurance business in any other EEA member state under the principleprincipal of “Freedom of Establishment.” In May 2003, AXIS Specialty Europe established a UK branch known as AXIS Specialty London. IFRCBI remains responsible for the prudential supervision of the UK branch, however, AXIS Specialty London must also comply with the “general good” requirements of the Financial Services Authority of the United Kingdom.

In July 2008, AXIS Specialty Europe established AXIS Specialty Australia, a branch office in Australia to transact general insurance business. The IFRCBI continues to be the responsible supervisory authority, however, the Australia Prudential Regulation Authority is also responsible for prudential supervision of the branch. AXIS Specialty Europe is also registered with the Australia Securities Investment Commission in accordance with Australia’s Corporations Act 2001, as amended.

AXIS Re Ltd.

AXIS Re Ltd. is a reinsurance limited liability company incorporated under the laws of Ireland. AXIS Re Ltd. is authorized by the IFRCBI as a composite reinsurer (non-life and life) in accordance with the European Communities (Reinsurance) Regulations 2006 (the “Regulations”). The Regulations, as amended, provide a comprehensive framework for the authorization and supervision of reinsurers in Ireland.

The EU Reinsurance Directive provides that the authorization and supervision of European reinsurers is the responsibility of the EU member where the head office of the relevant reinsurer is located. Once authorized in its home state, a reinsurer is automatically entitled to conduct reinsurance business in all EEA member states under the principles of Freedom of Establishment and Freedom of Services, similar to the system that applies to EU based insurers. The Reinsurance Directive provides that the financial and prudential supervision of a reinsurer, including that of the business it carries on in other countries, either through branches or Freedom of Services, is the sole responsibility of the home state. Significant reinsurance regulation includes the Irish Financial Regulator’sCBI’s Corporate Governance for Reinsurance Undertakings guidance, Fit and Proper requirements and Investment Policy guidance.

In September 2003, AXIS Re Ltd. established a branch in Zurich, Switzerland, known as AXIS Re Europe. The Swiss Financial Regulator does not impose additional regulation upon a branch of an authorized reinsurer.

During 2009, AXIS Re Ltd. obtained regulatory permissions to reinsure companies in Argentina, Brazil, Chile, Columbia, Dominican Republic, Ecuador, Guatemala and Mexico.

AXIS Specialty Holdings Ireland Ltd.

AXIS Specialty Holdings Ireland Ltd. is the holding company for AXIS Specialty Europe Ltd and AXIS Re Ltd. As a holding company of EU regulated insurance and reinsurance companies, AXIS Specialty Holdings Ireland Ltd. is subject to the IFR’sCBI’s Fit and Proper and solvency requirements.

AXIS Specialty Global Holdings Limited

AXIS Specialty Global Holdings Limited is an intermediate holding company for the AXIS U.S. insurance and reinsurance companies. It is not subject to insurance regulation.

United Kingdom

Under the law of England and Wales, a company may only transact insurance and/or reinsurance business in the United Kingdom upon authorization. AXIS Specialty Bermuda and the U.S. insurance and reinsurance subsidiaries are not authorized to transact insurance and/or reinsurance business in the United Kingdom. AXIS Re Ltd. is authorized to conduct business in the United Kingdom pursuant to the reinsurance directive, and AXIS Specialty Europe is authorized to conduct business in the U.K. on a freedom of services basis pursuant to the 3rd non-life directive and on a freedom of establishment basis through its branch, AXIS Specialty London.

Switzerland

AXIS Re Ltd. conducts reinsurance business from its branch in Zurich, Switzerland, subject to the supervision of the IFR.CBI. AXIS Specialty Europe, AXIS Specialty Bermuda and the U.S. insurance and reinsurance subsidiaries are not authorized to conduct insurance or reinsurance business in Switzerland.

Singapore

AXIS Specialty Bermuda conducts insurance and reinsurance business from its branch in Singapore, subject to the supervision of the BMA and Monetary Authority of Singapore. AXIS Specialty Europe, AXIS Re Ltd., and the U.S. insurance and reinsurance subsidiaries are not authorized to conduct insurance or reinsurance business in Singapore.

Canada

AXIS Reinsurance Company conducts insurance and reinsurance business from its branch in Canada, subject to the supervision of the New York Department of Insurance and Thethe OSFI Canada. AXIS Specialty Europe, AXIS Re Ltd., AXIS Specialty Bermuda and the U.S. other insurance subsidiaries are not otherwise authorized to conduct insurance or reinsurance business in Canada.

Australia

AXIS Specialty Europe conducts insurance business from its branch in Australia, subject to the supervision of the Irish Financial RegulatorCBI and the Australian Prudential Regulatory Authority. AXIS Specialty Bermuda, AXIS Re Ltd. and the U.S. insurance and reinsurance subsidiaries are not authorized to conduct insurance or reinsurance business in Australia.

Other Countries

The AXIS insurance and reinsurance companies also insure and reinsure risks in many countries in accordance with regulatory permissions and exemptions available to non-admitted insurers and reinsurers.

 

 

EMPLOYEES

As of February 12, 20108, 2011 we had 882approximately 1,000 employees. We believe that our employee relations are excellent. None of our employees are subject to a collective bargaining agreement.

 

 

AVAILABLE INFORMATION

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and therefore file periodic reports, proxy statements and other information, including reports filed by officers and directors under Section 16(a) of the Exchange Act, with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE. Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (such as us) and the address of that site is(http://www.sec.gov). Our common shares are traded on the NYSE with the symbol “AXS” and you can review similar information concerning us at the office of the NYSE at 20 Broad Street, New York, New York, 10005. Our Internet website address ishttp://www.axiscapital.com. Information contained in our website is not part of this report.

We make available free of charge, including through our internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Current copies of the charter for each of our Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee, Finance Committee, Executive Committee and Risk Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct, are available on our internet website at http:www.axiscapital.com.

 

 

ITEM 1A: RISK FACTORS

ITEM 1A:RISK FACTORS

 

 

You should carefully consider the following risks and all of the other information set forth in this report, including our consolidated financial statements and the notes thereto:

Our results of operations and financial condition could be materially adversely affected by the occurrence of natural and man-made disasters.

We have substantial exposure to unexpected losses resulting from natural disasters, man-made catastrophes and other catastrophiccatastrophe events. Catastrophes can be caused by various events, including hurricanes, typhoons, earthquakes, hailstorms, explosions, severe winter weather, fires, and other natural or man-made disasters. The incidence and severity of catastrophes are inherently unpredictable and our losses from catastrophes could be substantial.

Increases in the values and concentrations of insured property may increase the severity of these occurrences in the future. Also, changes in global climate conditions may further increase the frequency and severity of catastrophe activity and losses in the future. As an exampleexamples of the impact of catastrophe events, in 2010 we recognized net losses and loss expenses of $256 million as a result of the Chilean and New Zealand earthquakes and in 2008 we incurred netrecognized $408 million of losses onand loss expenses in relation to Hurricanes Ike and Gustav of $408 million, whichGustav. These events materially reduced our net income for that year.those years. Although we attempt to manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophiccatastrophe events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophe events could have a material adverse effect on our results of operations or financial condition.

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.

In recent years, we have experienced a softening market cycle throughout many of our property and liability lines of business, with increased competition, surplus underwriting capacity and deteriorating rates, terms and conditions all having an impact on our ability to write business.

Our investment portfolio is exposed to significant capital markets risk related to changes in interest rates, credit spreads and equity prices as well as other investment risks, which may adversely affect our results of operations, financial condition or cash flows.

The performance of our cash and investments portfolio has a significant impact on our financial results. A failure to successfully execute our investment strategy could have a significant impact on our results of operations or financial condition.

Our investment portfolio is subject to a variety of market risks, including risks relating to general economic conditions, interest rate fluctuations, equity price risk, foreign currency movements, pre-payment or reinvestment risk, liquidity risk and credit risk. Although we attempt to manage market risks through, among other things, stressing diversification and conservation of principal and liquidity in our investment guidelines, it is possible that, in periods of economic weakness or periods of turmoil in capital markets, we may experience significant losses in our portfolio.

Our fixed maturities, which represent 91% of our total investments at December 31, 2010, may be adversely impacted by changes in interest rates. Increases in interest rates could cause the fair value of our investment portfolio to decrease, resulting in a lower book value. Conversely, a declining interest rate environment, such as that noted in recent periods, can result in reductions in our investment yield as new funds and proceeds from maturing fixed maturity securities are invested at lower rates. This reduces our overall profitability. Interest rates are highly sensitive to many factors, including governmental monetary policies, inflation, domestic and international economic and political conditions and other factors beyond our control. Our fixed maturities may also be adversely impacted by fluctuations in credit spreads. A credit spread is the difference between the yield on the fixed maturity security of a particular borrower (or a class of borrowers with a specified credit rating) and the yield of a fixed maturity U.S. Treasury security of similar maturity. Accordingly, as credit spreads widen, the fair value of a non-U.S. Treasury fixed maturity security will underperform a U.S. Treasury security of similar maturity.

Given our reliance on external investment managers, we are also exposed to operational risks, which may include, but are not limited to, a failure to follow our investment guidelines, technological and staffing deficiencies and inadequate disaster recovery plans.

The persistence of the recent financial crisis or recurrence of a similar crisis could materially and adversely affect our business and financial condition.

WorldwideIn recent years, worldwide financial markets recently experienced unprecedented volatility and disruption including, among other things, dislocation in the mortgage and asset-backed securities markets, deleveraging and decreased liquidity generally, widening of credit spreads, bankruptcies and government intervention in a number of large financial institutions. These events resulted in extraordinary responses by governments worldwide, including the enactment of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act in 2009 in the U.S. This market turmoil has affected (among other aspects of our business) the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance. WhileAlthough there have been some indicators of stabilization in the financial markets have stabilized in recent months,during 2010, there continues to be significant uncertainty regarding the timeline for a full global economic recovery. As such, evolving market conditions may continue to affect our results of operations, financial position and capital resources. In the event that a similar market disruption recurs,there is further deterioration or volatility in financial markets or general economic conditions, it could result in a prolonged economic downturn or recession and our results of operations, financial position and/or liquidity, and competitive landscape could be materially and adversely affected.

We could face unanticipated losses from war, terrorism and political unrest, and these or other unanticipated losses could have a material adverse effect on our financial condition, and results of operations.operations and/or liquidity.

We have substantial exposure to unexpected losses resulting from war, acts of terrorism and political instability. In certain instances, we specifically insure and reinsure risks resulting from acts of terrorism. Even in cases where we attempt to exclude losses from terrorism and certain other similar risks from some coverages written by us, there can be no assurance that a court or arbitration panel will interpret policy language or otherwise issue a ruling favorable to us. Accordingly, we can offer no assurance that our reserves will be adequate to cover losses should they materialize.

We have limited terrorism coverage in our own reinsurance program for our exposure to catastrophe losses related to acts of terrorism. Furthermore, although the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) provides benefits in the event of certain acts of terrorism, those benefits are subject to a deductible and to other limitations. Under TRIEA, once our losses attributable to certain acts of terrorism exceed 20% of our direct commercial property and liability insurance premiums for the preceding calendar year, the federal government will reimburse us for 85% of such losses in excess of this deductible. Notably, TRIEA does not provide coverage for reinsurance losses or for losses involving nuclear, biological, chemical or radiological events. Given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in our own reinsurance program, future losses from acts of terrorism, particularly those in our reinsurance segment or those involving nuclear, biological, chemical or radiological events, could materially and adversely affect our results of operations, financial condition and/or liquidity in future periods. TRIEA may not be extended beyond 2014.

Our credit and political risk insurance line of business protects insureds with interests in foreign jurisdictions in the event governmental action prevents them from exercising their contractual rights and may also protect their assets against physical damage perils. This may include risks arising from expropriation, forced abandonment, license cancellation, trade embargo, contract frustration, non-payment, war on land or political violence (including terrorism, revolution, insurrection and civil unrest). Political risk insurance is typically provided to financial institutions, equity investors, exporters, importers, export credit agencies and multilateral agencies in an array of industries, in connection with investments and contracts in both emerging markets and developed countries.

Our credit and political risk line of business also protects insureds in foreign jurisdictions against non-payment coverage on specific loan obligations as a result of commercial as well as political risk events. The vast majority of the credit insurance provided is for single-named illiquid risks, primarily in the form of secured bank loans that can be individually analyzed and written. We avoid insurance for structured finance products defined by pools of risks and insurance for synthetic products that would expose us to mark-to-market losses. We also avoid terms in our credit insurance contracts which introduce liquidity risk, most notably, in the form of a collateralization requirement upon a ratings downgrade. Although we also attempt to manage our exposure, by among other things, setting credit limits by country, region, industry and individual counterparty and regularly reviewing our aggregate exposures, the occurrence of one or more large losses on our credit insurance portfolio could have a material adverse effect on our results of operations or financial condition.

If actual claims exceed our loss reserves, our financial results could be adversely affected.

While we believe that our loss reserves at December 31, 20092010 are adequate, new information, events or circumstances, unknown at the original valuation date, may lead to future developments in our ultimate losses being significantly greater or less than the reserves currently provided. The actual final cost of settling claims outstanding at December 31, 20092010 as well as claims expected to arise from the 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 to, changes in claim severity, changes in the expected level of reported claims, judicial action changing the scope and/or liability of coverage, changes in the legislative, regulatory, social and economic environment and unexpected changes in loss inflation.

The uncertaintyinherent potential volatility in oura loss reserve estimate is particularly pronounced for a company like ours that has a limited operating history and, therefore, relies more uponplaces reliance on industry benchmarks. To reduce some of the uncertainty, management performs an analysis of additional factors to be considered whenWhen establishing our IBNR, intended to enhance oursingle point best estimate beyond quantitative techniques. Atof loss reserves at December 31, 2009, we recorded additional IBNR for uncertainties relating2010, our management applied informed judgment to consider many qualitative factors that may not have been fully captured in actuarial estimates. Such factors included, but were not limited to: the timing of the emergence of claims. Although time lags are incorporated within the actuarial methods discussed above, these rely on 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 vastclaims, volume and diverse expanse of our worldwide exposures, may limit the usefulnesscomplexity of claims, experiencesocial and judicial trends, potential severity of other insurersindividual claims and reinsurers for similar typesthe extent of business.internal historical loss data versus industry information due to our relatively short operating history.

Changes to our previous estimate of prior year loss reserves can adversely impact the reported calendar year underwriting results by worsening our reported results if reserves prove to be deficient or improvingfavorably impact our reported results if reserves prove to be redundant. If our net income is insufficient to absorb a required increase in our loss reserves, we would incur an operating loss and could incur a reduction of our capital.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social, political and other environmental conditions change, unexpected issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims, such as the effects that recent disruptions in the credit markets could have on the number and size of reported claims under directors and officers and professional liability insurance lines of business. In some instances, these changes may not become apparent until some time after we have issued the insurance or reinsurance contracts that are affected by the changes. In addition, our actual losses may vary materially from our current estimate of the loss based on a number of factors (see above). As a result, the full extent of liability under an insurance or reinsurance contract may not be known for many years after such contract is issued and a loss occurs.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our results of operations or financial condition.

We seek to mitigate our loss exposure by writing a number of our insurance and reinsurance contracts on an excess of loss basis. Excess of loss insurance and reinsurance indemnifies the insured against losses in excess of a specified amount. We generally limit the program size for each client on our insurance business and purchase reinsurance for many of our lines of business. In the case of proportional reinsurance treaties, we seek per occurrence limitations or loss and loss expense ratio caps to limit the impact of losses from any one event. In proportional reinsurance, the reinsurer shares a proportional part of the premiums and losses of the reinsured. We also seek to limit our loss exposure by geographic diversification. Geographic zone limitations involve significant underwriting judgments, including the determination of the area of the zones and the inclusion of a particular policy within a particular zone’s limits. In addition, various provisions of our policies, such as limitations or exclusions from coverage or choice of forum negotiated to limit our risks may not be enforceable in the manner

we intend. We cannot be sure that any of these loss limitation methods will be effective and mitigate our loss exposure. As a result of these risks, one or more catastrophiccatastrophe or other events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our results of operations or financial condition.

We utilize models to estimate our exposures to catastrophe events but there may be substantial differences between the model estimates and our actual experience.

Catastrophe modeling utilizes a mix of historical data, scientific theory and mathematical methods. We believe that there is considerable uncertainty in the data and parameter inputs for the insurance industry catastrophe models. In that regard, there is no universal standard in the preparation of insured data for use in the models and the running of modeling software. In our view, the accuracy of the models depends heavily on the availability of detailed insured loss data from actual recent large catastrophes. Due to the limited number of events, there is significant potential for substantial differences between the modeled loss estimate and actual company experience for a single large catastrophe event. This potential difference could be even greater for perils with less modeled annual frequency, such as U.S. earthquake, or less modeled annual severity, such as European windstorm. We are also reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between our loss and that of the industry following a catastrophe event. In addition, actual losses may increase if our reinsurers fail to meet their obligations to us or the reinsurance protection we purchase is exhausted or otherwise unavailable.

The risk associated with reinsurance underwriting could adversely affect us.

In our reinsurance business, we do not always separately evaluate each of the individual risks assumed under reinsurance treaties. This is common among reinsurers. Therefore, we are largely dependent on the original underwriting decisions made by insurers that reinsure their liabilities, or ceding companies. We are subject to the risk that the ceding companies may not have adequately evaluated the risks to be reinsured and that the premiums ceded may not adequately compensate us for the risks we assume.

We could be materially adversely affected to the extent that managing general agents, general agents and other producers in our program business exceed their underwriting authorities or otherwise breach obligations owed to us.

In program business conducted by our insurance segment, following our underwriting, financial, claims and information technology due diligence reviews, we authorize managing general agents, general agents and other producers to write business on our behalf within underwriting authorities prescribed by us. Once a program commences, we must rely on the underwriting controls of these agents to write business within the underwriting authorities provided by us. Although we monitor our programs on an ongoing basis, our monitoring efforts may not be adequate or our agents may exceed their underwriting authorities or otherwise breach obligations owed to us. To the extent that our agents exceed their authorities or otherwise breach obligations owed to us in the future, our results of operations and financial condition could be materially adversely affected.

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.

There is no guarantee our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future. In addition to capacity risk, the remaining capacity may not be on terms we deem appropriate or acceptable or with companies with whom we want to do business. Finally, we face counterparty risk whenever we purchase reinsurance or retrocessional reinsurance. Consequently, the insolvency, inability or unwillingness of any of our present or future reinsurers to make timely payments to us under the terms of our reinsurance or retrocessional agreements could have an adverse effect on us.

If we experience difficulties with technology and/or data security our ability to conduct our business might be negatively impacted.

While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. Our business is dependent upon our employees’ and outsourcers’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as processing policies and paying claims. A shutdown of, or inability to access one or more of our facilities, a power outage, or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Computer viruses, hackers and other external hazards including catastrophiccatastrophe events could expose our data systems to security breaches. These risks could expose us to data loss and damages. As a result, our ability to conduct our business might be adversely affected.

We outsource certain technology and business process functions to third parties and may do so increasingly in the future. If we do not effectively develop and implement our outsourcing strategy, third party providers do not perform as anticipated or we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business. Our outsourcing of certain technology and business process functions to third parties may expose us to enhanced risk related to data security, which could result in monetary and reputational damages. In addition, our ability to receive services from third party providers might be impacted by cultural differences, political instability, unanticipated regulatory requirements or policies. As a result, our ability to conduct our business might be adversely affected.

Our investment portfolio is exposed to significant capital markets risk related to changes in interest rates, credit spreads and equity prices as well as other investment risks, which may adversely affect our results of operations, financial condition or cash flows.

The performance of our cash and investments portfolio has a significant impact on our financial results. A failure to successfully execute our investment strategy could have a significant impact on our results of operations or financial condition.

Our investment portfolio is subject to a variety of market risks, including risks relating to general economic conditions, interest rate fluctuations, equity price risk, foreign currency movements, pre-payment or reinvestment risk, liquidity risk and credit risk. Although we attempt to manage market risks through, among other things, stressing diversification and conservation of principal and liquidity in our investment guidelines, it is possible that, in periods of economic weakness or periods of turmoil in capital markets, we may experience significant losses in our portfolio.

Our fixed maturities, which represent 91% of our total investments at December 31, 2009, may be adversely impacted by changes in interest rates. Increases in interest rates could cause the fair value of our investment portfolio to decrease, resulting in a lower book value. Conversely, a decline in interest rates could reduce our investment yield, which would reduce our overall profitability. Interest rates are highly sensitive to many factors, including governmental monetary policies, inflation, domestic and international economic and political conditions and other factors beyond our control. Our fixed maturities may also be adversely impacted by fluctuations in credit spreads. A credit spread is the difference between the yield on the fixed maturity security of a particular borrower (or a class of borrowers with a specified credit rating) and the yield of a fixed maturity U.S. Treasury security of similar maturity. Accordingly, as credit spreads widen the fair value of our non-U.S. Treasury fixed maturity security will underperform a U.S. Treasury security of similar maturity.

As part of our diversification strategy, 7% of our investment portfolio is invested in equities and other investments. Other investments consist primarily of hedge funds, credit funds, the equity tranches of collateralized loan obligations and a short duration high yield fund.

Given our reliance on external investment managers, we are also exposed to operational risks, which may include, but are not limited to, a failure to follow our investment guidelines, technological and staffing deficiencies and inadequate disaster recovery plans.

Our operating results may be adversely affected by currency fluctuations.

Our reporting currency is the U.S. dollar.Dollar. However, a portion of our gross premiums are written in currencies other than the U.S. dollar.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. Although we attempt to manage our foreign currency exposure through matching of our major foreign denominated assets and liabilities, as well as through use of currency derivatives, there is no guarantee that we will successfully mitigate our exposure to foreign exchange losses.

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 catastrophiccatastrophe events and our ability to establish premium rates and reserves at levels sufficient to cover losses. We may need to raise additional funds through financings. If we are unable to do so, it may 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, our business, operating results and financial condition could be adversely affected.

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

Neither AXIS Specialty Bermuda nor AXIS Re Ltd. is licensed or admitted as an insurer or reinsurer in any jurisdiction other than Bermuda, Ireland and Singapore. Because the U.S. and some other jurisdictions do not permit insurance companies to take credit on their statutory financial statements for reinsurance obtained from unlicensed or non-admitted insurers unless appropriate security mechanisms are in place, our reinsurance clients in these jurisdictions typically require AXIS Specialty Bermuda and AXIS Re Ltd. to provide letters of credit or other collateral. Our credit facility isfacilities are used to post letters of credit. However, if our credit facility isfacilities are not sufficient or if we are unable to renew our credit facility on commercially affordable terms when it expires on August 25, 2010,facilities or if we are unable to arrange for other types of security on commercially affordable terms, AXIS Specialty Bermuda and AXIS Re Ltd. could be limited in their ability to write business for some of our clients.

A downgrade in our financial strength or credit ratings by one or more rating agencies could materially and negatively impact our business, financial condition, results of operations and/or liquidity.

As our ability to underwrite business is dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies, a downgrade, withdrawal or negative watch/outlook by any of these institutions could cause our competitive position in the insurance and reinsurance industry to suffer and make it more difficult for us to market our products. If we experience a credit rating downgrade, withdrawal or negative watch/outlook in the future, we could incur higher borrowing costs and may have more limited means to access capital. A downgrade, withdrawal or negative watch/outlook could also result in a substantial loss of business for us as ceding companies and brokers that place such business may move to other insurers and reinsurers with higher credit ratings.

Since we depend on a few brokers for a large portion of our revenues, loss of business provided by any one of them could adversely affect us.

We market our insurance and reinsurance worldwide primarily through insurance and reinsurance brokers and derive a significant portion of our business from a limited number of brokers. MMC (Marsh & McLennan Companies, Inc.), including its subsidiary Guy Carpenter & Company, Inc., Aon Corporation and Willis Group Holdings Ltd., provided a total of 64%62% of our gross premiums written during 2009.2010. Our relationships with these brokers are based on the quality of our underwriting and claim services, as well as our financial strength ratings. Any deterioration in these factors could result in the brokers advising our clients to place their business with other insurers/reinsurers. In addition, these brokers also have, or may in the future acquire, ownership interests in insurance and reinsurance companies that may compete with us and these brokers may favor their own insurers/reinsurers over other companies. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.

Our reliance on brokers subjects us to their credit risk.

In accordance with industry practice, we pay amounts owed on claims under our insurance and reinsurance contracts to brokers, and these brokers pay these amounts over to the clients that have purchased insurance or reinsurance from us. Although the law is unsettled and depends upon the facts and circumstances of the particular case, in some jurisdictions, if a broker fails to make such a payment, we might remain liable to the insured or ceding insurer for the deficiency.

Conversely, in certain jurisdictions, when the insured or ceding insurer pays premiums for these policies to brokers for payment over to us, these premiums might be considered to have been paid and the insured or ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received the premiums from the broker. Consequently, we assume a degree of credit risk associated with brokers with whom we transact business. These risks are heightened during financial instability or an economic downturn or recession.

Certain of our policyholders and intermediaries may not pay premiums owed to us due to bankruptcy or other reasons.

Bankruptcy, liquidity problems, distressed financial condition or the general effects of economic recession may increase the risk that policyholders or intermediaries, such as insurance brokers, may not pay a part of or the full amount of premiums owed to us, despite an obligation to do so. The terms of our contracts may not permit us to cancel our insurance even though we have not received payment. If non-payment becomes widespread, whether as a result of bankruptcy, lack of liquidity, adverse economic conditions, operational failure or otherwise, it could have a material adverse impact on our revenues and results of operations.

Changes in current accounting practices and future pronouncements may materially impact our reported financial results.

Unanticipated developmentsDevelopments in accounting practices may require us to incur considerable additional expenses to comply with such developments, particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, net equity and other relevant financial statement line items. In particular, recentthe U.S. Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) have been working jointly on an insurance contract project, resulting in the issuance of an Exposure Draft by the IASB in June 2010 and a Discussion Paper by the FASB in September 2010. The proposed guidance on accounting for and ongoing projects putreporting of insurance contracts by these two Boards would result in place by standard setters globally have indicated a possible move awaymaterial change from the current insurance accounting models toward more fair value-based models. Additionally, each Board recently issued Exposure Drafts for the accounting for and reporting of financial instruments, which may lead to further recognition of fair value based models whichchanges through net income. These two proposals could introduce significant volatility in the earnings of insurance industry participants. There is considerable uncertainty with respect to the final outcome of these two proposed standards.

We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel.

Our success depends on our ability to retain the services of our existing key executives and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. We do not maintain key man life insurance policies with respect to our employees, except for our Chief Executive Officer and President, John R. Charman. There can be no assurance that we will be successful in identifying, hiring or retaining successors on terms acceptable to us or on any terms.

Under Bermuda law, non-Bermudians, with some limited exceptions, may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government only upon showing that, after proper public advertisement in most cases, no Bermudian or spouse of a Bermudian, holder of a permanent resident’s certificate or holder of a working resident’s certificate is available who meets the minimum standard requirements for the advertised position. In 2001, the Bermuda government announced a new immigration policy limiting the duration of work permits to between six and nine years, with specified exemptions for “key” employees. In March 2004, the Bermuda government announced an amendment to the immigration policy which expanded the categories of occupations recognized by the government as “key” and for which businesses are eligible to apply for holders of jobs in those categories to be exempt from the six to nine year term limits. The categories include senior executives (chief executive officers, presidents through vice presidents), managers with global responsibility, senior financial posts (treasurers, chief financial officers through controllers, specialized qualified accountants, quantitative modeling analysts), certain legal professionals (general counsel, specialist attorneys, qualified legal librarians and knowledge managers), senior insurance professionals (senior underwriters, senior claims adjustors), experienced/specialized brokers, actuaries, specialist investment traders/analysts and senior information technology engineers/managers. All executive officers who work in our Bermuda office that require work permits have obtained them.

Competition in the insurance industry could reduce our growth and profitabilityprofitability.

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.

In recent years, we have experienced a softening market cycle throughout many of our property and liability lines of business, with increased competition, surplus underwriting capacity and deteriorating rates, terms and conditions all having an impact on our ability to write business. While market conditions generally improved during 2009 on many lines of business, there is no assurance that such improvements in rates and conditions will continue.

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

In a time of financial uncertainty or a prolonged economic downturn or recession, regulators may choose to adopt more restrictive insurance laws and regulations, which may result in lower revenues and/or higher costs and thus could materially and adversely affect our results of operations.

Our insurance and reinsurance subsidiaries conduct business globally, including in 50 states of the U.S. and the District of Columbia.globally. 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 our subsidiaries maintain minimum levels of statutory capital and liquidity, meet solvency standards, participate in guaranty funds and submit to periodic examinations of their financial condition and compliance with underwriting regulations. 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 our shareholders. We may not be able to comply fully with, or obtain appropriate exemptions from these statutes and 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 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 or in the interpretation thereof by enforcement or regulatory agencies could have an adverse effect on our business.

Potential government intervention in our industry as a 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 markets. Government regulators are generally concerned with the protection of policyholders to the exclusion of other constituencies, including shareholders of insurers and reinsurers. An example of such intervention was the expansion of the Florida Hurricane Catastrophe Fund in 2007, which increased the capacity of the Fund to compete against commercial providers of catastrophe reinsurance. In addition, in December 2007, the Terrorism Risk Insurance Revision and Extension Act of 2007 extended the material provisions of TRIA for an additional seven years to December 31, 2014 and expanded coverage to include domestic acts of terrorism.

In addition, in recent years certain U.S. and non-U.S. judicial and regulatory authorities, including U.S. Attorney’s Offices and certain state attorneys general, have commenced investigations into other business practices in the insurance industry. While we cannot predict the exact nature, timing or scope of possible governmental initiatives, such proposals could adversely affect our business by, among other things:

 

Providing reinsurance capacity in markets and to consumers that we target;

 

Requiring our further participation in industry pools and guaranty associations;

 

Expanding the scope of coverage under existing policies; e.g., following large disasters;

 

Further regulating the terms of insurance and reinsurance policies; or

 

Disproportionately benefiting the companies of one country over those of another.

In addition, although the U.S. federal government has not historically regulated insurance, there have been proposals from time to time, and especially after the recent global financial crisis, to impose federal regulation on the insurance industry. On July 21, 2010, the President of the U.S. signed Dodd-Frank. Among other things, Dodd-Frank establishes a Federal Insurance Office within the U.S. Treasury. This Federal Insurance Office initially has limited regulatory authority and is empowered to gather data and information regarding the insurance industry, including conducting a study for submission to the U.S. Congress on how to modernize and improve insurance regulation in the U.S. Further, Dodd-Frank gives the Federal Reserve supervisory authority over a number of financial services companies, including insurance companies, if they are designated by a two-thirds vote of a Financial Stability Oversight Council as ‘systemically important’. While we do not believe that we are systemically important, as defined in Dodd-Frank, Dodd-Frank or additional federal regulation that is adopted in the future could impose significant burdens on us, impact the ways in which we conduct our business, increase compliance costs, duplicate state regulation and/or could result in a competitive disadvantage.

In addition, therethe European Parliament has adopted a new directive referred to as “Solvency II”, which will be effective January 1, 2013. Solvency II will replace the existing E.U. insurance and reinsurance legislation and has three pillars: (i) a risk based capital assessment, including the approval of internal capital models, (ii) a principles-based risk governance framework, and (iii) external regulatory disclosure obligations. Our European subsidiaries AXIS Specialty Europe and AXIS Re Ltd. are efforts currently underway inworking towards becoming Solvency II compliant. The E.U. will also be assessing Bermuda for “equivalence” under the U.S. to federally regulate financial services companies, which could include insurance companies, including through the establishment of a U.S. federal regulatory body or agency. This legislation, if enacted, could result in the federal government assuming a more direct role in theSolvency II directive and Bermuda has embarked on legislative changes over its regulation of insurers and reinsurers, with a view to meeting the insurance industry.equivalency requirements. AXIS Specialty Limited is likewise working towards meeting the new requirements of the Bermuda

Monetary Authority. Many of the detailed requirements are still being developed and tested by the E.U. The U.S. Congressfinal implementation of this directive may require us to incur considerable expense to comply with its requirements and the adoption of new capital modeling rules could revisit U.S. federal preemptionimpact the levels of state insurance regulationscapital required to operate our Bermuda and implement solvencyEuropean subsidiaries. Solvency II could also increase our compliance costs and capital requirements. We cannot predict whether any U.S. federal legislation will be enacted at all, or if it is enacted, what issues it will address. Any such legislation could have an effect onimpact the way in which we conduct our business and results of operations.govern our subsidiaries.

Our ability to pay dividends and to make payments on indebtedness may be constrained by our holding company 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 Ltd., AXIS Specialty Europe, AXIS Re U.S., AXIS Specialty U.S., AXIS Surplus and AXIS Insurance Co. (collectively, our “Insurance Subsidiaries”). Dividends and other permitted distributions from our Insurance Subsidiaries (in some cases through our subsidiary holding companies), 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.

Global climate change may have a material adverse effect on our results of operation and financial condition if we are not able to adequately assess and reserve for the increased frequency and severity of catastrophes resulting from these environmental factors.

Recent North Atlantic hurricane seasons have shown a marked increase in windstorm activity, both in terms of total number of storms and their intensity. Atmospheric concentrations of carbon dioxide and other greenhouse gases have increased dramatically since the industrial revolution and there is debate as to whether this has caused a gradual increase in global average temperatures. Increasing global average temperatures may continue in the future and could impact our business in the long-term. However, there is little consensus in the scientific community regarding the effect of global environmental factors on the frequency and severity catastrophes. Climatologists concur that heat from the ocean drives hurricanes, but they cannot agree on how much ocean temperature changes alter the annual outlook. In addition, it is unclear whether rising sea temperatures are part of a longer cycle.

We attempt to mitigate the risk of financial exposure from climate change through our underwriting risk management practices. This includes sensitivity to geographic concentrations of risks, the purchase of protective reinsurance and selective underwriting criteria which can include, but is not limited to, higher premiums and deductibles and more specifically excluded policy risks. However, given the scientific uncertainty about the causes of increased frequency and severity of catastrophes and the lack of adequate predictive tools, a continuation and worsening of recent trends may have a material impact on our results of operation or financial condition.

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.

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 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 acquiror, the integrity and management of the acquiror’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 AuthorityCBI 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.CBI. 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 AuthorityCBI has three months from the date of submission of a notification within which to oppose the proposed transaction if the Irish Regulatory AuthorityCBI 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.

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.

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. The Bermuda Minister of Finance announced in November 2010 that the assurance will be extended to 2035 but the required legislation for this has not yet been brought before the Bermuda legislature.

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 Limited (“AXIS Ireland Holdings”), AXIS Re Ltd., AXIS Specialty Europe, and AXIS Specialty Global Holdings Limited are Irish companies and AXIS Specialty U.K. Holdings Limited (“AXIS U.K. Holdings”) is a U.K. company.company, and Sirius Australia Pty Limited and Dexta Corporation Pty Limited are Australian Companies. 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 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 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 Europe, is/are trading in the United Kingdom through a permanent establishment in the United Kingdom and therefore subject to U.K. tax.

In addition, there are circumstances in which companies that are neither resident in the United Kingdom, nor entitled to the protection afforded by a double tax treaty between the United Kingdom and the jurisdiction in which they are resident, may be exposed to income tax in the United Kingdom (other than by deduction or withholding) on the profits of a trade carried on there even if that trade is not carried on through a permanent establishment. We intend to operate in such a manner that none of our companies will fall within the charge to United Kingdom income tax in this respect.

If thisany of our companies, other than AXIS U.K. Holdings, were treated as being resident in the case,United Kingdom for U.K. corporation tax purposes, or if any of our companies other than AXIS U.K. Holdings, and AXIS Specialty Europe were to be treated as carrying on a trade in the United Kingdom, whether or not through a permanent establishment, our results of operations could be materially adversely affected.

Our U.K. operations may be affected by future changes in U.K. tax law.

AXIS U.K. Holdings should be treated as resident in the United Kingdom (by virtue of its being incorporated and managed there) and accordingly be subject to U.K. tax in respect of its worldwide income and gains. AXIS Specialty Europe is subject to U.K. corporation tax as a result of its having a permanent establishment in the United Kingdom, however the charge to U.K corporation tax is limited to profits (including revenue profits and capital gains) attributable directly or indirectly to such permanent establishment. Any change in the basis or rate of U.K. corporation tax could materially adversely affect the operations of these companies.

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 Ltd., AXIS Specialty Europe, and AXIS Specialty Global Holdings Limited should be resident in Ireland for tax purposes and that none of our companies, other than AXIS Ireland Holdings, AXIS Re Ltd., AXIS Specialty Europe, and AXIS Specialty 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 Ltd., AXIS Specialty Europe and AXIS Specialty 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 Ltd., AXIS Specialty Europe and AXIS Specialty 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 Europe and AXIS Re 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 the corporate tax ratesbase within the EU. Ireland, along with other member states, has consistently resisted any movement towards standardized corporate tax rates or tax base 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.tax. 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 Europe or AXIS Re 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 Europe and AXIS Re 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 Europe and AXIS Re 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 Europe and AXIS Re Ltd. If, however, investment income earned by AXIS Specialty Europe or AXIS Re 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 response to a number of measures taken and commitments by the government of Bermuda in June, 2009, Bermuda was listed as a jurisdiction that has substantially implemented those standards. 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 U.S. federal income tax law or the manner in which it is interpreted 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. For example, legislation has been introduced in Congress to limit the deductibility of reinsurance premiums paid by U.S. companies to non-U.S. affiliates. A similar provision was included as part of President Obama’s proposed budget for fiscal year 2011. It is possible that this or similar legislation could be introduced in and enacted by the current Congress or future Congresses that could have an adverse impact on us. In addition, existing interpretations of U.S. federal income tax laws could change, also resulting in an adverse impact on us.

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

ITEM 1B.UNRESOLVED STAFF COMMENTS

 

 

We have no outstanding, unresolved comments from the SEC staff at December 31, 2009.2010.

 

 

ITEM 2. PROPERTIES

ITEM 2.PROPERTIES

 

 

We maintain office facilities in the United States, Bermuda, Europe, Canada, Australia 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. Our worldwide headquarters office is located at 92 Pitts Bay Road, Pembroke, Bermuda. We believe that our office space is sufficient for us to conduct our operations for the foreseeable future.

 

 

ITEM 3. LEGAL PROCEEDINGS

ITEM 3.LEGAL PROCEEDINGS

 

 

Except as noted below, we are not a party to any material legal proceedings. From time to time, we are subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against us in the ordinary course of insurance or reinsurance operations. In our opinion, the eventual outcome of these legal proceedings is not expected to have a material adverse effect on our financial condition, or results of operations.operations or cash flows.

In 2005, a putative class action lawsuit was filed against our U.S. insurance subsidiaries. In re Insurance Brokerage Antitrust Litigation was filed on August 15, 2005 in the United States District Court for the District of New Jersey and includes as defendants numerous insurance brokers and insurance companies. The lawsuit alleges antitrust and Racketeer Influenced and Corrupt Organizations Act (“RICO”) violations in connection with the payment of contingent commissions and manipulation of insurance bids and seeks damages in an unspecified amount. On October 3, 2006, the District Court granted, in part, motions to dismiss filed by the defendants, and ordered plaintiffs to file supplemental pleadings setting forth sufficient facts to allege their antitrust and RICO claims. After plaintiffs filed their supplemental pleadings, defendants renewed their motions to dismiss. On April 15, 2007, the District Court dismissed without prejudice plaintiffs’ complaint, as amended, and granted 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, and a hearing was held in April 2009. On August 16, 2010, the Third Circuit Court of Appeals affirmed the District Court’s dismissal of the antitrust and RICO claims arising from the contingent commission arrangements and remanded the case to the District Court with respect to the manipulation of insurance bids allegations. 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 HOLDERSPART II

 

 

Not applicable.

PART II

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

ITEM 5.MARKET FOR 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 forthprovides 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:

 

 2009 2008    2010     2009 
High Low Dividends
Declared
 High Low Dividends
Declared
    High     Low     Dividends
Declared
     High     Low     Dividends
Declared
 

1st Quarter

 $  30.55 $  17.32 $  0.20 $  41.81 $  32.77 $  0.185    $ 32.29      $ 27.22��     $ 0.21      $ 30.55      $ 17.32      $ 0.20  

2nd Quarter

 $27.43 $22.02 $0.20 $36.65 $29.65 $0.185    $32.47      $28.65      $0.21      $27.43      $22.02      $0.20  

3rd Quarter

 $30.94 $25.06 $0.20 $36.00 $27.74 $0.185    $33.35      $29.20      $0.21      $30.94      $25.06      $0.20  

4th Quarter

 $31.73 $27.76 $0.21 $31.47 $17.27 $0.200    $37.15      $32.58      $0.23      $31.73      $27.76      $0.21  
                               

On February 17, 2010,14, 2011, the number of holders of record of our common shares was 52. 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.

TheWhile we expect to continue paying cash dividends in the foreseeable future, the declaration and payment of future dividends will be at the discretion of our Board of 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.facilities. See Item 8, Note 18 to the Consolidated Financial Statements included in this report.7 ‘Liquidity and Capital Resources’ for further information.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forthprovides information regarding the number of common shares we repurchased in the quarter ended December 31, 2009:2010:

 

Period Total
Number of
Shares
Purchased
  Average
Price Paid
Per Share
  

Total Number

Of Shares

Purchased as Part

Of Publicly Announced Plans

or Programs(a)

  Maximum Number
(or Approximate Dollar Value) of
Shares that May Yet Be
Purchased Under the Announced
Plans or Programs(b)
 

October 1-31

 -    -   -   $211.6 million   

November 1-30

 2,505,257    $  29.57    2,504,608    $137.5 million  

December 1-31

 3,348,515   $28.55   3,346,540   $542.0 million  

Total

 5,853,772       5,851,148   $  542.0 million  
Period Total Number
of Shares
Purchased
  Average
Price Paid
Per Share
  Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
(a)
  

Maximum Number (or Approximate
Dollar Value) of Shares That
May Yet Be Purchased Under the
Announced Plans

or Programs(b)

 

October 1-31, 2010

  6,476  $ 32.51    -       $870.4 million  

November 1-30, 2010

  6,101,447  $35.36    6,100,707   $ 654.6 million  

December 1-31, 2010

  1,671,653  $36.62    1,671,550   $593.4 million  

Total

  7,779,576       7,772,257   $593.4 million  
(a)Share repurchases relating to withhold to cover tax liabilitieswithholdings upon vesting of restricted stock awards are excluded from our share repurchase plan.

 

(b)On December 6, 2007,10, 2009, our Board of Directors approved a share repurchase plan with the authorization to repurchase up to $500 million of our common shares until December 31, 2011. In addition to this plan, on September 24, 2010, our Board of Directors approved a new share repurchase plan with the authorization to repurchase up to an additional $400$750 million of our common shares until December 31, 2009.

On December 10, 2009, our Board of Directors extended the above repurchase plan until December 31, 2011. Further, our Board of Directors approved a new share repurchase plan with the authorization to repurchase up to an additional $500 million of our common shares to2012. Share repurchases may be effected from time to time in the open market or privateprivately negotiated transactions. This share repurchase plan will expiretransactions, depending on December 31, 2011.market conditions.

 

 

ITEM 6.SELECTED FINANCIAL DATA

 

 

The following tables set forth our selected historical consolidated financial information for the last five years. 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.

 

 As of and for Year ended December 31  As Of and For The Year Ended December 31, 
 2009 2008 2007 2006 2005  2010 2009 2008 2007 2006 
 (in thousands, except per share amounts)  (in thousands, except per share amounts) 

Selected Statement of Operations Data:

          

Gross premiums written

 $3,587,295   $3,390,388   $3,590,090 $  3,609,036   $3,393,885   $3,750,536  $3,587,295  $3,390,388  $3,590,090  $3,609,036 

Net premiums earned

  2,791,764    2,687,181    2,734,410  2,694,270    2,553,683    2,947,410   2,791,764   2,687,181   2,734,410   2,694,270 

Net investment income

  464,478    247,237    482,873  407,100    256,712    406,892   464,478   247,237   482,873   407,100 

Net realized investment (losses) gains

  (311,584  (85,267  5,230  (25,702  (16,912

Net realized investment gains (losses)

  195,098   (311,584  (85,267  5,230   (25,702

Net losses and loss expenses

  1,423,872    1,712,766    1,370,260  1,425,855    2,051,129    1,677,132   1,423,872   1,712,766   1,370,260   1,425,855 

Acquisition costs

  420,495    366,509    384,497  386,959    337,383    488,712   420,495   366,509   384,497   386,959 

General and administrative expenses

  370,157    335,758    303,831  268,396    212,842    449,885   370,157   335,758   303,831   268,396 

Interest expense and financing costs

  32,031    31,673    51,153  32,954    32,447    55,876   32,031   31,673   51,153   32,954 

Preferred share dividends

  36,875    36,875    36,775  37,295    4,379    36,875   36,875   36,875   36,775   37,295 

Net income available to common shareholders(1)

 $461,011   $350,501   $1,055,243 $925,765   $90,061   $819,848  $461,011  $350,501  $1,055,243  $925,765 

Per Common Share Data:

          

Basic earnings per common share

 $3.36   $2.50   $7.15 $6.18   $0.63   $6.74  $3.36  $2.50  $7.15  $6.18 

Diluted earnings per common share

 $3.07   $2.26   $6.41 $5.63   $0.57   $6.02  $3.07  $2.26  $6.41  $5.63 

Cash dividends per common share

 $0.81   $0.755   $0.68 $0.615   $0.60   $0.86  $0.81  $0.755  $0.68  $0.615 

Basic weighted average common shares outstanding

  137,279    140,322    147,524  149,745    143,226    121,728   137,279   140,322   147,524   149,745 

Diluted weighted average common shares outstanding

  150,371    155,320    164,515  164,394    157,524    136,199   150,371   155,320   164,515   164,394 

Operating Ratios:(1)(2)

          

Net loss and loss expense ratio

  51.0%    63.7%    50.1%  52.9%    80.3%    56.9%    51.0%    63.7%    50.1%    52.9%  

Acquisition cost ratio

  15.1%    13.6%    14.1%  14.4%    13.2%    16.6%    15.1%    13.6%    14.1%    14.4%  

General and administrative expense ratio

  13.2%    12.5%    11.1%  10.0%    8.3%    15.2%    13.2%    12.5%    11.1%    10.0%  
                             

Combined ratio

  79.3%    89.8%    75.3%  77.3%    101.8%    88.7%    79.3%    89.8%    75.3%    77.3%  
                             

Selected Balance Sheet Data:

          

Investments

 $  10,622,104   $   8,611,898   $   8,977,653 $7,663,387   $   6,421,929   $ 11,524,166  $ 10,622,104  $8,611,898  $8,977,653  $7,663,387 

Cash and cash equivalents

  864,054    1,820,673    1,332,921  1,989,287    1,280,990    1,045,355   864,054   1,820,673   1,332,921   1,989,287 

Reinsurance recoverable balances

  1,424,172    1,378,630    1,356,893  1,359,154    1,518,110    1,577,547   1,424,172   1,378,630   1,356,893   1,359,154 

Total assets

  15,306,524    14,282,834    14,675,309  13,665,287    11,925,976    16,445,731   15,306,524   14,282,834   14,675,309   13,665,287 

Reserve for losses and loss expenses

  6,564,133    6,244,783    5,587,311  5,015,113    4,743,338    7,032,375   6,564,133   6,244,783   5,587,311   5,015,113 

Unearned premium

  2,209,397    2,162,401    2,146,087  2,015,556    1,760,467    2,333,676   2,209,397   2,162,401   2,146,087   2,015,556 

Senior notes

  499,476    499,368    499,261  499,144    499,046    994,110   499,476   499,368   499,261   499,144 

Total shareholders’ equity

  5,500,244    4,461,041    5,158,622  4,412,647    3,512,351    5,624,970   5,500,244   4,461,041   5,158,622   4,412,647 

Book value per common share(2)

 $37.84   $29.08   $32.69 $26.09   $20.23  

Diluted book value per common share(2)

 $33.65   $25.79   $28.79 $23.45   $18.34  

Book value per common share(3)

 $45.60  $37.84  $29.08  $32.69  $26.09 

Diluted book value per common share(3)

 $39.37  $33.65  $25.79  $28.79  $23.45 

Common shares outstanding

  132,140    136,212    142,520  149,982    148,831    112,393   132,140   136,212   142,520   149,982 

Common shares outstanding - diluted

  148,596    153,588    161,804  166,884    164,274    130,189   148,596   153,588   161,804   166,884 

 

(1)Effective April 1, 2009, we adopted new Financial Accounting Standards Board guidance for the recognition and presentation of other-than-temporary impairments for fixed maturities. Refer to Item 8, Note 2 to the Consolidated Financial Statements for further details.
(2)Operating ratios are calculated by dividing the respective operating expenses by net premiums earned.
(2)(3)Book value per common share and diluted book value per common share are based on total common shareholders’ equity divided by common shares and diluted common share equivalents outstanding, respectively.

 

 

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

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

 

 

The following is a discussion and analysis of our results of operations for the years ended December 31, 2010, 2009 2008 and 20072008 and our financial condition at December 31, 20092010 and 2008.2009. This should be read in conjunction with the Consolidated Financial Statements and related notes included in Item 8 of this report. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.

 

   Page

20092010 Financial Highlights

  4648

Executive Summary

  4749

Underwriting Results – Results—Group

  5153

Results by Segment: Years ended December 31, 2010, 2009 2008 and 20072008

  5961

i) Insurance Segment

  5961

ii) Reinsurance Segment

  6465

Other Revenues and Expenses

  6968

Net Investment Income and Net Realized Investment Gains/Losses

  7069

Cash and Investments

  7573

Liquidity and Capital Resources

  84

Commitments and Contingencies81

  89

Critical Accounting Estimates

  9088

i) Reserves for Losses and Loss Expenses

  9088

ii) Reinsurance Recoverable Balances

  10299

iii) Premiums

  103101

iv) Fair Value Measurements

  106104

v) Other-Than-Temporary-ImpairmentsOther-Than-Temporary Impairments

  111108

Recent Accounting Pronouncements

  114110

Off-Balance Sheet and Special Purpose Entity Arrangements

  114110

Non-GAAP Financial Measures

  115110

 

20092010 FINANCIAL HIGHLIGHTS

 

 

20092010 Consolidated Results of Operations

 

Net income available to common shareholders of $461$820 million, or $3.36$6.74 per share basic and $3.07$6.02 diluted

 

  

Operating income of $766$627 million, , or $5.10$4.60 per share diluted(1)

 

Gross premiums written of $3.6$3.8 billion

Net premiums written of $3.1 billion

 

Net premiums earned of $2.8$2.9 billion

 

Net favorable prior year reserve development of $423$313 million, pretaxpre-tax

Estimated pre-tax net losses of $118 and $138 million for the Chilean and New Zealand earthquakes, respectively

 

Underwriting income of $525$409 million and combined ratio of 79.3%88.7%

 

Net investment income of $464$407 million

 

Net realized investment lossesgains of $312$195 million

20092010 Consolidated Financial Condition

 

Total cash and investments of $10.6$12.6 billion; fixed maturities, cash and short-term securities comprise 93% of total cash and investments withand have an average credit rating of AA

 

Total assets of $15.3$16.4 billion

 

Reserve for losses and loss expenses of $6.6$7.0 billion and reinsurance recoverable of $1.4$1.6 billion

 

Total debt of $499$994 million and a debt to total capitalization ratio of 8.3%15.0%

 

Common shareholders’ equity of $5.0$5.1 billion; diluted book value per common share of $33.65$39.37

 

Share repurchasesRepurchased 21.8 million common shares under the repurchase plan authorized by our Board of 5.85 millionDirectors for total cost of $170$699 million; remaining authorization of $593 million under share repurchase authorization; additional $500 million share repurchase authorization approved by the Board of Directors inat December 200931, 2010

 

Strong liquidity, with $4.271% or $8.9 billion of our cash and investment portfolio invested in investment-grade, intermediate maturity fixed income holdings (excluding restricted investments) and cash expected to be available within one to three business days

 

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

 

EXECUTIVE SUMMARY

 

 

Business Overview

We are a Bermuda-based global provider of specialty lines insurance and treaty reinsurance products with operations in Bermuda, the United States, Europe, Singapore, Canada and Australia. Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Reinsurance.Re. Our strategy is to leverage our expertise, experience and relationships to expand our business globally. We are focused on organic growth, which we have supplemented with small acquisitions, while managing a portfolio of diversified and attractively priced risks. We executedOur execution on this strategy during 2009 by:in 2010 included:

 

establishing infrastructurerestructuring certain of our ceded reinsurance programs;

taking advantage of select opportunities for premium growth; and resources related to

the recent launch of our Global Accident & Health line of business, which focusesoperations, focused on specialty accident products rather than traditional medical coverages and began offering insurance and reinsurance productscoverages.

In addition, during 2010 we:

locked in January 2010;$500 million of capital for 10 years at 5.875% via issuance of senior notes in March;

 

continuing to target smallobtained authorization from our Board of Directors for a new $750 million common share repurchase program, providing us with further capital management capabilities, and middle-market insurance business through the acquisition of the operations of Australian managing general agent Dexta Corporation Pty Ltd. (which we acquired in early 2009 and will use as a platformrepurchased 21.8 million common shares for introduction of additional products into Australian and Asian markets);

continuing efforts to support organic growth;

expanding our geographic presence by securing the necessary licenses and approvals to begin full operations as branch insurers in Canada and Singapore;$699 million; and

 

establishingreplaced our existing credit facility with a branch office in Latin Americanew credit facility and a representative office in Spain to expand our reinsurance presence in these locations.new secured letter of credit facility.

We expect these actions will lead to long-term growth in our insurance and reinsurance businesses.

Results of Operations

 

Year ended December 31,  2009 Percentage
Change
 2008 Percentage
Change
 2007  2010 % Change   2009 % Change   2008 
         

Underwriting income:

               

Insurance

  $84,185   (55% $187,257   (50% $373,803   $210,039   149%    $84,185   (55%)    $187,257 

Reinsurance

   440,450   269%    119,411   (67%  364,230    199,164   (55%)     440,450   269%     119,411 

Net investment income

   464,478   88%    247,237   (49%  482,873    406,892   (12%)     464,478   88%     247,237 

Net realized investment gains (losses)

   (311,584 265%    (85,267 nm    5,230       195,098   nm     (311,584  265%     (85,267

Other revenues and expenses

   (179,643 121%    (81,262 (39%  (134,118   (154,470  (14%)      (179,643  121%     (81,262
                         

Net income

   497,886   29%    387,376   (65%  1,092,018    856,723   72%     497,886   29%     387,376 

Preferred share dividends

   (36,875 -    (36,875 -    (36,775  (36,875  -         (36,875  -         (36,875
                         

Net income available to common shareholders

  $461,011   32%   $350,501   (67% $1,055,243   $819,848   78%    $461,011   32%    $350,501 
                         

Operating income:

       

Operating income

  $766,241   76%   $435,962   (58% $1,049,633   $626,724   (18%)    $766,241   76%    $ 435,962 

Net realized investment gains (losses), net of tax

   (305,230   (85,461   5,610  
                         

Net income available to common shareholders

  $  461,011    $  350,501    $  1,055,243  
            
            

nm - not meaningful

Underwriting Results

20092010 versus 2008:2009:Total underwriting income was $409 million for 2010, a decrease of 22%.

Underwriting results in our insurance segment benefited from a substantially reduced level of claim activity in our credit and political risk lines, as well as the continued consideration of our own loss experience in establishing our

current accident year loss ratios, most notably for professional lines. Reduced ceded reinsurance costs due to the restructuring of certain programs on renewal in the second quarter of 2010 increased net premiums earned. These factors were partially offset by a $93 million reduction in net favorable prior period reserve development and increases in acquisition costs and general and administrative expenses. In addition, the segment’s 2010 underwriting results were not impacted by our indemnity contract exposed to longevity risk. During 2009, we recognized net losses of $525$133 million in relation to this contract, which was cancelled during the fourth quarter of that year.

The reduction in underwriting income for our reinsurance segment was primarily the result of $246 million net losses incurred (net of related reinstatement premiums) as a result of the Chilean and New Zealand earthquakes in February and September 2010, respectively. In addition, we recognized net losses for a number of other notable 2010 weather-related events, including the first quarter Australian storms and European Windstorm Xynthia, numerous U.S. storms throughout the year, and the fourth quarter Australian floods. In contrast, catastrophe activity was notably less significant in 2009. Partially offsetting this increase in natural catastrophe losses was a lower level of claims activity in our trade credit and bond line of business in 2010.

2009 versus 2008: Total underwriting income increased $218 million, or 71%, compared to underwriting income of $307 million in 2008. Overall, the increase was driven by lower catastrophe losses relative to the prior year.losses. In particular, the North Atlantic hurricane season was benign in 2009 compared to 2008, which included net losses incurred of $384 million, net of related earned reinsurancereinstatement premiums, on Hurricanes Ike and Gustav. Approximately three-quarters of these hurricane losses were incurred within our reinsurance segment.

Underwriting income inIn our insurance segment, decreased $103 million comparedthe lower level of catastrophe losses in 2009 was more than offset by the previously mentioned losses on our indemnity contract exposed to 2008. This decrease was driven by a net loss of $133 million on an insurance derivative contract which was cancelledlongevity risk and settled in the fourth quarter of 2009. In addition, our insurance segment was impacted by higher current accident year loss activity on itsthe credit and political risk linelines. In addition to the lower level of business this year. These factors were partially offset by lower catastrophe activity this year, as discussed above.

Underwritinglosses in 2009, underwriting income in our reinsurance segment increased $321 million compareddue to 2008. This increase was driven by a lower level of catastrophe losses relative to the prior year, as discussed above. In addition, underwriting income in 2009 benefited from an additional $38 million of net favorable prior period reserve development relative to 2008. Thesedevelopment; however, these factors were partially offset by increased current accident year loss activity on trade credit and bond reinsurance business this year.

2008 versus 2007: Total underwriting income in 2008 decreased $431 million, or 58%, compared to 2007. The reduction was primarily driven by net losses incurred from Hurricanes Ike and Gustav (see above).

2009.

Net Investment Income

2010 versus 2009: The $58 million decrease in 2010 primarily resulted from lower reinvestment yields on our fixed maturity portfolio. Our alternative investment portfolio (“other investments”) also contributed to the decrease; although these investments performed well in both years, our hedge funds and credit funds generated higher returns in 2009.

2009 versus 2008:2008:The $217 million increase in 2009 was primarily due to improved market conditions for our alternativeother investments, which was partially offset by lower reinvestment yields on our fixed maturities, cash and short-term investments and cash.

2008 versus 2007:The $236 million decrease in 2008 was driven by significant valuation declines in our alternative investments (credit and hedge funds), resulting from the unprecedented disruption to the global financial markets. This decline was partially offset by a 17% increase in net investment income earned on fixed maturities primarily due to higher average fixed maturities balance.investments.

Net Realized Investment Gains (Losses)

Unprecedented volatility and turmoil in the global financial markets in the past two yearsduring 2008 and 2009 led to significant impairment charges on our available-for-sale investments. In 2009investments of $78 million and 2008, net realized investment losses included other-than-temporary impairment (“OTTI”) charges of $337 million, respectively. The 2009 amount included a $263 million OTTI charge on a portfolio of medium-term notes (“MTNs”), where we no longer expected to fully recover amortized costs based on updated cash flow projections. The significant recovery in global financial markets since March 2009 resulted in notably improved valuations for fixed maturities and $78 million, respectively.equities, a portion of which we realized in 2010.

Other Revenues and Expenses

The 121% increasemovements in 2009 from 2008 wasother revenues and expenses were primarily due to foreign exchange lossesrate movements. We recognized $16 million and an increase$44 million in income tax expense on profits earned from our U.S. subsidiaries. The $53 million reductionforeign exchange gains in 2010 and 2008, from 2007 wasrespectively, primarily due to higherthe remeasurement of net liabilities denominated in the Euro, following its depreciation against the U.S. Dollar. In 2009, the U.S. Dollar equivalent of our net liability balances denominated in foreign currencies increased due to a weakening U.S. Dollar and we recognized foreign exchange gains as well as lower financing costs duelosses of $29 million. An increase in interest expense following our March 2010 senior note issuance also contributed to the terminationhigher expense levels for 2010.

Outlook

Looking forward to 2011, we expect to see a continuation of challenging rate conditions in the insurance marketplace. As a $400 million repurchase agreement in late 2007.result, gross premiums written are expected to be flat to modestly up. We expect any growth to be driven by our newer product lines and geographies, including AXIS Global Accident & Health. With respect to our reinsurance segment and based on our experience at the significant January 1 renewal date, we expect rates to be flat to marginally down. We continue to monitor market rates and conditions and may adjust our business mix based on opportunities we see.

Financial Measures

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

 

  
Year ended December 31,  2009  2008  2007 

Year ended and at December 31,

    2010     2009     2008 
              

ROACE(1)

   10.3%   8.1%   24.6%       16.2%       10.3%       8.1%  

Operating ROACE(2)

     17.1%     10.1%     24.5%       12.4%       17.1%       10.1%  

DBV per common share(3)

  $33.65  $25.79  $28.79         $39.37     $33.65     $25.79 

Cash dividends per common share

  $0.810  $0.755  $0.680  

Cash dividends declared per common share

    $0.860     $0.810     $0.755 
                          
(1)ROACEReturn on average common equity (“ROACE”) is calculated by dividing net income available to common shareholders for the period by the average shareholders’ equity determined by using the common shareholders’ equity balances at the beginning and end of the period.
(2)Operating ROACE is calculated by dividing operating income for the period by the average common shareholders’ equity determined by using the common shareholders’ equity balances at the beginning and end of the period. Operating ROACE is a non-GAAP financial measure, as defined in SEC Regulation G. See‘Non-GAAP ‘Non-GAAP Financial Measures’ for additional information and a reconciliation to the nearest GAAP financial measure (ROACE).
(3)DBVDiluted book value (“DBV”) represents total common shareholders’ equity divided by the number of common shares and diluted common share equivalents outstanding, determined using the treasury stock method.

Return on Equityequity

Our objective is to generate superior returns on capital that appropriately reward our common shareholders for the risks we assume and to grow revenue only when we deemexpect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any year may make it difficult to achieve short-term excessa profitability target in any specific period and, had, therefore, established a return on average common equity (“ROACE”)ROACE target of at least 15% over athe full underwriting cycle. Our average annual ROACE since inception is approximately 16%, in-line with this long-term goal.

2010 versus 2009:Our 2010 operating income was adversely impacted by the higher level of catastrophe activity relative to 2009, a reduction in the net favorable prior period development recognized and continued reinvestment yield reductions on our fixed maturities portfolio. However, this was partially offset by the comparative absence of charges related to our indemnity contract exposed to longevity risk following the cancellation of that contract in 2009. Our average common equity increased 13%, also contributing to the reduction in the return. The increase

in average common equity was driven by a global recovery in financial markets and our net income available to common shareholders; these increases were partially offset by more significant common share repurchases.

In addition to the changes noted for operating ROACE above, ROACE also includes net realized gains and losses (including OTTI charges). As a result, our 2010 return improved relative to 2009 primarily due to the substantial reduction in OTTI charges.

2009 versus 2008:Our 2009 operating ROACE improved relative to 2008 as a result of minimal catastrophe activityactivity; 2008 results were adversely impacted by losses incurred in relation to Hurricanes Ike and Gustav. In addition, strong performance from our investments in hedge and credit funds. However, it was adversely impacted by $312funds in 2009 also contributed to the increase. Partially offsetting these improvements were a $92 million ofincrease in net realized investment losses a $133 million loss on an insurance derivativerelated to our indemnity contract that was terminated during the fourth quarterexposed to longevity risk and lower reinvestment yields on our fixed maturities portfolio duringportfolio.

The higher ROACE in 2009 was driven by the year. Our 2008 ROACE was negatively impacted by losses incurred related to Hurricanes Ike and Gustav, as well as investment losses relating to the financial market crisis. In contrast, our 2007 ROACE benefited from an absence of major catastrophe losses and stable financial markets, as well as higher yields earned on our fixed maturities.

Our 2009 Operating ROACE improved significantly from 2008 for the same reasonsfactors noted above for ROACE excludingoperating ROACE. However, the impact of net realized investment losses, which were $226 million higherincrease was partially offset by the previously discussed increase in 2009. Our 2007 Operating ROACE benefited from both strong underwriting and net investment income results.OTTI charges.

Diluted book value per common share (“DBV per common share”)

We consider DBV per common share to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis will ultimately translatestranslate into growth ofin our stock price. Our DBV per common share increased 17% in 2010. Factors contributing to this increase include: (1) net income available to common shareholders of $820 million, (2) an overall improvement in valuations for our available-for-sale securities, as global financial markets continued to improve and (3) the execution of common share repurchases at a discount to book value. The increase in 2009 was primarily driven by athe net increase in the fair value of our investment portfolio resulting from a recovery in globaldue to financial markets coupled withmarket improvements and our net income available to common shareholders of $461 million. The reduction in 2008 as compared to 2007 was primarily due to the significant decline in the fair value of our investment portfolio as a result of the unprecedented turmoil in global credit and equity markets, combined with higher stock repurchases and lower underwriting income.

Cash dividends per common share

We believe in returning excess capital to our shareholders by way of dividends (as well as stock repurchases) and, accordingly, our dividend policy is an integral part of the value we create for our shareholders. TheOur strong earnings in recent years have permitted our Board of Directors to approve successive annual increases in quarterly common share dividends for the past three years.

 

UNDERWRITING RESULTS - GROUP

 

 

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

 

Year ended December 31,  2009 Percentage
Change
  2008 Percentage
Change
 2007  2010 % Change   2009 % Change   2008 
         

Revenues:

                

Gross premiums written

  $  3,587,295   6%  $  3,390,388   (6% $  3,590,090      $3,750,536   5%    $3,587,295   6%    $3,390,388 

Net premiums written

   2,816,429   6%   2,666,880   (7%  2,863,757    3,147,540   12%     2,816,429   6%     2,666,880 

Net premiums earned

   2,791,764   4%   2,687,181   (2%  2,734,410    2,947,410   6%     2,791,764   4%     2,687,181 

Other insurance related income (loss)

   (129,681    (38,667   3,911    2,073     (129,681    (38,667
 

Expenses:

                

Current year net losses and loss expenses

   (1,847,044      (2,089,053   (1,707,237   (1,990,187     (1,847,044     (2,089,053

Prior period reserve development

   423,172      376,287     336,977    313,055     423,172     376,287 

Acquisition costs

   (420,495    (366,509   (384,497  (488,712    (420,495    (366,509

General and administrative expenses

   (293,081    (262,571   (245,531  (374,436    (293,081    (262,571
                          

Underwriting income(1)

  $  524,635   71%  $306,668   (58% $  738,033   $409,203   (22%)    $524,635   71%    $306,668 
                          
                          
(1)Refer to Item 8, Note 3 to the Consolidated Financial Statements, for a reconciliation of underwriting income to “Income before income tax” for the periods indicated above.

UNDERWRITING REVENUES

Premiums Written:

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

 

  Gross Premiums Written  Gross Premiums Written 
Year ended December 31,  2009  Change 2008  Change 2007  2010     % Change    2009     % Change   2008 
 

Insurance

  $1,775,590  (4% $1,841,934  (10% $  2,039,214      $ 1,916,116     8%    $ 1,775,590      (4%)    $ 1,841,934 

Reinsurance

   1,811,705  17%    1,548,454  -    1,550,876    1,834,420     1%     1,811,705      17%     1,548,454 
                                 

Total

  $3,587,295  6%   $3,390,388  (6% $3,590,090   $3,750,536     5%    $3,587,295      6%    $3,390,388 
                                 

% ceded

                         

Insurance

   42.3%  3.9%    38.4%  3.5%    34.9%    30%      (12) pts     42%       4 pts     38%  

Reinsurance

   1.1%  0.1%    1.0%  0.1%    0.9%    1%      - pts     1%       - pts     1%  

Total

   21.5%  0.2%    21.3%  1.1%    20.2%    16%      (5) pts     21%       - pts     21%  
  
  Net Premiums Written  Net Premiums Written 
  2009  Change 2008  Change 2007  2010     % Change    2009     % Change   2008 

Insurance

  $  1,025,061  (10% $  1,133,843  (15% $  1,326,647   $1,332,220     30%    $1,025,061      (10%  $1,133,843 

Reinsurance

   1,791,368  17%    1,533,037  -    1,537,110    1,815,320     1%     1,791,368      17%     1,533,037 
                                 

Total

  $2,816,429  6%   $2,666,880  (7% $2,863,757   $3,147,540     12%    $2,816,429      6%    $2,666,880 
                                 
                                   

2010 versus 2009: The 5% increase in gross written premiums during 2010 was driven by our insurance segment. A number of factors contributed to the increase, including opportunities in the U.S. property market, select new business opportunities in the onshore energy market and rate increases on offshore energy business following the Deepwater Horizon event. In addition, professional lines premiums increased due to select new business opportunities and the continued build-out of our platform in Europe, Australia and Canada.

The twelve percentage point reduction in the ceded premium ratio for our insurance segment primarily reflected changes in reinsurance purchasing; we increased the attachment points on our excess of loss property program and reduced the cession rate on our quota share professional lines program on renewal during the second quarter.

2009 versus 2008:The 6% growth Growth in consolidated gross premium written in 2009 was driven by our reinsurance segment, reflecting improved market conditions and the select expansion of our business. InMarket conditions in our insurance segment market conditions have generally improved this year and the segment also benefited from certain growth opportunities, particularly within professional lines business. However, gross premiums written in 2009 were reduced byfor the segment as a whole declined due to limited underwriting opportunities for credit and political risk business, as well as our decision to reduce peak zone catastrophe exposures in the first half of 2009, which particularly impacted property related lines in the first half of the year.lines.

The increase in the premiums ceded premium ratio infor our insurance segment this year reflectsreflected a combination of business mix changes and rate increases on our property reinsurance program.

2008 versus 2007:Net Premiums Earned:The 6% reduction in consolidated gross premiums in 2008 emanated from our insurance segment, reflecting the reduction of business due to deteriorating market conditions across most property and liability insurance lines of business. In addition, the credit and political risk insurance line was negatively impacted by a reduction in available transactions associated with a slow down in the capital flows amidst the ongoing global financial crisis. Gross premiums written in our reinsurance segment in 2008 were largely unchanged from 2007. Although market conditions deteriorated moderately during the year, the impact of this was largely offset by some growth opportunities.

The increase in the premiums ceded ratio in 2008 primarily reflected the purchase of additional proportional coverage within our liability and professional lines business together with the impact of business mix changes.

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

 

Year ended
December 31,
              Percentage Change 
                               %  Change
Year ended
December 31,
2009  2008  2007  08 to 09 07 to 08  2010   2009   2008   09 to 10  08 to 09
                 

Insurance

  $1,157,966  41%  $1,183,143  44%  $1,208,440  44%  (2% (2%)      $1,206,493    41%    $1,157,966    41%    $1,183,143    44%    4%  (2%)

Reinsurance

   1,633,798  59%   1,504,038  56%   1,525,970  56%  9%   (1%  1,740,917    59%     1,633,798    59%     1,504,038    56%    7%  9%
                                                  

Total

  $  2,791,764  100%  $  2,687,181  100%  $  2,734,410  100%  4%   (2% $ 2,947,410    100%    $ 2,791,764    100%    $ 2,687,181    100%    6%  4%
                                                  
                                               

2009 versus 2008:Changes in net premiums earned reflect period to period changes in net premiums written and business mix, together with normal variability in premium earning patterns. Overall, consolidated

2010 versus 2009: The increase in net premiums earned for our insurance segment resulted from the previously discussed changes in our ceded reinsurance programs and an 8% increase in gross premiums written. The increase for our reinsurance segment reflects premium growth on certain lines of business.

2009 versus 2008: Consolidated net premiums earned increased, relative to the prior year, driven by the growth ofin our reinsurance business as discussed above. Net premiums earned in our insurance segment decreased this year in line withfollowing the previously mentioned exposure reductions on several lines of business.reductions. This was partially offset by the accelerated recognition of certain credit and political risk premium this yearpolicies in 2009 due to the actual and anticipated exhaustion of exposure on certain loss impacted policies.

2008 versus 2007:The reduction in net premiums earned in 2008 as compared with 2007 primarily emanated from the insurance segment, reflecting lower net premiums written, partially offset by the impact of growth in certain lines of business in prior years.

UNDERWRITING EXPENSES

The following table provides a breakdown of our combined ratio:

 

Year ended December 31,  2009 Point
Change
 2008 Point
Change
 2007     2010   % Point
Change
     2009   % Point
Change
   2008 
                

Current accident year loss ratio

  66.2%   (11.5% 77.7%   15.3%   62.4%          67.5%     1.3      66.2%     (11.5   77.7%  

Prior period reserve development

  (15.2% (1.2% (14.0% (1.7% (12.3%     (10.6%   4.6      (15.2%   (1.2   (14.0%

Acquisition cost ratio

  15.1%   1.5%   13.6%   (0.5% 14.1%       16.6%     1.5      15.1%     1.5    13.6%  

General and administrative expense ratio(1)

  13.2%   0.7%   12.5%   1.4%   11.1%       15.2%     2.0      13.2%     0.7    12.5%  
                                        

Combined ratio

  79.3%   (10.5% 89.8%   14.5%   75.3%       88.7%     9.4      79.3%     (10.5   89.8%  
                                        
                                
(1)The general and administration expense ratio includes corporate expenses not allocated to underwriting segments of 2.7%2.5%, 2.7% and 2.1%,2.7% for 2010, 2009 2008 and 2007,2008, respectively. These costs are discussed further in theOther Revenue and Expenses’Expenses section below.

Current Accident Year Loss Ratio:

2010 versus 2009: The 1.3 percentage point increase in our current accident year loss ratio was primarily driven by a higher level of catastrophe activity, most notably with respect to major earthquakes in Chile and New Zealand. On February 27, 2010, a magnitude 8.8 earthquake occurred off the coast of the Maule Region of Chile. The earthquake and following tsunami and aftershocks caused significant destruction to areas in Chile. We recognized estimated pre-tax net losses (net of related reinstatement premiums) of $110 million for this event. On September 4, 2010, a magnitude 7.1 earthquake occurred near Christchurch, New Zealand; the earthquake and associated aftershocks caused significant destruction in the Christchurch region. We recognized estimated pre-tax net losses of $138 million for this event. There were a number of other weather-related loss events of note during 2010, including Australian and U.S. storms and Windstorm Xynthia in the first quarter and further Australian storms and flooding and U.S. storms in the fourth quarter. In contrast, catastrophe losses were notably lower in 2009.

The following factors partially offset the impact of a higher level of catastrophe activity on the current accident year loss ratio:

Reductions in the current accident year loss ratios for our credit and political risk insurance and trade credit and bond reinsurance from their elevated 2009 levels, when increased loss activity was driven by the global financial crisis;

The continued incorporation of more of our own historical loss experience in establishing the current accident year loss ratios for short-tail lines of business. Given that our loss experience has generally been better than we expected, this resulted in lower current accident year ratios for this business; and

For our medium-tail business, and in particular our professional lines insurance and reinsurance business, our historical loss experience on prior accident years has generally been lower than the loss ratios we initially established. In recognition of the increasing maturity and credibility of our own loss experience, we assigned increased weight to our own loss experience when establishing our current accident year loss ratios for this business in 2010, with a corresponding reduction in the weight assigned to industry data. We also took into account the recovery from the global financial crisis. This, therefore, led to lower current accident year loss ratios on this business for 2010.

Our estimates of net losses in relation to the Chilean and New Zealand earthquakes were derived from ground-up assessments of our individual contracts and treaties in the affected regions and are consistent with our market shares in the regions. As part of our estimation process, we also considered current industry insured loss

estimates, market share analyses, catastrophe modeling analyses and the information available to date from clients, brokers and loss adjusters. There are a number of potential complications involved with the investigation, adjustment and handling of insurance claims arising from the Chilean earthquake which may result in a longer development tail than that observed for other catastrophes of a similar magnitude. These include restrictions on who is permitted to adjust claims, the scope of the coverage on the original policies and the practical and logistical issues associated with adjusting property damage and business interruption losses across such a vast area. Industry-wide insured loss estimates for these events, as well as our own estimates, remain subject to change as additional actual loss data becomes available. Actual losses in relation to these events may ultimately differ materially from current loss estimates.

2009 versus 2008: The 11.5 percentage point reduction in our consolidated current accident year loss ratio was driven by lower catastrophe related losses relative to the prior year.2008. In particular, the North Atlantic hurricane season was benign in 2009, compared to 2008, which includedwhile we recognized pre-tax net losses incurred of $408 million, or 15.2 percentage points, onin relation to Hurricanes Ike and Gustav. These factors wereGustav in 2008. This was partially offset by additionalthe elevated loss activity on credit and political risk insurance business and trade credit and bond reinsurance business emanating from the turbulent economic environment. previously noted.

For further discussion on current accident year loss ratios, refer to the insurance and reinsurance segment discussions below.

2008 versus 2007:The 15.3 ratio point increase in our current accident year loss ratio for 2008 was driven by higher catastrophe losses, primarily emanating from net losses incurred on Hurricanes Ike and Gustav. The current accident year loss ratio in 2008 was also negatively impacted, by among other things, a higher frequency and severity of property losses in our insurance segment as well as the impact of pricing deterioration across many lines of business. Offsetting these factors, the 2008 current accident year loss ratio benefited from the incorporation of more of our own loss experience within a number of our short-tail lines of business, relative to the prior year. In addition, we had a relatively higher level of loss recoveries in 2008 within our insurance segment, as a result of our expanded reinsurance coverage.

Prior Period Reserve Development:

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

 

    
Year ended December 31,  2009    2008    2007
  

Insurance

  $  210,861    $  202,339    $  214,018

Reinsurance

   212,311     173,948     122,959
                 

Total

  $423,172    $376,287    $336,977
                 
                 

 

Year ended December 31,

    2010     2009     2008 
              

Insurance

    $ 118,336     $ 210,861     $ 202,339 

Reinsurance

     194,719      212,311      173,948 
                      

Total

    $313,055     $423,172     $376,287 
                      
                      

Overview

Overall, a significant portion of the net favorable prior period reserve development in each of the last three years has primarily beenwas generated from the property, marine, terrorism and aviation lines of our insurance segment and the property catastrophe and cropcatastrophe lines of our reinsurance segment. These lines of business, the majority of which have short tail exposures, contributed 63%58%, 65% and 86% and 95% toof the total net favorable reserve development in 2010, 2009 2008 and 2007,2008, respectively. The favorable development on these lines of business primarily reflects the recognition of better than expected loss emergence, rather than explicit changes toin our actuarial assumptions. Refer to the ‘Critical Accounting Estimate on Loss Reserves’ for further discussion.

Approximately 37% and 34% of the net favorable reserve development in 2010 and 2009, respectively, was generated from professional lines insurance and reinsurance business. This favorable development was driven by theincreased incorporation of more of our own historical claims experience into theour ultimate expected loss ratios for accident years 20062007 and prior, with less weighting being given to the initial expected loss ratios, which wereinformation derived from industry benchmarks. WeDuring 2008, we concluded that a reasonable level of credible loss data had developed for the 2005 and prior accident year professional lines business and we began to give weight to our own loss experience for professional lines business in 2008, on those earlier accident years which had developed a reasonable level of credible data.years. However, last year, the impact of this change during 2008 was largely offsetnotably muted by adverse development on the 2007 accident year 2007insurance business, emanatingdriven by losses arising from exposure to the sub-prime creditglobal financial crisis.

The continued economic downturn and credit crisis also had some impact

During 2010, we recognized net favorable prior period reserve development of $38 million on our prior year loss reserves during 2009. Specifically, we strengthened our loss reserves for accident year 2008 trade credit and bond reinsurance business, by $40 million andprimarily on the 2009 accident year 2008 professional lines insurance business by $44 million to reflect claims emergence that was worse than we had anticipated.

Credit and political risk business contributed 8% and 17% of the total net favorable reserve development in 2009 and 2008, respectively. In 2009, the favorable development was generated from credit related classes, largely from accident year 2007, and, to a lesser extent, the 2007 and 2008 accident years, 2006 and 2005, and was driven by thein recognition of lowerbetter than expected loss activity.experience. In contrast, we recognized $18 million net adverse prior period reserve development on this business during 2009 to reflect updated information from our cedants.

We recognized $18 million of net adverse prior period reserve development on our credit and political risk insurance business during 2010, as we worked towards finalizing settlements for certain loss events and reductions in recovery estimates for the latest available information. During 2009 and 2008, respectively, we recognized $35 million and $65 million of net favorable development on this business, primarily in relation to credit-related classes. Better than expected loss emergence contributed to the favorable development was primarily generated from credit related classes, partially in recognitionboth years. In addition, the adoption of lower than expected loss activity and also due to adopting a more accelerated loss development profile and development on these lines. We also recognized favorable2004 and prior period reserve development from ouraccident year traditional political risk book from accident years 2004business contributed to the favorable development in 2008.

Refer to the‘Critical Accounting Estimate — Reserve for Losses and prior.

Loss Expenses’ section for further details. We caution that conditions and trends that impacted the development of our liabilitiesreserve for losses and loss expenses in the past may not necessarily occurrecur in the future.

The following sections provide further details on prior year reserve development by segment, line of business and accident year.

Insurance Segment:

 

  
Year ended December 31,  2009     2008     2007     2010     2009     2008 
              

Property and Other

  $  65,192      $  94,089      $  113,124     

Property

    $51,740     $65,192     $94,089 

Marine

   39,798       27,276       43,753       23,338      39,798      27,276 

Aviation

   13,207       29,888       37,524       11,995      13,207      29,888 

Credit and Political Risk

   35,438       65,136       5,759  

Credit and political risk

     (18,414     35,438      65,136 

Professional lines

   73,207       (5,798     21,087       56,993      73,207      (5,798

Liability

   (15,981     (8,252     (7,229     (7,316     (15,981     (8,252
                                  

Total

  $  210,861      $  202,339      $  214,018      $ 118,336     $ 210,861     $ 202,339 
                                  
                              

In 2009,2010, we experienced $211recognized $118 million of net favorable prior period reserve development, the principal components of which were as follows:were:

 

$52 million of net favorable prior period reserve development on our property business, the majority of which emanated from the 2005 through 2009 accident years and related to better than expected loss emergence.

$23 million of net favorable prior period reserve development on marine business, largely related to the 2007 through 2009 accident years and driven by better than expected loss emergence. This included net favorable development on offshore energy business of $20 million.

$12 million of net favorable prior period reserve development on aviation business, spanning several accident years and largely related to better than expected loss emergence.

$18 million of net adverse prior period reserve development on credit and political risk business. This balance consisted of net adverse development of $54 million on the 2009 accident year, as we worked towards finalizing settlements for certain loss events and reduced our collateral estimates for the latest

 

$65available information. Partially offsetting this amount was $36 million ofin net favorable prior period reserve development on property business, the majority2006 through 2008 accident years, in recognition of which related to accident year 2008. The favorable development was driven by the continued migration to our actual loss experience, which was broadly better than we expected. As described inanticipated loss emergence on our Critical Accounting Estimate on Loss Reserves’, the Bornhuetter-Ferguson actuarial method, which we primarily use for this business, provides for a transition between initial expected loss ratios to actual loss experience, as an accident year matures. The favorable development included a $9 million decrease in our estimate for Hurricanes Ikeconfiscation, expropriation, nationalization and Gustav due to a reduction in reported losses.deprivation (“CEND”) and credit business.

$57 million of net favorable prior period reserve development on professional lines business, primarily generated from the 2004 through 2006 accident years, for reasons discussed in the overview.

$7 million of net adverse development on liability business, primarily related to the 2007 through 2009 accident years and reflecting earlier than expected loss emergence on Excess & Surplus (“E&S”) umbrella business for those years over the past twelve months.

In 2009, we recognized $211 million of net favorable prior period reserve development, the principal components of which were:

$65 million of net favorable prior period reserve development on property business, the majority of which emanated from the 2008 accident year and related to better than expected loss emergence. This amount included a $9 million reduction in our estimate for Hurricanes Ike and Gustav due to a reduction in reported losses.

 

$40 million of net favorable prior period reserve development on marine business, driven by better than expected loss emergence. This included favorable development on energy offshore business of $21 million, the largest component of which related to a $7 million reduction in a specific case reserve fromon the 2006 accident year 2006.year.

 

$13 million of net favorable prior period reserve development on aviation business, which was spread acrossspanning several accident years and was the result ofresulting from better than expected loss emergence.

 

$35 million of net favorable prior period reserve development on credit and political risk business, driven by the recognition of lowerbetter than expected loss activityemergence on the 2005 through 2007 accident years.

 

$73 million of net favorable prior period reserve development on professional lines business. This was driven by net favorable development on the 2005 accident year, 2005,as well as the 2004 and 2006 accident years to a lesser extent, accident years 2004 and 2006, asfor the reasons discussed in the overview above. This was partially offset by net adverse development of $44 million on the 2008 accident year, 2008 business ($44 million), primarily reflecting higher than expected loss activity associated with the financial crisis on financial institutions business.business as a result of the global financial crisis.

 

$16 million of net adverse prior period reserve development on liability lines of business. This was driven by $24 million of net adverse development of $24 million on Excess & Surplus (“E&S”) casualty&S liability business, primarily impacting the 2007 accident year, 2007, andas well as the 2008 accident year to a lesser extent, accident year 2008.extent. We adjusted our loss development profile onprofiles for these accident years, having observed higher than expected frequency and severity of claims emergence on this business over the lastprevious twelve months. This was partially offset by net favorable development on E&S umbrella business, predominately from the 2004 and 2005 accident years, 2005 ($4 million) and 2004 ($5 million), reflecting the incorporation of more of our own actual experience with respect to reinsurance recoveries.

In 2008, we experiencedrecognized $202 million of net favorable prior period reserve development, the principal components of which were as follows:were:

 

$15194 million of net favorable prior period reserve development on property business, the majority of which emanated from the 2007 and 2006 accident years and related to better than expected loss emergence.

$27 million of net favorable prior period reserve development on marine business, spanning several accident years and primarily relating to better than expected loss emergence.

$30 million of net favorable prior period reserve development on aviation business, primarily relating to the 2007 and 2005 accident years and resulting from better than expected loss emergence.

$65 million of net favorable prior period reserve development on our property ($90 million), aviation ($30 million), marine ($27 million) and terrorism ($4 million) lines of business. This development was largely generated from accident years 2007 ($70 million), 2006 ($40 million) and 2005 ($18 million). The favorable development was driven by the continued migration to our actual loss experience, which was better than we expected.

Net favorable prior period reserve development of $65 million from our credit and political risk line of business. The favorable development wasbusiness, driven by the continued migration to our actual loss experience, which was better than we expected.expected loss emergence.

 

Net$6 million of net adverse development of $6 million from ouron professional lines business. This was driven by adverse development of $37 million fromon the 2007 accident year, 2007, partially offset by favorable development of $32 million on accident yearsthe 2003 and 2004.2004 accident years.

 

Net$8 million of net adverse prior period reserve development of $8 million on our liability business. This wasbusiness, largely due to higher than expected loss emergence on a specific program across several accident years.

Reinsurance Segment:

 

Year ended December 31,

    2010     2009     2008 
              

Catastrophe and property

    $93,534     $154,755     $171,660 

Credit and bond

     37,793      (17,939     (4,495

Professional lines

     60,067      69,399      10,707 

Motor

     1,225      4,358      2,634 

Liability

     2,100      1,738      (6,558
                      

Total

    $ 194,719     $ 212,311     $ 173,948 
                      
                      

In 2007,2010, we experienced $214recognized $195 million of net favorable prior period reserve development, the principal components of which were as follows:were:

 

$20294 million of net favorable prior period reserve development on ourcatastrophe and property ($112 million), marine ($44 million), aviation lines ($38 million) and terrorism ($9 million) lines of business. This development was primarily generated from accident year 2006 ($127 million), 2004 ($44 million) and 2003 ($26 million). The favorable development was driven by the continued migration to our actual loss experience, which was better than we expected. Our accident year 2005 reserves were adversely impacted by the strengthening of our loss estimates for Hurricanes Katrina, Rita and Wilma by approximately $34 million.business largely consisting of:

$15 million of favorable development on our accident year 2003 professional lines business. This related to a specific claim, which we had previously made provision for, but removed following a favorable court ruling.

Adverse development of $8 million on our 2006 accident and health business (included in “Other”) due to a higher than expected emergence of claims.

$7 million of adverse development on our accident year 2004 and 2005 liability reserves, due to a higher than expected emergence of claims on a specific program.

Reinsurance Segment:

    
Year ended December 31,  2009     2008     2007 
  

Catastrophe, property and other

  $  154,755      $  171,660      $  119,537     

Credit and Bond

   (17,939     (4,495     5,480  

Professional lines

   69,399       10,707       (54

Motor

   4,358       2,634       (2,239

Liability

   1,738       (6,558     235  
                    

Total

  $212,311      $173,948      $122,959  
                    
                    

In 2009, we experienced $212 million of net favorable reserve development, the principal components of which were as follows:

$68 million of net favorable prior period reserve development on catastrophe business, generated from accident years 2008 ($46 million), 2007 ($16 million) and prior ($6 million), and emanating from property related catastrophe business ($63 million) and workers compensation catastrophe business ($5 million). The favorable development was driven by the continued migration to our actual loss experience, which was broadly better than we expected. As described in our ‘Critical Accounting Estimate on Loss Reserves’, the Bornhuetter-Ferguson actuarial method, which we primarily use for this business, provides for a transition between initial expected loss ratios to actual loss experience, as an accident year matures. For accident year 2008, the favorable development included a $7 million decrease in our estimate for Hurricanes Ike and Gustav due to a reduction in reported losses.

 

$65 million of net favorable prior period reserve development on property business, generatedwith $54 million relating to per risk business and $11 million relating to pro-rata business. Of the total amount, $43 million emanated from the 2007 through 2009 accident years and resulted from better than expected loss emergence and a further $16 million emanated from the 2005 accident year and was largely due to a favorable court judgment associated with one particular claim.

$21 million of net favorable prior period reserve development on crop reserves, principally related to the 2009 accident year and largely resulting from the reduction in reserves for Canadian crop losses following updated information from the cedant.

$11 million of net favorable prior period reserve development on catastrophe business, primarily related to the 2009 and 2005 accident years. Development on the 2009 accident year was primarily driven by better than expected loss emergence, while the development on the 2005 accident year largely related to a reduction in our reserve for one particular claim following receipt of updated information. Partially offsetting this, we recognized net adverse development of $33 million on the 2008 ($34 million),accident year, largely related to updated information with respect to Hurricane Ike losses.

$38 million of net favorable prior period development on trade credit and bond reinsurance lines of business, largely related to the 2009 accident year and, to a lesser extent the 2007 ($22 million) and 2008 accident years, in recognition of better than expected loss emergence and updated information from our cedants.

$60 million of net favorable prior ($9 million),period reserve development on professional lines reinsurance business, primarily on the 2006 accident year and, to a lesser extent the 2007, 2005 and 2004 accident years, for the reasons discussed in the overview above.

In 2009, we recognized $212 million of net favorable prior period reserve development, the principal components of which were:

$155 million of net favorable prior period reserve development on catastrophe and property business largely consisting of:

$68 million of net favorable prior period reserve development on catastrophe business, primarily related to the 2008 and 2007 accident years and emanating from property-related catastrophe business ($63 million) and workers compensation catastrophe business ($5 million). This development was primarily driven by better than expected loss emergence, including a $7 million reduction in our estimate for Hurricanes Ike and Gustav due to a reduction in reported losses.

$65 million of net favorable prior period reserve development on property business, primarily related to the 2008 and 2007 accident years and emanating from per risk business ($42 million) and property pro ratapro-rata business ($23 million). The favorableThis development was driven bylargely the continued migration to our actual loss experience, which was broadlyresult of better than we expected.expected loss emergence. In addition, we updatedaccelerated the loss development profile of propertyfor our per risk business, to reflect a more accelerated profile, based on our review of historichistorical data. ForThe development on the 2008 accident year 2008, the favorable development included a $6 million decreasereduction in our estimate for Hurricanes Ike and Gustav, due to a reduction in reported losses.

 

$19 million of net favorable prior period reserve development on crop reserves (included in “Other”), predominately frombusiness, primarily relating to the 2008 accident year 2008,and reflecting limited reported losses relative to our expectation.better than expected loss emergence.

 

$18 million of net adverse prior period reserve development on our trade credit and bond reinsurance lines of business. This wasbusiness, driven by adverse development of $40 million on the 2008 accident year, 2008, reflecting updated loss information received from our cedants this year.cedants. This was partially offset by net favorable development on earlier accident years, reflecting thein recognition of better than expected loss emergence.

 

$69 million of net favorable prior period reserve development on our professional lines reinsurance business. This was primarily driven by net favorable development on accident yearsbusiness, predominantly in relation to the 2005 and 2004 asaccident years for the reasons discussed in the overview above.overview. This was partially offset by $7 million of net adverse development of $7 million on the 2008 accident year, 2008 reflecting claims activity associated with the global financial market crisis.

$4In 2008, we recognized $174 million of net favorable development on motor non-proportional business, primarily relating to better than expected loss experience on our accident year 2007 U.K. business.

In 2008, we experienced $174 million of net favorableprior period reserve development, the principal components of which were as follows:were:

 

$78172 million of net favorable prior period reserve development on catastrophe and property business generated from accident years 2007 ($36 million), 2006 ($25 million) and prior ($17 million), and emanating from property related catastrophe business ($59 million) and workers compensation catastrophe business ($19 million). The favorable development was driven by the continued migration to our actual loss experience, which was better than we expected.largely consisting of:

 

$84 million of net favorable prior period reserve development on property business, generated fromprimarily related to the 2005 through 2007 accident years 2007 ($26 million), 2006 ($21 million), 2005 ($20 million) and prior ($17 million), and emanating from property per risk business ($57 million) and property pro ratapro-rata business ($27 million). The recognition of this net favorable development was driven by the continued migration to our actual loss experience, which was better than we expected.

$10 million of favorable prior period reserve development on our accident year 2007 and 2006 crop reserves.

Net favorable development of $11 million from our professional lines business. This was driven by favorable development of $25 million on accident years 2003 and 2004, offset by adverse development of $14 million from accident years 2007 and 2006.

$7 million adverse development on our accident year 2003 liability reserves related to higher than expected loss emergence on a stop loss contract.emergence.

Net adverse development of $4 million on our credit and bond lines of business, largely from accident year 2007, and reflecting the increased potential for loss in the deteriorating economic environment.

In 2007, we experienced $123 million of net favorable reserve development, the principal components of which were as follows:

$7778 million of net favorable prior period reserve development on catastrophe business, generatedemanating primarily from the 2007 and 2006 accident years 2006 ($64 million), 2005 ($10 million) and prior ($3 million), and emanating from propertyyears. This development included $19 million related catastrophe business ($66 million) andto workers compensation catastrophe business ($11 million). The favorable developmentand was driven bylargely the continued migration to our actual loss experience, which wasresult of better than we expected.expected loss emergence.

 

$2610 million of net favorable prior period reserve development on propertycrop business, emanating from property per risk business ($13 million)primarily relating to the 2007 and property pro rata business ($13 million)2006 accident years and primarily from accident year 2006. The favorable development was driven by the continued migration to our actual loss experience, which was better than we expected.expected loss emergence.

 

$1511 million of net favorable prior period reserve development on our professional lines reinsurance business, driven by net favorable development of $25 million on the 2003 and 2004 accident years, partially offset by adverse development of $14 million on the 2007 and 2006 accident years.

$7 million of net adverse development on our 2003 accident year 2005 and 2006 crop reserves.liability business, reflecting greater than expected loss emergence on a stop-loss contract.

 

 

RESULTS BY SEGMENT

 

 

INSURANCE SEGMENT

Results from our insurance segment were as follows:

 

Year ended December 31,  2009 Percentage
Change
 2008 Percentage
Change
 2007   2010 % Change 2009 % Change 2008 
        

Revenues:

              

Gross premiums written

  $  1,775,590   (4% $  1,841,934   (10% $  2,039,214       $ 1,916,116   8%   $ 1,775,590   (4%)   $ 1,841,934 

Net premiums written

   1,025,061   (10%  1,133,843   (15%  1,326,647     1,332,220   30%    1,025,061   (10%)    1,133,843 

Net premiums earned

   1,157,966   (2%  1,183,143   (2%  1,208,440     1,206,493   4%    1,157,966   (2%)    1,183,143 

Other insurance related income (loss)

   (130,946   (39,862   1,860     2,073    (130,946   (39,862

Expenses:

              

Current year net losses and loss expenses

   (823,555   (862,007   (748,282   (688,205   (823,555   (862,007

Prior period reserve development

   210,861     202,339     214,018     118,336    210,861    202,339 

Acquisition costs

   (113,187   (102,475   (126,423   (152,223   (113,187   (102,475

General and administrative expenses

   (216,954   (193,881   (175,810   (276,435   (216,954   (193,881
                        

Underwriting income

  $84,185   (55% $187,257   (50% $373,803    $210,039   149%   $84,185   (55%)   $187,257 
                        
  
    Point
Change
   Point
Change
       % Point
Change
   % Point
Change
   

Ratios:

              

Current year loss ratio

   71.1%    (1.8%  72.9%   11.0%    61.9%     57.0%    (14.1  71.1%    (1.8  72.9%  

Prior period reserve development

   (18.2% (1.1%  (17.1% 0.6%    (17.7%   (9.8%  8.4   (18.2%  (1.1  (17.1%

Acquisition cost ratio

   9.8%    1.2%    8.6%   (1.9%  10.5%     12.6%    2.8   9.8%    1.2   8.6%  

General and administrative expense ratio

   18.7%    2.3%    16.4%   1.9%    14.5%  

General and administrative ratio

   23.0%    4.3   18.7%    2.3   16.4%  
                                

Combined ratio

   81.4%    0.6%    80.8%   11.6%    69.2%     82.8%    1.4   81.4%    0.6   80.8%  
                                
                        

Gross Premiums Written:

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

 

                   Percentage Change                  %  Change
Year ended December 31, 2009 2008 2007 08 to 09 07 to 08   2010   2009   2008   09 to 10  08 to 09
 

Property

 $551,536 31% $539,138 29% $659,595 32% 2%   (18%)       $600,806    31%    $551,536    31%    $539,138    29%    9%  2%

Marine

  200,867 11%  193,234 10%  218,030 11% 4%   (11%   224,814    12%     200,867    11%     193,234    10%    12%  4%

Terrorism

  36,023 2%  36,288 2%  51,757 3% (1% (30%   37,246    2%     36,023    2%     36,288    2%    3%  (1%)

Aviation

  76,198 4%  67,761 4%  70,387 3% 12%   (4%   75,794    4%     76,198    4%     67,761    4%    (1%)  12%

Credit and political risk

  19,450 1%  183,041 10%  232,549 11% (89% (21%   30,669    2%     19,450    1%     183,041    10%    58%  (89%)

Professional lines

  671,618 38%  601,874 33%  528,616 26% 12%   14%     712,053    37%     671,618    38%     601,874    33%    6%  12%

Liability

  219,869 13%  216,629 12%  248,562 12% 1%   (13%   228,247    12%     219,869    13%     216,629    12%    4%  1%

Other

  29 -  3,969 -  29,718 2% (99% (87%

Other(1)

   6,487    -         29    -         3,969    -        nm  (99%)
                                            

Total

 $  1,775,590 100% $  1,841,934 100% $  2,039,214 100% (4% (10%  $ 1,916,116    100%    $ 1,775,590    100%    $ 1,841,934    100%    8%  (4%)
                                            
                                         

nm - not meaningful

(1)Includes accident and health

2010 versus 2009:The 8% increase in gross premiums written was led by opportunities in the U.S. property market and select new business opportunities in the onshore energy market. The increase in professional lines premiums largely reflected select new business opportunities and the continued build-out of the platform in Europe, Australia and Canada. Rate increases on offshore energy business resulting from the Deepwater Horizon event, as well as increases in our share of certain policies and select new business opportunities resulted in increased marine premiums.

2009 versus 2008: The 4% decreasereduction in gross premiums written primarily reflects a reduction inreflected limited credit and political risk business, emanating from limited underwriting opportunities withinin the weakened global economy. Gross premiums written were also impacted by our decision to reduce peak zone catastrophe exposures in property and marine lines of business this yearduring 2009, as part of our ongoing diversification strategy within thesethose lines. Gross premiums written in 2009 did, however, benefit from a general improvement in rates, this year, particularly for more volatile, loss-affected lines such as those with catastrophe exposure, energy and financial institutions business. GrossOur 2009 gross premiums written this year also benefited from the maturing of certain property and liability programs, having established business with managing general agents and other producers in prior years. Gross premiums written in 2009 further benefited from certain new opportunities for financial institutions business this year.business.

2008 versus 2007: The global property and liability insurance markets were highly competitive during 2008 with surplus capacity and price deterioration remaining prevalent. Gross premiums written declined in most lines of business reflecting declining rates for new and renewal business and the non-renewal of business that did not meet our underwriting requirements. The reduction in property premiums also reflects our decision to reduce our overall risk exposure to this business while unfavorable market conditions persist. The decrease in credit and political risk premium reflected a reduction in available transactions associated with a slow down in capital flows amidst the global financial crisis.

Partially offsetting these decreases, we experienced growth in professional lines business in 2008. This was partially related to renewal rights we acquired in conjunction with our purchase of the Media Pro business in the second quarter of 2007. In addition, in the later part of the year, the growth was driven by new business arising from disruptions in the financial institutions sector together with some rate increases on renewal business.

Premiums Ceded:

2010 versus 2009:Premiums ceded in 2010 were $584 million, or 30% of gross premiums written, compared with $751 million, or 42%, in 2009. The reductions were primarily attributable to changes in our reinsurance purchasing, including higher attachment points on our property excess of loss program and reduced cession rates on our professional lines quota share reinsurance programs on renewal during the second quarter.

2009 versus 2008: Premiums ceded in 2009 were $751 million, or 42% of gross premiums written, compared to $708 million, or 38%, in the same period of 2008. The increase in the ceded premium ratios this yearratio in 2009 primarily reflectsreflected a combination of business mix changes and rate increases on our property reinsurance program. Business mix changes primarily relaterelated to the growth of our professional lines business in 2009 together withand a reduction in credit and political risk premiums, a line for which we do not purchase reinsurance cover.

2008 versus 2007: Premiums ceded in 2008 were $708 million, or 38% of gross premiums written, compared with $713 million, or 35%, in 2007. The increase in our ceded premium ratio primarily reflects a combination of business mix changes and the purchase of additional proportional coverage within liability and professional lines business during 2008.

Net Premiums Earned:

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

 

                Percentage Change                                % Change
Year ended December 31, 2009 2008 2007 08 to 09 07 to 08  2010   2009   2008   09 to 10  08 to 09
                 

Property

 $268,469 23% $328,709 28% $317,497 26% (18% 4%   $337,525    28%    $268,469    23%    $328,709    28%    26%  (18%)

Marine

  139,196 12%  151,809 13%  156,981 13% (8% (3%  145,356    12%     139,196    12%     151,809    13%    4%  (8%)

Terrorism

  34,001 3%  42,629 4%  59,674 5% (20% (29%  32,486    3%     34,001    3%     42,629    4%    (4%)  (20%)

Aviation

  64,245 6%  65,259 5%  88,280 7% (2% (26%  66,636    6%     64,245    6%     65,259    5%    4%  (2%)

Credit and political risk

  188,311 16%  144,481 12%  112,837 9% 30%   28%    89,773    7%     188,311    16%     144,481    12%    (52%)  30%

Professional lines

  381,364 33%  340,929 29%  330,646 28% 12%   3%    444,663    37%     381,364    33%     340,929    29%    17%  12%

Liability

  82,286 7%  97,898 8%  109,005 9% (16% (10%  87,481    7%     82,286    7%     97,898    8%    6%  (16%)

Other(1)

  94 -  11,429 1%  33,520 3% (99% (66%  2,573    -         94    -         11,429    1%    nm  (99%)
                                           

Total

 $  1,157,966 100% $  1,183,143 100% $  1,208,440 100% (2% (2% $ 1,206,493    100%    $ 1,157,966    100%    $ 1,183,143    100%    4%  (2%)
                                           
                                        

nm - not meaningful

(1)Includes accident and health

20092010 versus 2008:2009:The decrease in netNet premiums earned in 2009 primarily reflects a 10% reduction in net premiums written this year, although the rate of reduction was less accelerated. This is partially due to the earning of credit and political risk business written in prior years, which typically provides multi-year coverage, and therefore earns over a greater number of periods. The average duration of the unearned premium on our credit and political risk line for 2010 included a $12 million reduction in connection with the settlement of business at December 31,prior accident year claims, while the comparative 2009 was 4.7 years. Net premiums earned on credit and political risk business for 2009 also includesfigure included the accelerated recognition of $50 million of premium due to the actual and anticipated exhaustion of exposure on certain loss impacted policies. Excluding the impact of these adjustments in both periods, net premiums earned for the segment increased 10% during 2010. This increase was primarily reflective of the second quarter 2010 reinsurance purchasing change, although the impact was somewhat muted due to the change being effective midway through the year. Increased gross premiums written also contributed to the higher net premiums earned.

20082009 versus 2007:2008:The 2% decrease in net premiums earned in 2008 primarily reflects a decreasereflected the 10% reduction in net premiums written, this year, although the rate of reduction was less accelerated. This was partially due to growththe continued earning of credit and political risk line of business written in prior years, whichyears; these policies typically providesprovide multi-year coverage and, therefore, earnsearn over a greater number of periods.years. Net premiums earned in 2008on credit and political risk business for 2009 was also benefited from growth in property premiums in prior years as well as lower ceded premium amortized costs on this business in 2008.impacted by the $50 million accelerated recognition discussed above.

Insurance LossesLoss Ratio:

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

 

Year ended December 31,  2009  Point
Change
  2008  Point
Change
  2007 
  

Current accident year

  71.1%   (1.8% 72.9%   11.0%  61.9%  

Prior period reserve development

  (18.2% (1.1% (17.1% 0.6%  (17.7%)   
                 

Loss ratio

  52.9%   (2.9% 55.8%   11.6%  44.2%  
                 
                 

Year ended December 31,    2010   % Point
Change
   2009   % Point
Change
   2008 
              

Current accident year

     57.0%     (14.1   71.1%     (1.8   72.9%  

Prior period reserve development

     (9.8%   8.4    (18.2%   (1.1   (17.1%
                            

Loss ratio

     47.2%     (5.7   52.9%     (2.9   55.8%  
                            
                            

Current Accident Year Loss Ratio

2010 versus 2009:

The 14.1 percentage point reduction in our current accident year loss ratio primarily resulted from a lower level of claims activity in our credit and political risk business relative to 2009. Loss activity on this line was elevated in 2009 due to the global financial crisis, resulting in a 133% current accident year loss ratio. In 2010, we considered

the recovery in global economic conditions and established a 70% current accident year loss ratio for this line. In addition, the lower current accident year loss ratio for the segment was driven by business mix changes and the previously discussed consideration of our own loss experience in establishing loss ratios for our medium-tail business in 2010, most notably for professional lines. We also considered the global economic recovery when establishing our 2010 current accident year loss ratio for our professional lines business. As a result of these factors, our current accident year loss ratio on professional lines business declined from 72% in 2009 to 61% in 2010.

Our insurance segment’s exposures to the Chilean and New Zealand earthquakes were not significant.

2009 versus 20082008:

The 1.8 ratiopercentage point decrease in our current accident year loss ratio was the net result of several factors. The most significant drivers for the decrease were as follows:

 

Lower catastrophe activity in 2009 relative to 2008, which included net losses incurred of $127 million, or 10.7 points, onrelated to Hurricanes Ike and Gustav.

 

A decreasereduction in the expectedcurrent accident year loss ratio of our overall professional lines business from 77% in 2008 to 72% for the current accident year.2009. The prior year included2008 ratio contemplated additional loss activity emanating from the subprime and related creditglobal financial crisis.

 

A reduced severity of property related losses in 2009 relative to 2008.

 

The incorporation of more of our own historical loss experience within short-tail lines of business. Given that this experience has generally been better than we expected, this had the impact of reducingreduced our net2009 current accident year loss ratiosratio on several lines of business relative to 2008.

These factors were partially offset by:

Increasedby increased claims activity on the credit component of credit and political risk business, emanating from the effects of the global financial crisis. The current accident year loss ratio on our credit and political risk business was 133% for 2009, was 133% compared to 38% for 2008. This contributed to an additional 14.6 points to the overall current accident year loss ratio for the insurance segment, relative to the prior year. The increase includes a reserving provision related to2009 ratio was impacted by estimated losses for one peak credit insurance risk which has been stressed byexposure, Blue City Investments 1 Limited; we concluded the global economic downturn. No claim has been presented to date. However, we have been closely monitoring the status of the underlying projectrelated settlement and identified an opportunity to work and negotiate with interested parties to settle our exposure. We have reserved for the amount that we believe will ultimately be payable to eliminate our exposure.

2008 versus 2007

The 11.0 ratio point increase in our current accident year loss ratio was the net result of several factors. The most significant drivers for the increase were as follows:

Higher catastrophe losses in 2008, driven by losses incurred on Hurricanes Ike and Gustav of $127 million, or 10.7 points.

A higher frequency and severity of property losses in 2008, including mining losses in Australia and several other worldwide property risk losses.

An increase in the overall expected loss ratios of our professional lines business from 72% in 2007 to 77% for accident year 2008, primarily reflecting the impact of the sub-prime crisis on our portfolio.

An increase in most of our initial expected loss ratio selections, reflecting the impact of pricing deterioration across most of our portfolio, partially offset by more favorable pricing on our ceded reinsurance.

These factors were partially offset by:

A reduction in our credit and political risk loss ratio from 46% in 2007 to 38% for accident year 2008. This was primarily due to accelerating the loss development profile of our credit related classes based on our historical loss experience. Although we experienced an increase in loss activity from these classespolicy cancellation during the second half of 2008, stemming from the economic downturn, these losses remained within our initial loss ratios.2010.

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

Acquisition Cost Ratio:The increase in our acquisition cost ratio during 2010 primarily reflected the impact of the previously mentioned changes in our property and professional lines reinsurance purchasing. Acquisition costs in our insurance segment in 2008 had thebenefited from non-recurring benefit of adjustments to sliding scale commissions followingarising out of net favorable prior year releasesperiod reserve development on our professional lines business. Acquisitions cost ratios were otherwise broadly comparable over the three year period.

General and Administrative Expense Ratio:The increase in theTotal general and administrative ratioexpenses increased in 2010, reflecting additional staffing and IT costs associated with the build-out of our insurance segmentthe segment’s platform and higher performance-related compensation expenses. Increased staffing and IT costs, combined with a reduction in both 2008 and 2009 primarily reflects a combination of lower net premiums earned and additional headcount and IT costs over this period.contributed to the higher ratio in 2009 relative to 2008.

Other Insurance Related Income / Income/Loss: During the fourth quarter of 2009 and 2008, we negotiated the cancellation ofrecorded net losses associated with our indemnity contract exposed to longevity risk following an analysis of likely ultimate loss as well as a review$133 million and $41 million, respectively. As we negotiated the cancellation of our legal rights and obligations underthis contract during the contract. Under this cancellation agreement, we agreed to pay total cash consideration of $200 million in exchange for a full release and discharge from any and all obligations under the contract, both past and future. This resulted in the recognition of $28 million in income for the quarter. During the thirdfourth quarter of 2009 we made a significant upward adjustment to our original life expectancy assumptions for the lives backing the note insured underand this contract which resulted in a significant increase in the fair value liability. For the full year 2009, we incurred a loss of $133 million for the above contract, net of premiums. This is in addition to the $41 million loss recorded in 2008 due to change in the estimated fair value of the contract. This was the only contract of this kind in our portfolio. Refer to the ‘Critical Accounting Estimate – Fair Value Measurements’ sectionportfolio, there was no corresponding amount for further details on the estimation process of the fair value for this contract prior to its cancellation.2010.

2010 Insurance Segment Outlook

In the insurance marketplace, the positive rate changes we observed during the first half of 2009 have generally decelerated, however terms and conditions as well as breadth of coverage remain stable. We continue to observe competition for market share with the most aggressive behavior emanating from admitted markets in the U.S. and new markets.

While rates for catastrophe-exposed property business have recently deteriorated, rates for energy lines of business have remained more stable, particularly in the offshore area. We expect to see a continuation of this trend as we head into the key March 1st and April 1st renewals. On our credit and political risk line of business, as has been the case throughout this year, global lending and trading activity remains weak and, therefore, opportunities in this line are expected to remain limited.

For professional lines insurance, we continue to observe favorable market conditions, particularly for financial institutions business, where pricing is up approximately 20%. Commercial directors’ and officers’ pricing has flattened out after gradual declines in recent years, while errors and omissions pricing has been flat to modestly down. For liability business, we are observing fewer new business opportunities and less available renewal premium as a result of exposure reduction by insureds amidst the current economic environment. This affect is compounded by the competitive pressures around this lower premium base. As a result, we continue to maintain a defensive posture in these lines.

REINSURANCE SEGMENT

Results from our reinsurance segment were as follows:

 

Year ended December 31, 2009 Percentage
Change
 2008 Percentage
Change
 2007  2010 % Change   2009 % Change 2008 
        

Revenues:

             

Gross premiums written

 $  1,811,705   17%   $  1,548,454   -   $  1,550,876      $ 1,834,420   1%    $ 1,811,705   17%   $1,548,454 

Net premiums written

  1,791,368   17%    1,533,037   -    1,537,110    1,815,320   1%     1,791,368   17%    1,533,037 

Net premiums earned

  1,633,798   9%    1,504,038   (1%  1,525,970    1,740,917   7%     1,633,798   9%    1,504,038 

Other insurance related income

  1,265     1,195     2,051    -          1,265    1,195 
 

Expenses:

             

Current year net losses and loss expenses

  (1,023,489   (1,227,046   (958,955   (1,301,982     (1,023,489    (1,227,046

Prior period reserve development

  212,311     173,948     122,959    194,719     212,311    173,948 

Acquisition costs

  (307,308   (264,034   (258,074  (336,489    (307,308   (264,034

General and administrative expenses

  (76,127   (68,690   (69,721  (98,001    (76,127   (68,690
                       

Underwriting income

 $440,450   269%   $119,411   (67% $  364,230   $199,164   (55%)    $440,450   269%   $119,411 
                       
  
  Point    Point       % Point
Change
     % Point
Change
   

Ratios:

  Change    Change           

Current year loss ratio

  62.6%   (19.0%  81.6%   18.7%    62.9%    74.8%    12.2    62.6%    (19.0  81.6%  

Prior period reserve development

  (13.0% (1.4%  (11.6% (3.5%  (8.1%  (11.2%  1.8    (13.0%  (1.4  (11.6%

Acquisition cost ratio

  18.8%   1.3%    17.5%   0.6%    16.9%    19.3%    0.5    18.8%    1.3   17.5%  

General and administrative expense ratio

  4.7%   0.1%    4.6%   -    4.6%  

General and administrative ratio

  5.7%    1.0    4.7%    0.1   4.6%  
                               

Combined ratio

  73.1%   (19.0%  92.1%   15.8%    76.3%    88.6%    15.5    73.1%    (19.0  92.1%  
                               
                       

Gross Premiums Written:

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

 

Year ended December 31, 2009 2008 2007 Percent Change 
                               % Change
Year ended December 31, 2009 2008 2007 08 to 09 07 to 08  2010   2009   2008   09 to 10  08 to 09
                 

Catastrophe

 $466,566 26% $454,768 29% $471,469 30% 3%   (4%)      $453,059    25%    $466,566    26%    $454,768    29%    (3%)  3%

Property

  326,728 18%  296,109 19%  281,453 18% 10%   5%    354,528    19%     326,728    18%     296,109    19%    9%  10%

Professional lines

  328,509 18%  226,768 15%  230,040 15% 45%   (1%  288,236    16%     328,509    18%     226,768    15%    (12%)  45%

Credit and bond

  223,564 12%  154,497 10%  124,976 8% 45%   24%    254,130    14%     223,564    12%     154,497    10%    14%  45%

Motor

  104,850 6%  100,225 7%  96,805 6% 5%   4%    148,683    8%     104,850    6%     100,225    7%    42%  5%

Liability

  272,702 15%  183,488 12%  238,511 16% 49%   (23%  238,062    13%     272,702    15%     183,488    12%    (13%)  49%

Engineering

  61,518 3%  83,356 5%  71,968 5% (26% 16%    68,215    4%     61,518    3%     83,356    5%    11%  (26%)

Other

  27,268 2%  49,243 3%  35,654 2% (45% 38%    29,507    1%     27,268    2%     49,243    3%    8%  (45%)
                                           

Total

 $  1,811,705 100% $  1,548,454 100% $  1,550,876 100% 17%   -   $ 1,834,420    100%    $ 1,811,705    100%    $ 1,548,454    100%    1%  17%
                                           
                                        

2010 versus 2009:While premiums written for the segment were comparatively stable, there were variances for certain lines of business. Our motor premiums benefited from significant new business in the first quarter of 2010, as we increased our participation in select European markets including the U.K. Our trade credit and bond line of business grew as the result of new Latin American surety business. Proportional premium estimate adjustments also impacted trade credit and bond gross premiums written; we recognized net adverse estimate revisions of

$15 million and $2 million in 2010 and 2009, respectively. Refer to the ‘Critical Accounting Estimate—Premiums’for a further discussion of these estimates. Property premiums also increased, due to both new business opportunities and an increase in our share on certain treaty renewals. Partially offsetting these increases was a reduction in our liability premiums, which was largely driven by the non-renewal of a significant contract following a material change to the cedant’s business. In addition, net adjustments to premium estimates on proportional contracts written in prior years for professional lines business were lower in 2010; we recognized $1 million in net adverse estimate revisions in 2010, compared to net favorable revisions of $12 million in 2009.

2009 versus 2008:The 17% increase in gross premiums written in 2009 was driven by improved market conditions and the select expansion of our business. Gross premiums written for liability and professional lines of business primarily benefited from new and opportunistic business opportunities, together with an increase in our share on certain treaty renewals this year. The growth of these lines was also partially due to the impact of premium adjustments on prior year proportional and excess of losscontracts for professional lines and liability contracts.liability. In 2009, we recorded positivenet favorable premium estimate adjustments of $14$12 million on prior year professional lines businessproportional contracts and negativenet adverse adjustments of $4 million on liability business, compared to negativenet adverse adjustments of $18$7 million and $13$9 million, respectively, in the prior year. Refer to the‘Critical Accounting Estimate on Premiums’ for further discussion.2008.

The trade credit and bond reinsurance market in Continental Europe experienced significant dislocation at the January 1, 2009 renewal and we were able to strengthen our market position at improved pricing, terms and conditions. In addition, at the first of July renewal, we entered the bond reinsurance market in Latin America.America at the July 1, 2009 renewal. The increase in catastrophe gross premiums written was driven by a combination of rate increases in the U.S. property catastrophe market together with new business opportunities and an increase in our participation on certain renewals. The prior yearrenewals; our 2008 balance included catastrophe reinstatement premiums of $28 million in connection with Hurricanes Ike and Gustav. The increase in property premiums in 2009 primarily reflectsreflected an improvement in rates and some new property pro rata business.

Gross premiums written on our engineering and crop business (included in “Other”) decreased during 2009, primarily reflecting exposure reductions amidst less favorable market conditions.

Gross premiums written in 2009 were also negatively impacted from a stronger U.S. dollar relative to 2008. In particular, the U.S. dollar was stronger against the Euro and Sterling at our major renewal of January 1. Gross premiums written excluding the effect of exchange rate movements increased 19% in 2009.

2008 versus 2007:Gross premiums written in 2008 benefited from a weakened U.S. dollar relative to 2007. In particular, the U.S. dollar was weaker against the Euro at our major renewal of January 1. This primarily impacted our property, credit and bond and motor lines of business. Gross premiums written otherwise decreased 3% in 2008, which was partially due to the impact of premium adjustments on prior year proportional and excess of loss professional lines and liability contracts. In 2008, we recorded negative premium adjustments of $18 million and $13 million on professional lines business and liability business, respectively, compared to positive adjustments of $8 million and $6 million, respectively in the prior year.

The opportunity for growth within our reinsurance portfolio was generally limited in 2008, reflecting a modest deterioration in global market conditions. In addition, we experienced an ongoing trend of higher risk retention by our clients, particularly on liability lines. These factors were partially offset by growth opportunities within engineering and crop line of business in 2008. We also recorded $28 million of reinstatement premiums in connection with Hurricanes Ike and Gustav on catastrophe line of business. Property premiums in 2008 benefited from the renewal of a significant 16-month pro-rata contract, which previously renewed in 2006.

Net Premiums Earned:

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

 

Year ended December 31,  2009  2008  2007  Percent Change 
                               % Change
Year ended December 31, 2009  2008  2007  08 to 09 07 to 08  2010   2009   2008   09 to 10  08 to 09
                 

Catastrophe

  $451,085  28%  $453,091  30%  $463,068  30%  -   (2%)      $454,954    26%    $451,085    28%    $453,091    30%    1%  -    

Property

   311,272  19%   305,483  20%   333,154  22%  2%   (8%  323,201    19%     311,272    19%     305,483    20%    4%  2%

Professional lines

   266,792  16%   221,531  15%   245,672  16%  20%   (10%  285,224    16%     266,792    16%     221,531    15%    7%  20%

Credit and bond

   179,362  11%   139,861  9%   107,618  7%  28%   30%    217,809    13%     179,362    11%     139,861    9%    21%  28%

Motor

   99,497  6%   97,773  7%   98,627  7%  2%   (1%  127,404    7%     99,497    6%     97,773    7%    28%  2%

Liability

   227,511  14%   181,858  12%   212,689  14%  25%   (14%  232,014    13%     227,511    14%     181,858    12%    2%  25%

Engineering

   66,428  4%   53,524  4%   30,800  2%  24%   74%    71,229    4%     66,428    4%     53,524    4%    7%  24%

Other

   31,851  2%   50,917  3%   34,342  2%  (37% 48%    29,082    2%     31,851    2%     50,917    3%    (9%)  (37%)
                                                  

Total

  $  1,633,798  100%  $  1,504,038  100%  $  1,525,970  100%  9%   (1% $ 1,740,917    100%    $ 1,633,798    100%    $ 1,504,038    100%    7%  9%
                                                  
                                               

The increase in net premiums earned in 2010 related to the aforementioned increased trade credit and bond and motor writings, while the 2009 reflectsincrease reflected gross premium written growth across several lines of business, this year, in particular professional lines, trade credit and bond and liability business. Net premiums earned in 2008 were largely unchanged with 2007, reflecting a period in which our gross premiums written were also relatively stable.

Loss Ratio:

The table below shows the components of our loss ratio:

 

Year ended December 31,  2009  Point
Change
  2008  Point
Change
  2007 
  

Current accident year

  62.6%   (19.0% 81.6%   18.7%   62.9%     

Prior period reserve development

  (13.0% (1.4% (11.6% (3.5% (8.1%
                 

Loss ratio

  49.6%   (20.4% 70.0%   15.2%   54.8%  
                 
                 

Year ended December 31,    2010   % Point
Change
     2009   % Point
Change
   2008 
                

Current accident year

     74.8%     12.2      62.6%     (19.0   81.6%  

Prior period reserve development

     (11.2%   1.8      (13.0%   (1.4   (11.6%
                              

Loss ratio

     63.6%     14.0      49.6%     (20.4   70.0%  
                              
                              

Current Accident Year Loss Ratio

2010 versus 2009:

The 12.2 percentage point increase in our current accident year loss ratio was largely the result of an increased level of natural catastrophe activity. We recognized estimated pre-tax net losses (net of related reinstatement premiums) of $136 million and $110 million for the 2010 New Zealand and Chilean earthquakes, respectively. In addition, we recognized net losses for a number of other notable 2010 weather-related events including the first quarter Australian and U.S. storms and European Windstorm Xynthia, as well as fourth quarter Australian and U.S. storms. In contrast, catastrophe losses were notably less significant in 2009.

The following factors partially offset the impact of the catastrophe-related increase:

A lower level of claims activity in our trade credit and bond business relative to the prior year; loss activity on this line was elevated in 2009 as a result of the global financial crisis. Our current accident year loss ratio on this business was 61% in 2010, compared to 89% for 2009;

The continued incorporation of more of our own historical loss experience within short-tail lines of business, which has reduced our current accident year loss ratio because our experience has generally been better than we expected; and

The previously discussed increased consideration of our own loss experience in establishing our current accident year loss ratios for our medium-tail business in 2010, most notably for professional lines.

2009 versus 20082008::

The 19.0 ratio point decrease in our current accident year loss ratio was the net result of several factors. The most significant drivers forof the decrease were as follows:were:

 

A benign North Atlantic hurricane season in 2009 comparedcomparison to 2008, which includedwhen we recognized pre-tax net losses incurred of $281 million, or 18.7 points, onin relation to Hurricanes Ike and Gustav.

OtherA reduction in other catastrophe losses in 2009 were also lower relative to the prior year,2008, which included flood, hail and tornado activity in the U.S., an earthquake in China and storms in Australia. The most significant catastrophe losses this yearin 2009 related to European windstorm activity in the first and third quarter,quarters, with total incurred net losses estimated at $27 million.

 

The incorporation of more of our own historical loss experience within short-tail lines of business. Given that this experience has generally been better than we expected, this had the impact of reducingreduced our netcurrent accident year loss ratios on several lines of business relative to 2008.

These factors were partially offset by:

 

Increased loss activity on trade credit and bond business this year emanating from continued turbulence in the economic environment.global financial crisis. The current accident year loss ratio on credit and bond business in 2009 was 89% compared to 72% for17 points higher than in 2008.

 

An increase in Canadian crop losses in 2009 relative to 2008.

2008 versus 2007:

The 18.7 ratio point increase in our current accident year loss ratio was the net result of several factors. The most significant drivers for the increase were as follows:

A more active North Atlantic hurricane season in 2008 compared to 2007, with losses primarily emanating from Hurricanes Ike and Gustav of $281 million, or 18.7 points. Other catastrophe losses in 2008, which included flood, hail and tornado activity in the U.S., an earthquake in China and storms in Australia were broadly in line with 2007, which included losses incurred on Windstorm Kyrill and flooding and storm damage in Australia and U.K.

Increased loss activity on trade credit and bond business in 2008 emanating from the deteriorating economic environment. The current accident year loss ratio on credit and bond business in 2008 was 72% compared to 55% for 2007.

Our initial expected loss ratios in 2008 were mostly higher than in 2007, reflecting the impact of pricing deterioration across many several lines of business. The impact of this was partially offset by the incorporation of more of our own historical loss experience in our loss picks, which has generally been better than the industry benchmarks that we also incorporate.

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

Acquisition Cost Ratio:The increase in the acquisition cost ratio of our reinsurance segment in 2009 versus 2008 primarily reflectsreflected changes in business mix and growth in lines with higher acquisition costs.

2010 Reinsurance Segment Outlook

Our 2010 treaty reinsurance renewals are progressing well and we are satisfied with the quality, diversity and balance of the portfolio we reassembled at January 1, 2010. Typically, approximately 50% of our reinsurance gross premiums written within any calendar year renews 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 2010 will represent over 7% growth in premium relative to the same period in 2009. The growth rate is 4% after adjusting for changes in foreign exchange rates.

Just over 80% of our 2009 expiring premium from our Europe-based reinsurance business renews on January 1st and it was this portfolio that drove our growth. Across the board, the market was more competitive, but not irrational, and we continued to decline business that was not attractively priced. The select areas where we chose to grow, combined with a modest shift in our portfolio towards more proportional business, resulted in growth overall in the European reinsurance account. The most significant areas of growth were our trade credit and bond reinsurance and motor reinsurance lines of business. Our new Latin America surety reinsurance team contributed to growth in the trade credit and bond reinsurance line with new business written at the January 1st renewal. In our motor reinsurance line, we reduced our participation in the excess-of-loss market in France due to the failure of the market to secure rate to compensate for escalating loss costs. However, this reduction was more than offset by new proportional motor treaties in the U.K., where cedants are experiencing rate increases on the underlying account.

Overall, our catastrophe reinsurance premium was down approximately 10% at the January 1st renewal as we reduced our exposure to European windstorm. Increased competition has led to expected margins reducing gradually over the last few years. This business is still attractively priced at current levels, but the expectation of continued pressure in Europe prompted us to re-balance our worldwide cat portfolio. In North America, any price reductions at the January 1st renewal did not alter expected margins materially. Property catastrophe reinsurance remains one of our most attractively priced lines of business. Pricing for regional property per risk and excess of loss accounts was, for the most part, driven by experience. The exception to this was Continental Europe where the market did not react similarly.

Our liability and professional lines reinsurance business, reduced slightly at the January 1st renewal. Professional liability treaties that showed deterioration in experience received pricing increases as warranted. Conversely, there were moderate downward movements in areas with less loss experience, such as commercial directors’ and officers’ business. For general liability business, accounts were renewed as expiring with some exceptions where rate were up modestly. Those accounts warranting large increases because of poor experience generally renewed with rate increases.

 

 

OTHER REVENUES AND EXPENSES

 

 

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

 

Year ended December 31,  2009  Percentage
Change
  2008  Percentage
Change
  2007 
  

Corporate expenses

  $  77,076  5%  $  73,187   26%   $  58,300     

Foreign exchange losses (gains)

   28,561  nm   (43,707 160%    (16,826

Interest expense and financing costs

   32,031  1%   31,673   (38%  51,153  

Income tax expense

   41,975  109%   20,109   (52%  41,491  
                 

Total

  $179,643  121%  $81,262   (39% $134,118  
                 
                    
nm-not meaningful

 

Year ended December 31,

  2010  % Change  2009   % Change  2008 
           

Corporate expenses

  $75,449  (2%)  $77,076   5%  $73,187 

Foreign exchange losses (gains)

   (15,535 nm   28,561   nm   (43,707

Interest expense and financing costs

   55,876  74%   32,031   1%   31,673 

Income tax expense

   38,680  (8%)   41,975   109%   20,109 
                   

Total

  $ 154,470  (14%)  $ 179,643   121%  $81,262 
                   
                     

nm - not meaningful

Corporate Expenses: Our corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 2.7%2.5%, 2.7% and 2.1%2.7% for 2010, 2009 and 2008, and 2007, respectively. The increase in the corporate expense ratio from 2007 to 2008 was primarily due to higher share-based compensation costs, principally associated with the renewed employment contract for our CEO and a higher grant date fair value on issued awards year over year (refer to Item 8, Note 15 to the Consolidated Financial Statements). The corporate expense ratio for 2009 was largely unchanged from 2008.

Foreign Exchange Losses (Gains): Some of our business is written in currencies other than the U.S. dollars.Dollar. The foreign exchange lossgains in 2009 was primarily due2010 and 2008 were largely attributable to the remeasurement of net liabilities denominated in Euro, and Sterling, following their appreciationthe depreciation of the Euro against the U.S. dollar this year. In comparison,Dollar in those years. The appreciation of the Euro depreciatedand Sterling against the U.S dollar during 2008 drivingU.S. Dollar in 2009 drove the foreign exchange gainloss for that year. The foreign exchange gain in 2007 was driven by the revaluation of net asset balances denominated in several foreign currencies, following their appreciation against the U.S. dollar over this period.

Interest Expense and Financing Costs: Interest expense primarily includesrelates to interest due on theour senior notes we issued in 2004. In 2007, it also included interest costsand increased during 2010 following the issuance, on March 23, 2010, of $19$500 million incurred onaggregate principal amount of ten-year senior notes with a $400 million repurchase agreement we entered into in December 20065.875% coupon. See Item 8, Note 10(a) to finance a life settlement investment. We terminated this agreement in September, 2007.the Consolidated Financial Statements for further details.

Income Tax Expense: Income tax expense is generated primarily through our foreign operations in the United States and Europe. TheOur effective tax rate, which is calculated as income tax expense divided by income before tax, was 4.3%, 7.8% for 2009 compared withand 4.9% in 2010, 2009 and 2008, and 3.7% in 2007. Therespectively. This effective tax rate variescan vary between periods depending on the distribution of net income or losses among(loss) amongst tax jurisdictions, as well as other factors.

During 2010, our various taxable jurisdictions.

The increaseincome tax expense included a $14 million reduction in the valuation allowance associated with our deferred tax assets arising from realized U.S. capital losses. We realized net U.S. capital gains in 2010 that will allow us to utilize a portion of those capital loss tax-carryforwards. As a result, the effective tax rate for our U.S. operations declined. Partially offsetting this was the establishment of a $6 million valuation allowance related to operating loss tax-carryforwards in other jurisdictions. The increase in our effective rate in 2009 overrelative to 2008 was driven by an increase in the portionproportion of total pre-tax income generated by our U.SU.S. subsidiaries. The net income generated by our U.S. subsidiaries in 2009 relative to the prior year. In 2008 our U.S subsidiaries incurredwas adversely impacted by significant losses relatedin relation to Hurricanes Ike and Gustav. The increase in the effective tax rate in 2008 over 2007 was associated with the establishment of a full valuation allowance ($30 million) against net deferred tax assets arising from U.S. realized capital losses and investment impairments arising during the year, due to insufficient positive evidence for recognition.

 

 

NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS/LOSSES

 

 

Net Investment Income

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

 

Year ended December 31,  2009 %
Change
 2008 %
Change
   2007   2010 % Change   2009 % Change   2008 
          

Fixed maturities

  $385,418   (10% $428,416   17%    $366,746       $352,357   (9%)    $385,418   (10%)    $428,416 

Other investments

   82,042   137%    (220,981 (743%   34,351     64,765   (21%)     82,042   137%      (220,981

Cash and cash equivalents

   8,302   (80%  41,576   (54%   90,700     5,836   (30%)     8,302   (80%)     41,576 

Equities

   3,765   (52%  7,862   100%     -     2,900   (23%)     3,765   (52%)     7,862 

Short-term investments

   651   (82%  3,579   16%     3,079     1,441   121%     651   (82%)     3,579 
                           

Gross investment income

   480,178   84%    260,452   (47%   494,876     427,299   (11%)     480,178   84%     260,452 

Investment expense

   (15,700 19%    (13,215 10%     (12,003   (20,407  30%     (15,700  19%     (13,215
                           

Net investment income

  $  464,478   88%   $  247,237   (49%  $  482,873    $ 406,892   (12%)    $ 464,478   88%    $247,237 
                           
 

Pre-tax yield:(1)

                 

Fixed maturities

   4.2%     5.2%      5.0%     3.6%      4.2%      5.2%  

Cash and cash equivalents

   0.6%     2.8%      4.9%     0.5%      0.6%      2.8%  
                      
              
(1)Pre-tax yield is annualized and calculated as net investment income divided by the average month-end amortized cost balancebalances for the period.periods indicated.

Fixed MaturitiesMaturities:

20092010 versus 2008:2009: The 9% reduction in investment income from fixed maturities reflects lower reinvestment yields during in the current year primarily due to a downward shift in U.S. Treasury rates and further tightening of credit spreads. This decline in net investment income was partially offset by growth of 7% on our average fixed maturities balances in the current year. This growth was primarily due to redeploying operating cash to fixed maturities.

2009 versus 2008: The 10% reduction in investment income was primarily due to lower reinvestment yields as a result of the global economic stimuli provided by various government bodies in late 2008 which contributed to the significant tightening of credit spreads. This reduction was partially offset by growth of 12% inon our average fixed maturity balances during the year.

2008 versus 2007: The increase in investment income from fixed maturities was primarily due to the impact of positive operating cash flows on our average investment balances, compounded with slightly higher yields.

Cash and Cash Equivalents

2009 versus 2008: The decrease in investment income from cash and cash equivalents in 2009 reflects the decline in global short-term interest rates that the global governments have initiated to stabilize financial markets and the broader economy. Average cash and cash equivalents balances in 2009 were similar to those in 2008.

2008 versus 2007:The reduction in net investment income from cash and cash equivalents in 2008 was due to a significant decline in global short-term interest rates and lower average cash and cash equivalents balances during the current year. The reduction in our average cash and cash equivalents balances was largely associated with the funding of our share repurchases and investment portfolio during the first half of 2008. During the second half of 2008, we began to increase our allocation to cash and cash equivalents in response to the deteriorating financial market conditions.

Other InvestmentsInvestments:

As noted in our ‘Critical Accounting Estimates—Fair Value Measurements’, weWe record the change in fair value on our other investments in net investment income. Accordingly,income and consequently, the pre-tax return on other investments may vary materially yearperiod over year,period, in particular during volatile credit and equity markets.

The following table provides a breakdown of net investment income (loss) from other investments:

 

  
Year ended December 31,  2009 2008 2007     2010     2009     2008 
              

Hedge funds

    $ 25,663     $ 43,399     $(72,614

CLO - equity tranched securities

     21,970      (23,366     5,528 

Credit funds

  $53,461   $(149,787 $936          14,474      53,461       (149,787

Hedge funds

   43,399    (72,614  21,260  

Short duration high yield fund

   8,548    (4,108  3,087       2,658      8,548      (4,108

CLO – equity tranched securities

   (23,366  5,528    8,102  

Life settlement contracts

   -    -    966  
                            

Total

  $  82,042   $  (220,981 $  34,351      $64,765     $82,042     $(220,981
                            
 

Pre-tax return on other investments(1)

   15.8%    (35.1%  3.7%       12.1%       15.8%       (35.1%
                        
(1)The pre-tax return on other investments is calculated by dividing total income (loss) from other investments by the average month-end fair value balances held for the periods indicated.

2010 versus 2009:The 15.8% pre-tax return on other investments declined by 3.7% to 12.1% in 2009 was2010 primarily driven by strong performance bydue to lower returns from our investments in hedge funds and credit funds. Our hedge fund investments have exposures primarily to net long equity positions, and these funds tracked the strong performance of global equity indices during the year.positions. Credit funds also advanced on modest improvement in the recoverypricing of market pricing for the underlying bank loans that form the collateral of these funds. In 2008, credit funds were negatively impacted by illiquidity proliferating throughoutfunds; however, we did not achieve the credit markets rather than a fundamental deteriorationoutsized returns of 2009 when the valuation of the underlying collateral. Loan valuations withincollateral recovered from historic lows. The decline in income from short duration high yield fund was due to its full redemption in 2010.

Partially offsetting the decline in the pre-tax return was the recovery in fair value for our CLO equity tranched securities (“CLO Equities”) in 2010. The increase in fair value was driven primarily by lower than anticipated default rates, partially offset by lower recovery rates, resulting in higher cash distributions from CLO Equities than previously expected. In light of this development, we slightly reduced our default rate and recovery rate assumptions for the remaining lives of the CLO Equities in our valuation models during the fourth quarter of 2010 (refer to the ‘Critical Accounting Estimates—Fair Value Measurements’for further details).

2009 versus 2008: The 15.8% pre-tax return on other investments in 2009 was primarily driven by the strong recovery in the equity and credit funds began falling atmarkets from the end of 2007 after default expectations increased2008 financial crisis as a result of the collapse of the sub-prime mortgage industry that effectively shut down credit markets worldwide.unprecedented global economic stimuli provided by various government bodies in late 2008. This led to a significant widening in credit spreads. Although there was a brief recovery in prices in mid-2008, prices continued to fall dramatically in the months following the failure of Lehman Brothers and other global financial firms that forced de-leveraging by investors within the financial markets. Loan valuations at the end of 2008 were near historical lows. Consequently, this contributed significantly to the negative pre-tax return in 2008.

The strong performance in 2009 was partially offset by a reduction in thenegative fair value of the collateralized loan obligation (“CLO”) equity tranched securitiesadjustment to CLO Equities due to lower recoveries on actualaccelerated defaults and lower recoveries observed earlier during 2009 which led us to negatively adjust our projected default rate and recovery rate assumptions.

Cash and Cash Equivalents:

2010 versus 2009: The 30% reduction in investment income was driven mainly by continuing lower global short-term interest rates, oncompounded with lower average cash and cash equivalent balances.

2009 versus 2008: The 80% reduction in investment income in 2009 was driven by the underlying collateral. Actual defaultsignificant decline in global short-term interest rates have stabilized andinitiated by global government policy makers in some cases are currently trending lowerlate 2008 in response to the turmoil in the second halffinancial markets. Level of 2009. Refer to the ‘Critical Accounting Estimate – Fair Value Measurements’ section for further details.

Equities

During 2008, we began funding an allocation to global equities. The income from equities represents dividends received, net of applicable withholding taxes. To reduce our exposure to the financial sector in early 2009, we sold all of the non-redeemable preferred stocks. As a result, our dividend income declined by 52%average cash and cash equivalent balances was relatively consistent in 2009 relative toand 2008.

Net Realized Investment Gains/Losses

Our fixed maturities and equities are classified as 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 investment gains/losses) only when securities are sold, hedged, or when OTTI are recorded on these assets.impaired. Additionally, net income is impacted (through net realized gains/losses) by changes in the fair value of investment derivatives, mainly foreign exchange forward contracts.contracts, are recorded in net realized investment gains/losses.

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

 

  
Year ended December 31,  2009 2008 2007     2010     2009     2008 
              

On sale of:

     

On sale of investments:

             

Fixed maturities and short-term investments

  $34,795   $56,219   $  13,874         $200,048     $34,795     $56,219 

Equities

   (10,822  (69,523  -       10,800      (10,822     (69,523

OTTI charges recognized in earnings

   (337,435  (77,753  (8,562     (17,932     (337,435     (77,753
 

Change in fair value of investment derivatives

   (1,032  6,650    (82     (3,641     (1,032     6,650 
  

Fair value hedges:

                  

Change in fair value of derivative instruments

   (13,655  7,248    -       35,886      (13,655     7,248 

Change in fair value of hedged investments

   16,565    (8,108  -       (30,063     16,565      (8,108
                            

Net realized investment gains (losses)

  $  (311,584 $  (85,267 $5,230      $ 195,098     $ (311,584    $ (85,267
                            
                        

On sale of investmentsinvestments:

Generally, sales of individual securities occur when we conclude there are changes in the relative value, credit quality, or duration of a particular issuer or market value is likely to deteriorate. To be prudent, weissuer. We may also sell to reduce a concentrationrebalance our investment portfolio in aorder to change exposure to particular issuersectors or asset class.classes.

Fixed maturities and short-term investments:2010 versus 2009

The net: Substantial gains were realized investment gains on the sale of fixed maturities and short-term investments in 2009 primarily include gains on sales of U.S. agency pass-throughs (residential mortgage-backed securities (“MBS”)) as the strong rally since late 2008 provided an opportunity to reduce potential extension of our duration risk (refer to‘Cash and Investments’ section).

The realized gains on fixed maturities as a result of the significant narrowing of credit spreads and, to a lesser extent, lower U.S. Treasury rates. Improvements in 2008 primarily reflectglobal equity markets also enabled us to realize gains on the sale of certain agency mortgage-backed securities, the price of which were positively impacted by the conservatorship of Fannie Mae and Freddie Mac. In addition, we also recognized gains on the repositioning of our high grade fixed income portfolio, taking advantage of dislocations in certain sectors of the fixed income markets.

Equities:

Netequity holdings. The realized investment losses on the sale ofour equities in 2009 were primarily driven by the sale of preferred shares in the financial sector in the first quarterquarter.

2009 versus 2008: The recovery in the credit markets in 2009 enabled us to rebalance our fixed maturities portfolio generating net realized gains. The realized gains in 2008 were primarily driven by the sale of certain agency MBS, in which pricing benefited from the year.

Netconservatorship of Fannie Mae and Freddie Mac. However, these gains were offset by realized losses on the saleequities, which included $60 million of equities in 2008 include losses of $60 million in connection with the sale of our Fannie Mae and Freddie Mac non-redeemable preferred equities recognizingprior to their deteriorating financial condition. These publicly traded government sponsored enterprises, which were leading participants in the U.S. secondary mortgage market, were negatively impacted by the housing market downturn and credit crunch. In September 2008, both Fannie Mae and Freddie Mac were placed into conservatorship by the U.S. Treasury.

OTTI chargescharges:

We review our available-for-sale investment portfolio each quarter to determine if the unrealized loss position of a security is other-than-temporary. Refer to the ‘Critical Accounting Estimates – OTTI’ section for further details on our impairment review process.

In accordance with the new accounting guidance issued and effective April 1, 2009, the OTTI charge to earnings in 2010 reflects only credit impairments, where projected cash flows are less than the amortized cost of a security, or the full unrealized loss position if we intend to sell a fixed maturity security or it is more likely than not that we will need to sell it to meet our liabilities. The newThis guidance does not allow for retrospective application, therefore the

OTTI chargecharges recorded for fixed maturities in the first quarter of 2009 as well asof $26 million and for priorthe full year periods2008 of $71 million are based on previous OTTI accounting guidance (i.e. the difference between the fair value and amortized cost of a debt security in an unrealized loss position).

The following table summarizes our Accordingly, the OTTI recognized in earnings by asset class:for the years presented the following table are not comparable.

 

  
Year ended December 31,  2009  2008  2007     2010     2009     2008 
              

Fixed maturities:

                    

Corporate debt

  $  277,979  $  56,809  $  3,683         $3,156     $277,979     $56,809 

Residential MBS

   24,594   4,956   509  

Commerical MBS

   10,843   323   1,024  

Agency MBS

     -           345      -      

Non-Agency CMBS

     413      10,843      323 

Non-Agency RMBS

     4,715      24,249      4,956 

ABS

   2,384   8,615   3,346       1,126      2,384      8,615 

Municipals

   1,280   394   -       19      1,280      394 
                  
               9,429      317,080      71,097 
   317,080   71,097   8,562   

Equities

   20,355   6,656   -       8,503      20,355      6,656 
                            

Total OTTI recognized in earnings

  $337,435  $77,753  $8,562      $ 17,932     $ 337,435     $ 77,753 
                            
                          

Fixed maturities:

The continued pricing improvement of credit spread sectors through 2010 significantly mitigated any further credit losses in our fixed maturities portfolio. The total 2009 OTTI charges in 2009 were significantly higher than 2008,charge on fixed maturities was primarily due to an impairment charge ofthe $263 million impairment on our medium-term note (“MTN”) holdings held within our corporate debt portfolio during the third quarter.of MTNs. In response to the credit crisis, the MTNMTNs managers had to reducereduced their leverage levels which in turn lowered the credit duration of the MTNs. As credit markets recovered and credit spreads tightened in 2009, price appreciation was not as pronounced as the depreciation during 2008 due to the lower credit duration of the MTNs. The tightening of credit spreads was more significant and much quicker than anticipated which has hindered the ability of the MTN managers to reinvest the underlying cash flows at wider credit spreads. Consequently, based on updatedwe revised the significant inputs in our projected cash flow projections, we concluded that we will not fully recover par on theseflows for the MTNs, resulting in a significant credit impairment charge during the third quarter of 2009. Since this impairment, the MTNs have partially recovered in fair value and therefore wecertain MTNs have recordedmatured or have been redeemed with total realized gains of $29 million in 2010 and an additional $14 million gain in January 2011 (see ‘Cash and Investments’ section).

The OTTI charges during 2009 also included credit losses on these securities.

subordinated debt of certain U.S. and foreign banks (included in corporate debt), as well as non-agency RMBS and ABS, which were largely due to exposures to alternative-A and sub-prime collateral. Further, we made the decision to sell certain corporate debt securities, non-agency RMBS and non-agency CMBS in an unrealized loss position.

The impairmentOTTI charges on the residential MBS during 2009in 2008 were primarily related to expected credit losses while the OTTI charge on the commercial MBS was related to our intent to sell in order to take advantage of the favorable market conditions and to reduce our exposure on this asset class.

In 2008, we impaired $32 million of impaired corporate debt securities held in Lehman Brothers following its bankruptcy and sale in September 2008. Additionally, the OTTI charges on residential MBS as well aswe impaired certain non-agency RMBS and ABS were primarily the result of the credit crisis and thedue to higher risk of defaults on certain identified securities.

The OTTI losses in 2007 were spread across our portfolio, with no concentration to any particular type of investment or sector.driven by the credit crisis.

Equities:

The level of OTTI losses on equities was much higher in 2009 than in 2010 and 2008 areprimarily as a result of the significant turmoil in the equity markets experienced in late 2008 and through the first quarter of 2009. The impairments were due to the severity and duration of the unrealized loss positions, for which we concluded the forecasted recovery period was too uncertain. The recognition of such losses does not necessarily indicate that sales will occur or that sales are imminent or planned.

Fair Value HedgesHedges:

Due to the significant volatility in the Euro vs. U.S. dollar currencies in 2008, we implemented a fair value hedging program to hedge un-matched foreign currency exposures in the third quarter of 2008. During 2009 and 2008, ourexposures. Our hedging program washas since been effective, resulting in a net gaingenerating gains/losses of $3 million and net lossless than 2% of $1 million, respectively. Refer to Item 8, Note 9 of our Consolidated Financial Statements and Item 7A. ‘Quantitative and Qualitative Disclosure About Market Risk – Foreign Currency Risk’for further details.notional balances.

Total Return

Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints, designed to manage risk.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. The following table provides a breakdown of the total return on cash and investments for the period indicated:

 

  
Year ended December 31,  2009 2008 2007   2010   2009 2008 
       

Net investment income

  $464,478   $247,237   $482,873       $406,892   $464,478  $247,237 

Net realized investments gains (losses)

   (311,584  (85,267  5,230     195,098    (311,584  (85,267

Change in net unrealized gains/losses, net of currency hedges

   798,870    (735,074  67,238     74,175    798,870   (735,074
                     

Total

  $951,764   $(573,104 $555,341    $676,165   $951,764  $(573,104
                     
 

Average cash and investments(1)

  $  11,138,624   $  10,623,059   $  10,217,520    $ 12,285,244   $ 11,138,624  $ 10,623,059 
           
           

Total return on average cash and investments, pre-tax

   8.5%    (5.4%  5.4%     5.5%     8.5%    (5.4%
                   
        
(1)The average cash and investments balance is calculated by taking the average of the month-end fair value balances held for the periods indicated.

 

 

CASH AND INVESTMENTS

 

 

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

 

  December 31, 2009  December 31, 2008   December 31, 2010   December 31, 2009 
Fair Value  Amortized Cost
or Cost
  Fair Value  Amortized Cost
or Cost
   Amortized Cost
or Cost
   Fair Value   Amortized Cost
or Cost
   Fair Value 
          

Fixed maturities, available for sale, fair value

  $9,718,355  $9,628,287  $7,750,654  $8,404,994     

Equities, available-for-sale, fair value

   204,375   195,011   107,283   164,330  

Other investments, at fair value

   570,276   585,414   492,082   632,304  

Fixed maturities

  $ 10,346,243   $ 10,482,897   $ 9,628,287   $ 9,718,355 

Equities

   327,207    349,254    195,011    204,375 

Other investments

   478,872    519,296    585,414    570,276 

Short-term investments

   129,098   129,098   261,879   261,879     172,719    172,719    129,098    129,098 
                             

Total investments

  $  10,622,104  $  10,537,810  $  8,611,898  $  9,463,507    $11,325,041   $11,524,166   $ 10,537,810   $ 10,622,104 
                             
 

Cash and cash equivalents(1)

  $864,054  $864,054  $1,820,673  $1,820,673    $1,045,355   $1,045,355   $864,054   $864,054 
                             
                          
(1)Includes restricted cash and cash equivalents of $116 million and $75 million for 2010 and $123 million for 2009, and 2008, respectively.

Overview

The amortized cost/cost of our total investments increased by $1.1 billion$787 million from December 31, 2008,2009, primarily as a result of shifting some of our cash and cash equivalents holdingsdue to our fixed maturities portfolio as well as investing a portion of our operating cash flows generated in 2009. The total increase was partially offset by $337 million in OTTI charges in 2009. Refer to ‘Net Realized Investment Losses’ above for further details.2010.

The increase of $2 billion in the fair value of our total investments inincreased by $902 million from December 31, 2009, was primarily due to new purchases (as noted above) coupled with significantlynet contributions and improved valuation as a result offor our fixed maturities driven by the recoverydownward shift in the U.S. Treasury

rates and the tightening of credit spreads. To a lesser extent, net contributions to global financial markets in 2009. This recovery was dueequity portfolios and positive equity returns during 2010 also contributed to the global government initiatives, centered on unprecedented monetary stimulusincrease in fair value of total investments. This combined growth was partially offset by net redemptions in certain alternative investment holdings (other investments) and near zero short-term interestnegative movement in foreign exchange rates, in response tomostly Euro against the financial crisis in late 2008. Most asset classes higher on the risk spectrum (i.e. lower quality credit ratings) gained significantly in valuation from the lows reached in March 2009 as a result of unprecedented credit spreads tightening.U.S. dollar.

The total change in net unrealized gains (losses) on our available-for-sale investment portfolio for 2009 was as follows:

    Net Unrealized
Gains (Losses) at
December 31, 2009
  Net Unrealized
Gains (Losses) at
December 31, 2008
  Change
in 2009
 
  

Fixed maturities:

     

U.S. government and agencies

  $  (3,215 $  38,566   $  (41,781)     

Non-U.S. government

   8,971    7,219 ��  1,752  

Corporate debt

   98,316      (455,742  554,058  

Residential MBS

   1,848    (24,813  26,661  

Commercial MBS

     (17,418  (170,217  152,799  

ABS

   (12,692  (52,260  39,568  

Municipals

   14,258    2,907    11,351  
              

Total fixed maturities

  $90,068   $(654,340 $744,408  
              
  

Equities:

     

Common stock

  $9,364   $(47,098 $56,462  

Preferred stock

   -    (9,949  9,949  
              

Total equities

  $9,364   $(57,047 $66,411  
              
              

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

Fixed Maturities

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

 

  December 31, 2009  December 31, 2008 
Fair Value  % of Total  Fair Value  % of Total   December 31, 2010   December 31, 2009 
   Fair Value   % of Total   Fair Value   % of Total 

Fixed maturities:

                  

U.S. government and agencies

  $  1,856,659  19%  $  1,187,333  15%     

U.S. government and agency

  $860,120    8%    $1,856,659    19%  

Non-U.S. government

   696,814  7%   279,225  4%     772,798    7%     696,814    7%  

Corporate debt

   3,580,766  37%   2,061,317  27%     4,162,908    40%     3,580,766    37%  

Residential MBS

   1,779,641  18%   2,711,998  35%  

Commercial MBS

   662,811  7%   763,098  10%  

Agency MBS

   2,593,582    25%     1,566,259    16%  

Non-Agency CMBS

   474,785    5%     653,211    7%  

Non-Agency RMBS

   244,202    2%     222,982    2%  

ABS

   443,139  5%   381,006  5%     661,843    6%     443,139    5%  

Municipals(1)

   698,525  7%   366,677  4%     712,659    7%     698,525    7%  
                             

Total

  $9,718,355  100%  $7,750,654  100%    $10,482,897    100%    $9,718,355    100%  
                             
  

Credit ratings:(1)(2)

                  

U.S. government and agencies

  $1,856,659  19%  $1,187,333  15%  

U.S. government and agency

  $860,120    8%    $1,856,659    19%  

AAA(2)(3)

   4,007,688  41%   4,504,963  58%     4,852,558    46%     4,007,688    41%  

AA

   914,454  9%   491,185  6%     1,081,535    10%     914,454    9%  

A

   1,760,929  18%   944,841  12%     2,150,324    21%     1,760,929    18%  

BBB

   1,036,359  11%   601,196  8%     1,163,168    11%     1,036,359    11%  

Below BBB(3)(4)

   142,266  2%   21,136  1%     375,192    4%     142,266    2%  
                             

Total

  $9,718,355  100%  $7,750,654  100%    $ 10,482,897    100%    $ 9,718,355    100%  
                             
                          
(1)Includes bonds issued by states, municipalities, and political subdivisions
(2)As assigned by S&P. In the absence of an S&P rating, we used the lower rating established by either Moody’s or FitchFitch.
(2)(3)Includes U.S. government-sponsored agency residential MBSRMBS and commercial MBSCMBS.
(3)(4)Non-investment grade securities

During 2009, the majority of new2010, we reduced our U.S. government and agency holdings, as well as our investment in non-agency CMBS. The proceeds, along with partial proceeds from our senior unsecured debt issued in March, were allocated primarily to corporate debt, agency MBS and ABS. New investments in corporate debt were made in high-grade corporate2010 due to our positive outlook for further credit spread tightening and the funding of a new short duration high yield portfolio. This consists of a well diversified portfolio of short duration high yield debt securities with a fair value of $277 million and a weighted-average credit rating of B+. The increase in non-investment grade holdings since December 31, 2009, was primarily due to take advantagethe funding of this new portfolio. Our ABS holdings increased in 2010 due to the availability of higher yields while maintaining the same overall credit quality profile for the investment portfolio. new issues with shorter durations.

At December 31, 2009,2010, fixed maturities had a weighted average credit rating of AA- (2009: AA) with a book yield of 3.3% (2009: 3.9%) and an approximate average duration of 3.13.2 years (2008: 2.5(2009: 3.1 years). When incorporating cash and cash equivalents into this calculation (bringing fixed maturities and cash to $11.5 billion), the average rating would be AA (2009: AA) and the average duration at December 31, 2009 iswould be 2.9 years (2009: 2.8 years (2008: 2.1 years).

Non-U.S. Government:

Our holdings in non-U.S. government securities consisted of fixed income obligations of non-U.S. sovereigns, including government agencies, local governments and supranationals. At December 31, 2009,2010, the weighted average credit rating offor these securities was AA+ (2009: AAA). The table below summarizes our fixed maturities portfolio was AA (2008: AA+). To calculate the weighted average credit rating, we assigned points to each rating with 30 points for the highest rating (U.S. governmentlargest country exposures by fair value at December 31, 2010 and agencies) and 2 points for the lowest rating (D) and used the average the weighted average market values of the individual securities. Securities that are not rated by S&P, Moody’s or Fitch are excluded from the weighted average calculation. 2009:

    December 31, 2010  December 31, 2009
Country  Fair Value   % of Total   Weighted
Average
Credit Rating
  Fair Value   % of Total   Weighted
Average
Credit Rating
              

Germany

  $186,745    24.2%    AAA  $176,522    25.3%    AAA

United Kingdom

   135,392    17.5%    AAA   69,778    10.0%    AAA

Canada

   79,803    10.3%    AA-   39,874    5.7%    AA+

Netherlands

   76,400    9.9%    AAA   65,908    9.5%    AAA

Spain

   56,671    7.3%    AA   20,443    2.9%    AA+

France

   41,927    5.4%    AAA   117,331    16.9%    AAA

Belgium

   36,397    4.7%    AA+   -         0.0%     

Qatar

   23,397    3.0%    AA   7,795    1.1%    AA-

Finland

   18,514    2.5%    AAA   -         0.0%     

Austria

   16,970    2.2%    AAA   -         0.0%     
                          
    $ 672,216    87.0%      $497,651    71.4%     
  

Supranationals

   53,370    6.9%    AAA   126,660    18.2%    AAA

Other

   47,212    6.1%    A+   72,503    10.4%    AA-
                          
   $ 772,798    100.0%    AA+  $ 696,814    100.0%    AAA
                          
                           

At December 31, 2009, the fair value2010, our non-U.S. sovereign debt portfolio had net unrealized losses of $4 million (2009: $9 million net unrealized gains) which included net unrealized foreign exchange losses of $9 million (2009: $2 million), mainly on EUR-denominated securities, not rated totaled $21 million (2008: $1 million).that have been effectively hedged through our hedging program.

The non-investment grade securities reported in the above table are as a result of downgrades subsequentWe also had no exposure to our initial purchases except for one MTN for $25 million. Our investment guidelinessovereign debt related to Portugal, Ireland, Italy, and policy as approved by the Finance Committee do not allow for investment in non-investment grade securities, without their pre-approval. Issuers of non-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer; accordingly, these securities are generally more sensitive to adverse economic conditions than investment grade securities. AtGreece at December 31, 2009, total non-investment grade securities comprised 1.5% (2008: 0.3%) of our total fixed maturities portfolio. We continue to hold these non-investment grade securities as we believe there is good return prospect based on their respective fundamentals. The increase in non-investment grade holdings was primarily due to downgrades of several non-agency RMBS issues and a small number of corporate debt issues during 2009.2010.

Corporate Debt:

At December 31, 2009,2010, our corporate debt portfolio had a weighted average credit rating of A (2008:A- (2009: A), a duration of 3.23.5 years (2008: 3.1(2009: 3.2 years) and a weighted average life of 4.54.4 years (2008:(2009: 4.5 years).

The composition of our corporate debt securities at December 31, 2010 and 2009 was as follows:

 

      December 31, 2010  December 31, 2009
  Fair Value  % of Fair
Value of Total
Fixed
Maturities
  

Net Unrealized
Gains at

December 31,
2009

  Change in Net
Unrealized Gains
(Losses) since
December 31, 2008
   Fair Value   % of
Total
   Weighted
Average
Credit Rating
  Fair Value   % of
Total
   Weighted
Average
Credit Rating
 

Direct Non Financials

  $2,329,712    56.0%    BBB+  $1,315,782    36.7%    A-

Direct Financials

  $  1,913,325  19.7%  $  25,543  $  126,058        1,722,756    41.4%    A+   1,913,324    53.4%    AA-

Direct Non Financials

   1,315,782  13.5%   55,251   82,919  

Medium-Term Notes (MTNs)

   351,660  3.6%   17,522   348,451     110,440    2.6%    BB+   351,660    9.9%    BBB
                                  

Total

  $3,580,767  36.8%  $98,316  $557,428    $ 4,162,908    100.0%    A-  $ 3,580,766    100.0%    A
                                  
                               

Non-financial exposures are primarily related to communications (20%), consumer non-cyclicals (19%) and electric (14%), with the remainder diversified across several other sub-sectors. The decline in the weighted average credit rating to BBB+ since December 31, 2009, was primarily due to the addition of a new short duration high yield portfolio (as mentioned above).

The direct financials exposures are primarily related to U.S. banks (30%(47%), and foreign banks (23%), and commercial finance (15%(20%), with the remainder diversified across several other sub-sectors. Included in direct financials debt are $281$49 million (2008: $98(2009: $281 million) of U.S. FDIC guaranteed bonds and $262 million (2009: $205 million (2008: nil)million) of foreign FDICgovernment guaranteed bonds. At December 31, 2009,Similar to our non-financials, the decline in the weighted average credit rating in 2010 was primarily due to the addition of financials debt was AA- by S&P (2008: A).

the new short duration high yield portfolio.

Non-financial exposuresIn general, our MTN holdings are primarily related to communications (28%), electric (16%) and consumer non-cyclicals (16%), with the remainder diversified across several other sub-sectors. The weighted average credit rating of non-financials debt at December 31, 2009 was A- by S&P (2008: A-).

The MTNs portfolio is collateralized by a pool of European fixed maturity securities diversified by country and asset sector with the majority of the exposure consisting of investment grade corporate and sovereign debt. The MTNs portfolio provides exposure to floating rate notes which allows us to diversify from our fixed interest rate exposure of other fixed maturity securities we hold in our investment portfolio. The fair value of MTNs is driven by the return of the underlying pool of fixed maturities and the level of leverage. As previously noted, we impaired all the MTNs during the third quarter of 2009, resulting in decreasing their amortized cost bases to fair value at the time of impairment. Following our review during the fourth quarter of 2009,During 2010, we have decidedreduced our allocation to redeem all MTNs managed by one manager and redeployredeployed the proceeds to investment grade diversified portfolios. These MTNs had a fair value of $61 million with unrealized gains of $1 million atfund the new short duration high yield portfolio. Subsequent to December 31, 2009,2010, we further reduced our holdings in MTNs by another $93 million and, were subsequently collected in early 2010. We continueaccordingly, our remaining exposure to hold the remaining MTNs as we believe there is still good short-term total return prospect for these investments.insignificant.

Non-Agency Mortgage-Backed Securities:

The following table provides a breakdown of the fair value of our residentialnon-agency RMBS and commercial MBSCMBS portfolios by credit rating as assigned by S&P:

 

  December 31, 2009  December 31, 2008     December 31, 2010     December 31, 2009 
Residential
MBS
  Commercial
MBS
  Residential
MBS
  Commercial
MBS
     Non-Agency
RMBS
     Non-Agency
CMBS
     Non-Agency
RMBS
     Non-Agency
CMBS
 
                  

U.S. government-sponsored agencies

  $  1,556,659  $  9,600  $  2,353,490  $  12,261     
 

Non-agencies:

         

AAA

   124,977   513,791   347,273   738,678      $ 164,510     $ 357,650     $ 124,977     $ 513,791 

AA

   27,499   63,555   5,555   4,042       7,547      43,405      27,499      63,555 

A

   2,831   74,473   1,799   8,117       2,442      72,191      2,831      74,473 

BBB

   3,794   1,392   2,556   -       11,559      1,539      3,794      1,392 

Below BBB(1)

   63,881   -   1,325   -       58,144      -           63,881      -      
                                     

Total

  $  1,779,641  $  662,811  $  2,711,998  $  763,098      $244,202     $474,785     $222,982     $653,211 
                                     
                                  
(1)Non-investment grade securities

Residential MBS:

Our residential MBSRMBS portfolio is supported by loans that are diversified across economic sectors and geographical areas. During 2009,2010, we reducedincreased our holdings in agency residential MBS due to the strong rally since late 2008 which gave us an opportunity to reduce the potential extensionnew issues of our duration risk due to the anticipated rise in interest rates. We reallocated the proceeds to U.S. treasury and agency debt securities. Further, we reduced holdings inAAA rated non-agency residential MBS and reallocated the proceeds to investment grade corporate debt securitiesRMBS to take advantage of higher yields. Valuation for agency RMBS improved significantly in 2009 as a result of the Federal Reserve’s MBS Purchase Program which helped to compress mortgage yield premiums closer to pre-crisis levels. Non-agency RMBS performed well due to renewed investors’ interest in riskier assets. As previously noted, the increase in non-investment grade RMBS was due to downgrades in 2009.

At December 31, 2009,2010, the average duration and weighted average life was 0.10.2 years (2008: 0.3(2009: 0.1 years) and 3.78.3 years (2008: 3.1(2009: 3.7 years), respectively, for non-agency residential MBS. At December 31, 2009, the non-agency residential MBS primarily originated from years 2004 to 2007, from which 2005 isRMBS. Based on fair value, the largest component (35%vintages in non-agency RMBS were years 2010 (25%) and 2005 (23%).

Our total exposure to subprime and Alt-A collateral has reduceddecreased to $70 million at December 31, 2010 from $88 million at December 31, 2009, from $132 million at December 31, 2008, primarily due to sales and paydowns. Of these securities, 50% (2009: 50%) are rated AAA by S&P (2008: 93%)&P.

Commercial MBS:

Our exposure to this asset class decreased in 20092010 primarily due to sales as the valuation on our commercial MBSCMBS holdings increased significantly during the year. Our remaining non-agency commercial MBSCMBS portfolio continues to be rated highly, with approximately 79%84% rated AAAAA or better (2009: 89%) by S&P. Additionally, the weighted average estimated subordination percentage for the non-agency portfolio was 27% at December 31, 2009 (2008:2010 (2009: 27%), which represents the current weighted average estimated percentage of the capital structure subordinated to the investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. At this time, based on fundamental analysis, we do not expect a principal loss on commercial MBS. At December 31, 2009,2010, the average duration and weighted average life was 3.63.4 years (2008:(2009: 3.6 years) and 4.45.2 years (2008: 4.5 years), respectively. Based on fair value, the largest vintages in our non-agency commercial MBS portfolio were years 2005 (18%), 2006 (23%) and 2007 (23%).

Asset- Backed Securities:

The $62 million increase in fair value at December 31, 2009 from 2008 was primarily due to improved valuations as a result of robust demand for assets issued through the Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”). The average duration and weighted average life of our ABS portfolio at December 31, 2009 was 1.3 years (2008: 0.6 years) and 2.7 years (2008: 3.5(2009: 4.4 years), respectively. Based on fair value, our ABS securitiesnon-agency CMBS portfolio primarily originateoriginates from years 2009 (44%2005 (22%) and 2008 (27%2006 (22%).

Asset-Backed Securities:

The following table provides a breakdown of the underlying collateral for our ABS by credit rating as assigned by S&P:

 

    Asset-backed securities 
  AAA  AA  A  BBB  BB and lower(3)  Total 

At December 31, 2009

             

Auto

  $  203,522  $-  $  2,547  $  174  $-  $  206,243     

Credit card

   73,172   -   -   -   -   73,172  

CLO(1)

   -   -   20,720   13,152   8,350   42,222  

Home equity

   65   -   -   -   -   65  

CDO(2)

   2,045   209   1,674   221   22   4,171  

Equipment

   26,684   -   157   -   -   26,841  

Other

   89,554   -   -   871   -   90,425  
                          

Total

  $395,042  $209  $  25,098  $14,418  $8,372  $443,139  
                          

% of total

   89%   0%   6%   3%   2%   100%  
  

At December 31, 2008

             

Auto

  $107,719  $8,365  $546  $322  $-  $116,952  

Credit card

   109,797   -   -   -   -   109,797  

CLO(1)

   1,298   -   22,889   11,036   -   35,223  

Home equity

   23,208   77   182   1,736   3,900   29,103  

CDO(2)

   4,540   277   1,181   4,714   -   10,712  

Equipment

   3,537   -   125   -   -   3,662  

Other

   75,557   -   -   -   -   75,557  
                          

Total

  $325,656  $  8,719  $24,923  $  17,808  $  3,900  $381,006  
                          

% of total

   85%   2%   7%   5%   1%   100%  
                          
(1)Collateralized loan obligation – debt tranched securities
(2)Collateralized debt obligation
(3)Non-investment grade
    Asset-backed securities 
    AAA   AA   A   BBB   Below BBB (3)   Total 
              

At December 31, 2010

             

Auto

  $358,337   $-        $-        $-        $-        $358,337 

Student loan

   124,553    -         -         -         -         124,553 

Credit card

   83,444    -         -         -         -         83,444 

CLO - debt tranches

   -         -         7,920    12,200    23,058     43,178 

Other

   50,125    225    167    1,770    44     52,331 
                               

Total

  $616,459   $225   $8,087   $13,970   $ 23,102    $661,843 
                               

% of total

   93%     0%     1%     2%     3%     100%  
  

At December 31, 2009

             

Auto

  $203,522   $-        $2,547   $174   $-        $206,243 

Credit card

   73,172    -         -         -         -         73,172 

Student loan

   63,015    -         -         -         -         63,015 

CLO - debt tranches

   -         -         20,720    13,152    8,350     42,222 

Other

   55,333    209    1,831    1,092    22    58,487 
                               

Total

  $ 395,042   $ 209   $ 25,098   $ 14,418   $8,372   $ 443,139 
                               

% of total

   89%     0%     6%     3%     2%     100%  
                               

The $219 million increase in fair value during 2010 was primarily due to the purchase of new floating rate issues, all AAA rated by S&P, for deployment of operating cash. The average duration and weighted average life of our ABS portfolio at December 31, 2010 was 1.0 years (2009: 1.3 years) and 3.8 years (2009: 2.7 years), respectively. Based on fair value, our ABS securities primarily originate from years 2010 (39%) and 2009 (25%).

Insurance Enhanced Securities:Municipals:

Our holdings in municipal debt are primarily held within the taxable portfolios of our U.S. subsidiaries and include debt issuance from states, municipalities and political subdivision. The following table provides a breakdown of the fair value of our municipal debt portfolio between Revenue and General Obligation bonds:

    December 31, 2010   December 31, 2009 
Type  Fair Value   % of Total   Weighted
Average
Credit Rating
   Fair Value   % of Total   Weighted
Average
Credit Rating
 
              

Revenue

  $520,700    73%     AA    $460,545    66%     AA  

General Obligation

   191,959    27%     AA     237,980    34%     AA  
                          
   $ 712,659    100%     AA    $ 698,525    100%     AA  
                          
                               

General obligation bonds are backed by the full faith and credit of the authority that issued the debt and are secured by the taxing powers of those authorities. Revenue bonds are backed by the revenue stream generated by the services provided by the issuer (e.g. sewer, water or utility projects).

During 2010, net unrealized gains on our municipal debt portfolio decreased from $14 million at December 31, 2009 to less than $1 million at December 31, 2010 as credit spreads on municipal debt widened, particularly during the final quarter of 2010. At December 31, 2009,2010, our top three municipal debt holdings were from California -14%, New York - 11%, and Texas - 9% (2009: California - 17%, New Jersey - 11% and New York - 8%).

Additionally, certain of our holdings in municipal debt were insured by financial guarantee companies. At December 31, 2010, we held insurance enhanced securities (MBS, ABS and municipal bonds)bonds in the amount of $217$163 million (2008: $215(2009: $195 million) or 2% (2008: 3%) of total fixed maturities. The, with a weighted average credit rating for the insured securities wasof AA (2008:(2009: AA) by S&P. In the event the financial guarantee companiesguarantors are unable to make good on their guarantee on a defaulted security, we would then be exposed to the credit loss. Excluding the insurance benefit from the financial guarantee companies, the weighted average credit ratingquality of the issuersour insured bond holdings was AA- (2008: A+(2009: AA-) by S&P for the above insured securities. As noted above, there is little difference between the average credit rating with and without the insurance enhancement at December 31, 2009, indicating that the market place is giving little credit for the insurance protection.&P. At December 31, 2009,2010, our largest exposures to financial guarantors were Financial Security Assurance Inc.Assured Guaranty Corp. for $69$61 million (2008: $72(2009: $8 million), MBIA InsuranceNational Public Finance Guarantee Corporation for $69$56 million (2008: $70(2009: $60 million) and Ambac Financial Group, Inc. for $57$23 million (2008: $60(2009: $53 million). We do not have any significanthad no direct investments in these companies at December 31, 2010 and 2009. Effective February, 2009, the insurance provided by MBIA was provided through its wholly owned subsidiary, National Public Finance Guarantee Corporation.

Gross Unrealized Losses:

At December 31, 2009,2010, the gross unrealized losses on our fixed maturities portfolio were $114 million (2009: $134 million (2008: $812 million).

The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for allinvestment grade fixed maturities in an unrealized loss position.

 

  December 31, 2009  December 31, 2008   December 31, 2010   December 31, 2009 
Severity of
Unrealized Loss
  Fair Value  Gross
Unrealized
Losses
 % of Total
Gross
Unrealized
Losses
  Fair Value  Gross
Unrealized
Losses
 % of
Total
Gross
Unrealized
Losses
   Fair Value   Gross
Unrealized
Losses
 

% of

Total Gross
Unrealized
Losses

   Fair Value   Gross
Unrealized
Losses
 

% of

Total Gross
Unrealized
Losses

 
           

0-10%

  $3,313,450  $(47,697 42%  $1,807,135  $(70,823 8%       $3,877,895   $(85,626  86%    $3,313,450   $(47,697  42%  

10-20%

   168,116   (30,904 27%   578,164   (102,239 13%     49,241    (9,582  10%     168,116    (30,904  27%  

20-30%

   66,169   (19,902 17%   495,492   (163,441 21%     10,642    (3,445  3%     66,169    (19,902  17%  

30-40%

   17,851   (9,263 8%   163,566   (91,372 11%     757    (339  1%     17,851    (9,263  8%  

40-50%

   696   (552 1%   137,276   (115,731 15%     225    (208  -         696    (552  1%  

> 50%

   3,538   (6,154 5%   174,535   (252,431 32%     -         -        -         3,538    (6,154  5%  
                                         

Total

  $  3,569,820  $  (114,472 100%  $  3,356,168  $  (796,037 100%    $ 3,938,760   $ (99,200  100%    $ 3,569,820   $ (114,472  100%  
                                         
                                  

AtThe range of greater than 50% severity of unrealized loss at December 31, 2009 the gross unrealized losses greater than 50% of amortized cost remaining on investment grade fixed maturities consistconsisted primarily of non-agency RMBS, non-agency CMBS and ABS where we dodid not anticipate credit losses. These securities havehad a weighted average credit rating of AA- by S&P. The greater than 50% severity of unrealized loss at December 31, 2008, was primarily related to our MTNs which represented $217 million or 86% of the gross unrealized lossesdecrease in this band and had a weighted average credit rating of BBB+ by S&P. The decreasebalance in gross unrealized losses greater than 50% of amortized cost in 20092010 was primarily due to the impairmentsale of our MTNs in the third quarter of 2009. The gross unrealized losses for the other ranges of severity noted in the above table decreased in 2009 primarily duecertain securities and, to the recovery of the global financial markets.a lesser extent, pricing improvement on one AAA rated non-agency RMBS that we continue to hold.

The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for all below non-investment grade fixed maturities in an unrealized loss position at December 31, 20092010 and 2008:2009.

 

    December 31, 2009  December 31, 2008 
Severity of
Unrealized Loss
  Fair Value  Gross
Unrealized
Losses
  % of Total
Gross
Unrealized
Losses
  Fair Value  Gross
Unrealized
Losses
  % of
Total
Gross
Unrealized
Losses
 

0-10%

  $59,464  $(1,866 10%  $1,700  $(36 0%     

10-20%

   20,993   (4,614 23%   -   -   0%  

20-30%

   6,039   (2,160 11%   4,392   (1,302 8%  

30-40%

   11,914   (6,855 35%   283   (128 1%  

40-50%

   3,756   (3,227 16%   -   -   0%  

> 50%

   373   (994 5%   12,762   (14,348 91%  
                        

Total

  $  102,539  $  (19,716 100%  $  19,137  $  (15,814 100%  
                        
                        

The greater than 50% severity of unrealized loss at December 31, 2008, was primarily related to one MTN and had a weighted average credit rating of B by S&P. This security was impaired in 2009 and contributed to the decrease in gross unrealized losses greater than 50% of amortized cost. The increase in gross unrealized losses for the other ranges of severity noted in the above table for 2009 is primarily due to downgrades during the year; however we do not anticipate credit losses on these securities.

At December 31, 2009, the investment portfolios held by our U.S. subsidiaries included $25 million of net unrealized gains (2008: $52 million on net unrealized losses) on fixed maturities and related deferred tax liability of $9 million (2008: deferred tax asset of $18 million). At December 31, 2008, the entire deferred tax asset on the net unrealized losses was provided for as a valuation allowance due to insufficient positive evidence regarding the utilization of these losses. The deferred tax liability at December 31, 2009 reduced the amount of valuation allowance required on the U.S. capital related items. At December 31, 2009, the total valuation allowance attributable to U.S. investment related items including unrealized and realized losses and OTTI was $29 million (2008: $52 million). This valuation allowance includes $22 million for deferred tax assets for capital loss carryforwards which expire as follows: $1 million in 2010, $1 million in 2011, $18 million in 2013 and $2 million in 2014. In accordance with the intraperiod tax allocation requirements, all changes in the valuation allowance attributable to movement in the net unrealized gains or losses in the U.S. were offset against the deferred tax benefit or expense recorded in accumulated other comprehensive income.

    December 31, 2010   December 31, 2009 

Severity of

Unrealized Loss

  Fair Value   Gross
Unrealized
Losses
  % of
Total Gross
Unrealized
Losses
   Fair Value   Gross
Unrealized
Losses
  % of
Total Gross
Unrealized
Losses
 
            

0-10%

  $136,714   $(2,665  18%    $59,464   $(1,866  10%  

10-20%

   18,245    (3,874  26%     20,993    (4,614  23%  

20-30%

   10,026    (4,160  28%     6,039    (2,160  11%  

30-40%

   7,636    (3,824  27%     11,914    (6,855  35%  

40-50%

   6    (5  -         3,756    (3,227  16%  

> 50%

   45    (167  1%     373    (994  5%  
                             

Total

  $ 172,672   $ (14,695  100%    $ 102,539   $ (19,716  100%  
                             
                             

Equity SecuritiesEquities

The fair valueDuring 2010, we increased our allocation to global equities by $110 million and recorded impairment charges of our$9 million. Our equity portfolios consist of well diversified publicly traded common stock holdings increased by $97 million at December 31, 2009 from 2008 primarily due to $62 million of net purchases, includingstocks and a foreign bond mutual fund, and $67 million in improved valuations as a resultfund. At December 31, 2010, no single common stock accounted for more than 2% of total equities, excluding the recovery in the global equity markets in 2009. This increase was partially offset by realized losses, including $20 million of OTTI charges.foreign bond mutual fund.

Other Investments

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

 

   
    December 31, 2009  December 31, 2008 
  

Hedge funds

  $94,630  16.6%  $55,496  11.3%  

Funds of hedge funds

   256,877  45.0%   196,291  40.0%  
                

Total hedge funds

   351,507  61.6%   251,787  51.3%  
                
  

Distressed securities

   22,957  4.0%   50,187  10.2%     

Long/short credit

   84,392  14.8%   50,907  10.3%  
                

Total credit funds

   107,349  18.8%   101,094  20.5%  
                
  

CLO - equity tranched securities

   61,332  10.8%   97,661  19.8%  

Short duration high yield fund

   50,088  8.8%   41,540  8.4%  
                

Total other investments

  $  570,276  100.0%  $  492,082  100.0%  
                
                

      

 

December 31, 2010

     December 31, 2009 
                  

Funds of hedge funds

    $235,240      45.3%      $256,877      45.0%  

Hedge funds

     123,036      23.7%       94,630      16.6%  
                             

Total hedge funds

     358,276      69.0%       351,507      61.6%  
                             

Long/short credit

     82,846      16.0%       84,392      14.8%  

Distressed securities

     21,911      4.2%       22,957      4.0%  
                             

Total credit funds

     104,757      20.2%       107,349      18.8%  
                             

CLO - equity tranched securities

     56,263      10.8%       61,332      10.8%  

Short duration high yield fund

     -           0.0%       50,088      8.8%  
                             

Total other investments

    $ 519,296      100%      $ 570,276      100.0%  
                             
                             

The investment objectives for our hedge fund allocation are to provide a differentiated source of investment return with low correlation to the balance of our assets, returns similar to equity market indices with less volatility, and contribution to the growth in the our book value.

The$7 million increase in the fair value of our total hedge funds investment in 20092010 reflects $56a $26 million of net subscriptions as well as significantincrease in valuation improvement after experiencing extremely poor performance during 2008 due to thecontinuing favorable global financial crisis. The fair value of our credit funds investment in 2009 was also driven by a strong recovery in the credit markets, partially offset by $47$19 million of net redemptions during the year.including proceeds from a fund closure. The decrease in our total credit funds investment was due to $16 million of cash distributions, partially offset by $14 million of improved valuations due to positive performance of its underlying loan collateral. Certain hedge and credit fund investments may be subject to restrictions on redemptions which may limit our ability to liquidate these investments in the short term. Refer to Item 8, Note 5 (b) of our Consolidated Financial Statements for further details.

The $5 million decrease in the fair value of the CLO – equity tranched securities inEquities since December 31, 2009, iswas primarily due to $13$27 million of cash distributions collected during the year,received in addition2010, offset partially by an improved valuation of $22 million primarily due to a $23 million decline in our estimate of fair value. Refer to ‘Critical Accounting Estimates – Fair Value Measurements for Other Investments’ section for further details.

Securities Lendinglower default rates than previously expected.

As previously noted, the short duration high yield fund was redeemed during 2010 and the cash proceeds of $53 million were used to partially fund a response to the credit crisis in late 2008, we decided to wind down our security lending program innew segregated short duration high yield corporate debt portfolio managed by an orderly manner to reduce our counterparty credit risk exposure. For certain securities, we may hold these until they mature in 2010. As of December 31, 2009, we had outstanding securities lending agreements of approximately $130 million (2008: $406 million).external manager.

Restricted AssetsInvestments

To support our insurance and reinsurance operations we provide collateral (fixed maturities and short-term investments) in various forms. We primarily utilize trust arrangements for U.S. insurance obligations, and to a lesser extent issue letters of credit, for reinsurance business. The new letter of credit facility (see‘Liquidity and CapitalResources’) is secured with fixed maturity investments. We are also required to maintain assetssecurities on deposit with various regulatory authoritiesauthorities. The fair value of our restricted investments was as follows:

 

At December 31,

  2010     2009 
        

Collateral in Trust for inter-company agreements

  $1,785,961     $1,592,014 

Collateral for secured letter of credit facility

   405,037      -      

Collateral in Trust for third party agreements

   217,905      173,547 

Securities on deposit with regulatory authorities

   87,657      72,081 
             

Total restricted investments

  $ 2,496,560     $ 1,837,642 
             
             

The $659 million increase of restricted investments in 2010 was primarily due to support our insurance and reinsurance operations. The assetsthe new secured letter of credit facility, whereas previously letters of credit were issued on depositan unsecured basis.

All of the above restricted investments are available to settle insurance and reinsurance liabilities. We also utilize trust accounts in certain large transactions to provide collateral to ceding companies, rather than providing letters of credit. The assets in trust consist primarily of highly rated fixed maturity securities and a foreign bond mutual fund. The fair value of our restricted assets components are as follows:

   
At December 31,  2009  2008 
  

Assets used for collateral in Trust for inter-company agreements

  $  1,592,014  $  1,455,634     

Deposits with U.S. regulatory authorities

   72,081   49,789  

Assets used for collateral in Trust for third party agreements

   173,547   149,623  
          

Total restricted investments

  $1,837,642  $1,655,046  
          
          

The increase in restricted investments in 2009 is primarily due to shifting some of our restricted cash equivalents into a foreign bond mutual fund used as collateral for certain reinsurance business.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

LIQUIDITY

Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet the short-term and long-term cash requirements of its business operations. We manage liquidity at both the holding company and operating subsidiary level. GlobalIn recent years, global economic conditions deteriorated and financial markets recently experienced unprecedented volatility and disruption. This market turmoil has affected (among other aspects of our business) the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and the performance of our investment performance in the foreseeable future.portfolio.

Holding Company

As a holding company, AXIS Capital has no operations of its own and its assets consist primarily of investments in its subsidiaries. Accordingly, AXIS Capital’s future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries.subsidiaries, such as a return of capital. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries and states in which AXIS Capital’s subsidiaries operate (refer to Item 8, Note 18, to the Consolidated Financial Statements for further information), as well as the need to maintain capital levels to adequately support insurance/reinsurance operations and preserve financial strength ratings issued by independent rating agencies. During 2009,2010, AXIS Capital received $698 million (2009: $530 million (2008:million; 2008: $430 million; 2007: $565 million) of dividends from its subsidiaries. AXIS Capital’s primary uses of funds are dividend payments to both common and preferred shareholders, stock repurchases, interest and principal payments on debt, capital investments in subsidiaries and payment of corporate operating expenses. We believe the dividenddividend/distribution capacity of AXIS Capital’s subsidiaries, which was over $1 billion at December 31, 2009,2010, will provide AXIS Capital with sufficient liquidity for the foreseeable future.

Operating Subsidiaries

AXIS Capital’s operating subsidiaries generally derive cash from investment income, as well as the net receipt of premiums less losses and loss expenses related to their underwriting activities. Historically, these cash receipts have been sufficient to fund the operating expenses of these subsidiaries, as well as to fund sufficient dividend payments to AXIS Capital. The remaining cash flows from subsidiaries are reinvested in our investment portfolio.

The insurance and reinsurance business of our operating subsidiaries provides liquidity in that premiums are received in advance, sometimes substantially in advance, of the time claims are paid. However, operating cash flows can be affected by claim payments that, due to the nature of our operations, may comprise large loss payments on a limited number of claims and can fluctuate significantly from period to period.

The following table summarizes our consolidated cash flows from operating, investing and financing activities in the last three years:

 

  
Total cash provided by (used in)  2009   2008   2007     2010   2009   2008 
          

Operating activities

  $849,856    $  1,525,725    $1,573,016         $ 1,187,777   $849,856   $ 1,525,725 

Investing activities

     (1,478,871   (633,313     (1,370,748     (687,790    (1,478,871   (633,313

Financing activities

   (321,924   (408,129   (847,213     (351,661   (321,924   (408,129

Effect of exchange rate changes on cash

   41,972     (59,819   34,475       (7,425   41,972    (59,819
                          

Increase (decrease) in cash and cash equivalents

  $  (908,967  $  424,464    $  (610,470    $140,901   $(908,967  $424,464 
                          
                      

Note: See Consolidated Statements of Cash Flows included in Item 8, Financial‘Financial Statements and Supplementary Data’, of this report for additional information.

 

Our 2009 cash flows from operating activities declined by $676 million in 2009,relative to 2008, primarily as the result of a $314 million increase in net paid losses, driven by claims on our credit and political risk business, andas well as a non-recurring payment of $200 million to settle our insurance derivative contract, andcontract. A reduction in lowernet investment income onfrom cash and fixed maturities.maturities also contributed to the decrease. Our 2010 cash flows from operating activities increased $338 million compared to 2009. The primary drivers of this increase were higher premium-related cash receipts, driven by gross premiums written increases, and lower reinsurance protection costs for our insurance segment largely driven by the previously mentioned changes in our reinsurance purchasing. Partially offsetting these increases were increased cash outflows for general and administrative expenses, previously noted, and an increase in our net paid losses as we continued to fund claim payments for lines of business impacted by the global financial crisis.

 

  

Our 20092010 cash outflows from investing activities relates principally to the net purchase of fixed maturities of $0.6 billion (2009: $1.6 billion (2008:billion; 2008: $0.1 billion; 2007: $1.7 billion). During the latter part of 2008, in response to deteriorating financial market conditions, we increased our asset-allocation to cash and cash equivalents, while reducing our net purchasing of fixed maturities. As markets stabilized during the current year,2009, we utilized our excess cash and cash equivalents to fund fixed maturity purchases.purchases and we continued to purchase fixed maturities in 2010. Refer to the‘Cash and Investments’ section above.

 

Net cash flows used in financing activities in 20092010 primarily compriserelate to common share repurchases of $710 million ($699 million from the market, with the remainder from employees to satisfy withholding tax liabilities upon vesting of restricted stock awards and stock option exercises) (2009: $176 million (2008:million; 2008: $291 million; 2007: $308 million), dividends paid on common shares of $108 million (2009: $113 million (2008:million; 2008: $106 million; 2007: $111 million) and dividends paid on preferred shares of $37 million (2008(2009: $37 million; 2008: $37 million). During 2010, this was partially offset by the $495 million net proceeds received from our senior notes issuance (discussed below and 2007: $37 million)in Item 8, Note 10(a) of our Consolidated Financial Statements).

Our diversified underwriting portfolio has demonstrated an ability to withstand catastrophic losses; we have generated significant positive operating cash flows since our inception, despite the occurrence of multiple large hurricanes during this period. We anticipate that cash flows from operations will continue to be sufficient to cover cash outflows under most loss scenarios as well as our other contractual commitments through the foreseeable future. Refer to the ‘CommitmentsContractual Obligations and ContingenciesCommitments’ section below for further information on our anticipated obligations.

In the unlikely event that paid losses accelerate beyond our ability to fund such payments from operating cash flows, we would utilize our cash and cash equivalent balances or liquidate a portion of our investment portfolio. Our cash and cash equivalent balance at December 31, 2009 was over $0.8 billion. In addition, our investment portfolio is heavily weighted towards conservative, high quality, and highly liquid securities. This includes $3.4We expect that, if necessary, approximately $8.9 billion in U.S. governmentof our December 31, 2010 cash and agency backed securities, which we believeinvestments balance could be liquidated withinavailable in one to three business days. At December 31, 2009, these securities were in a net unrealized gain position of $34 million. To provide some context, to the information above, our modeled single occurrence 1-in-250 year period U.SU.S. hurricane probable maximum loss, net of reinsurance, is approximately $1.3$1.5 billion. Refer to the ‘Enterprise Risk and Capital Management’ section of Item 1 for further information.

We regularly evaluate, through stress and scenario testing, our expected liquidity adequacy in extreme market and business conditions. We currently maintain a $1.5 billion credit facility, the terms of which allow us to issue letters of credit up to the full amount of the facility and borrow up to $500 million for general corporate purposes, with total usage not to exceed $1.5 billion. At December 31, 2009, we had no direct borrowings outstanding under the facility, however, unsecured letters of credit totaling $453 million (2008: $567 million) had been issued. These letters of credit are principally utilized to support non-admitted insurance and reinsurance operations in the United States. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business written by us and the loss experience of such business. In addition to letters of credit, we have established insurance trusts in the U.S. that provide cedants with statutory relief under U.S. state insurance regulations. We are currently evaluating our alternatives in advance of the scheduled August 2010 expiry of this facility and believe we will be able to continue to meet the collateral requirements of our clients and adequately preserve our liquidity. Refer to Item 8, Note 10 (b) of our Consolidated Financial Statements, for additional information on our credit facility.

CAPITAL RESOURCES

In addition to common equity, we have utilized other external sources of financing, including debt, preferred shares and ourletters of credit facility, to support our business operations. We believe that we hold sufficient capital to allow us to take advantage of profitable opportunities and to maintain our financial strength ratings, as well as to comply with various local statutory regulations. We monitor our capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business. The following table summarizes our consolidated capitalization position for the periods indicated:

 

  
At December 31,  2009  2008   2010     2009 
        

Long-term debt

  $499,476  $499,368       $994,110     $499,476 
          
        

Preferred shares

   500,000   500,000     500,000      500,000 

Common equity

   5,000,244   3,961,041     5,124,970      5,000,244 
                 

Shareholders’ equity

   5,500,244   4,461,041     5,624,970      5,500,244 
                 

Total capitalization

  $  5,999,720  $  4,960,409  
        

Ratio of debt to total capitalization

   8.3%   10.1%  

Total capital

  $ 6,619,080     $ 5,999,720 
          
 

Ratio of debt to total capital

   15.0%       8.3%  
  

Ratio of debt and preferred equity to total capital

   16.7%   20.1%     22.6%       16.7%  
                

We finance our operations with a combination of debt and equity capital. Our debt to total capital and debt and preferred equity to total capital ratios provide an indication of our capital structure, along with some insight into our financial strength. A company with higher ratios in comparison to industry average may show weak financial strength because the cost of its debts may adversely affect results of operations and/or increase its default risk. Although our ratios increased following our March 2010 senior note issuance (discussed below), our financial flexibility remains strong.

Long-term Debt:Long-term debt represents the senior notes we issued during 2004.2004 and 2010. For further information, refer to Item 8, Note 10 (a)10(a) of the Consolidated Financial Statements. We used the net proceeds from our 2010 senior notes offering for general corporate purposes. The issuance of this debt was the principal driver of the increase in our ratios of debt to total capital and debt and preferred equity to total capital in 2010.

Preferred Shares:During 2005, we issued $250 million of seriesSeries A and $250 million of seriesSeries B Preferredpreferred shares. For further information, refer to Item 8, Note 13 (b)13(b) of the Consolidated Financial Statements.

Common EquityEquity:: The value of our common equity increased by $0.1 billion and $1.0 billion during 2010 and 2009, respectively, as outlined in the following table:

 

Year ended December 31,

  2010     2009 
        

Common equity - opening

  $5,000,244     $3,961,041 

Net income

   856,723      497,886 

Change in unrealized appreciation on available for sale investments, net of tax

   74,364      828,320 

Share repurchases

   (709,583     (175,909

Common share dividends

   (121,651     (128,426

Preferred share dividends

   (36,875     (36,875

Share-based compensation

   36,695      48,217 

Foreign currency translation adjustment and other

   25,053      5,990 
             

Common equity - closing

  $ 5,124,970     $ 5,000,244 
             
             

Credit and Letter of Credit Facilities

Our syndicated $1.5 billion credit facility (the “Expired Facility”) was terminated in August 2010. Letters of credit outstanding under the Expired Facility at the time of termination remain valid until their expiry. As a resultcondition of the execution of our new syndicated credit facility (discussed below), we agreed to provide collateral to secure our remaining letter of credit obligations under the Expired Facility. In order to preserve the letter of credit and liquidity capacity previously provided by the Expired Facility, we entered into two new facilities during 2010, as described below. Refer to Item 8, Note 10 (b) for additional information on our credit and letter of credit facilities.

Syndicated Credit Facility

During 2010, we entered into a three-year revolving $500 million credit facility (the “Syndicated Credit Facility”), which provides us with combined borrowing and letter of credit issuance capacity up to the aggregate amount of the facility. At our request, and subject to certain conditions, the aggregate commitment of this facility may be increased by up to $250 million. Interest on loans issued under this is payable based on underlying market rates at the time of loan issuance. While any loans are unsecured, we have the option to issue letters of credit on a secured basis in order to reduce associated fees. This facility is subject to certain covenants that we believe are customary for facilities of this type, including limitations on fundamental changes, the incurrence of additional indebtedness and liens, certain transactions with affiliates and investments, as defined in the facility documents. Compliance with certain financial covenants that we believe are customary for insurance and reinsurance companies in credit facilities of this type is also required. These covenants include:

(i)Maintenance of a minimum consolidated net worth, with the minimum being equal to the sum of $3.689 billion plus 25% of consolidated net income (if positive) for each semi-annual fiscal period ending on or after December 31, 2010 plus 25% of the net cash proceeds received by AXIS Capital from the issuance of its capital stock during each such semi-annual fiscal period. For the purposes of this covenant, consolidated net worth excludes unrealized appreciation (depreciation) on our available for sale investments.

(ii)Maintenance of a maximum debt to total capital ratio of 0.35 to 1. For the purposes of this covenant, unrealized appreciation (depreciation) on our available for sale investments is excluded from total capital.

(iii)Maintenance of an A.M. Best Company, Inc. (“A.M. Best”) financial strength rating of at least B++ for each of AXIS Capital’s material insurance/reinsurance subsidiaries that are party to the Syndicated Credit Facility.

At December 31, 2010, this facility required a minimum consolidated net worth of $3.820 billion and our actual consolidated net worth as calculated under the provisions of the Syndicated Credit Facility was $5.463 billion. We had a consolidated debt to total capital ratio, calculated in accordance with the Syndicated Credit Facility provisions, of 0.15 to 1 and each of our material insurance/reinsurance subsidiaries party to the agreement had an A.M. Best financial strength rating of A.

In the event of default, including a breach of the covenants outlined above, the lenders may exercise certain remedies including the termination of the facility, the declaration of all principal and interest amounts related to facility loans to be immediately due and the requirement that any outstanding letters of credit that we opted to obtained on an unsecured basis be collateralized.

Additionally, the facility allows for an adjustment to the level of pricing should AXIS Capital experience a change in its senior unsecured debt ratings.

Secured Letter of Credit Facility

During 2010, we entered into a secured $750 million letter of credit facility (the “LOC Facility” and, together with the Syndicated Credit Facility, the “Credit Facilities”). This facility may be terminated by the lender on December 31, 2013 upon thirty days prior notice. This facility is subject to certain covenants, including the requirement to maintain sufficient collateral to cover all of our obligations under the facility. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to the lender. In the event of default, the lender may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the facility to any or all of the participating operating subsidiaries.

The standby letters of credit we issue are principally issued in the normal course of business to certain U.S.-based insurance and reinsurance operations that purchase reinsurance protection from us. These letters of credit allow those operations to take credit, under U.S. insurance regulations, for the year combined with recoveriesreinsurance obtained in the fairjurisdictions where AXIS Capital’s subsidiaries are not licensed or otherwise admitted as an insurer. The value of our investment portfolio.letters of credit outstanding is driven by, amongst other things, loss development on existing reserves, the payment pattern of such reserves, the expansion of business written by us and the loss experience of such business. In comparison, the valueaddition to letters of our common equity fell by $0.7 billion during 2008, driven primarily by a declinecredit, we have established insurance trusts in the fair valueU.S. that provide certain clients with statutory relief under U.S. insurance regulations.

At December 31, 2010, we had $315 million, nil and $41 million of our investment portfolio as a resultletters of global financial market turmoil. The following table reconciles our openingcredit outstanding under the secured letter of LOC Facility, the Syndicated Credit facility and closing common equity positions:the Expired Facility, respectively. Thus, outstanding capacity under the Credit Facilities was $935 million, not taking into consideration the $250 million potential increase in the amount available under the Syndicated Credit Facility. We were in compliance with all covenants of the Credit Facilities at the same date.

   
    2009  2008 
  

Common equity – opening

  $  3,961,041   $  4,658,622     

Net income

   497,886    387,376  

Change in unrealized appreciation (depreciation) on available for sale investments, net of tax

   828,320    (727,738

Share repurchases

   (175,909  (291,003

Common share dividends

   (128,426  (120,909

Preferred share dividends

   (36,875  (36,875

Share-based compensation and other

   54,207    91,568  
          

Common equity – closing

  $5,000,244   $3,961,041  
          
          

Share Repurchases

As part of our capital management program, our Board of Directors has approvedauthorized a share repurchase program. At December 31, 2009,2010, the remaining authorization with the authorization under the program was $542$593 million (refer to Item 5 ‘Market for Registrant’s Common Equity, Related Stockholder Matters and Issue Purchases of Equity Securities’ for additional information). Subsequent to December 31, 2009, we repurchased additional common shares for $125 million. As of February 5, 2010, additional repurchases of approximately $417 million were available under program. The timing and amount of the additional repurchase transactions under this program will depend on a variety of factors, including market conditions and corporate and regulatory considerations.

Shelf Registrations

On March 11, 2008,18, 2010, we filed an unallocated universal shelf registration statement with the SEC, which became effective upon filing. Pursuant to the shelf registration, we may issue an unlimited amount of equity, debt, trust preferred securities, warrants, purchase contracts or a combination of those securities. Our abilityintent and willingnessability to issue securities pursuant to this registration statement will depend on market conditions at the time of any proposed offering.

Financial Strength Ratings

AXIS Capital and our insuranceoperating subsidiaries are assigned debt and financial strength (insurance) ratings from internationally recognized rating agencies, including S&P,Standard & Poor’s, A.M. Best and Moody’s Investors Service. These ratings are publicly announced and are available directly from the agencies as well as on our Internet website.

Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to 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 support the business operations of the company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities.

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 Ratingrating

Standard & Poor’s

 “A Standard & Poor’s issuer credit rating is a current opinionAn “opinion of the financial security characteristics of an obligor’s overall financial capacity (its creditworthiness)insurance organization, with respect to the organization’s ability to pay under its financial obligations. This opinion focuses on the obligor’s capacityinsurance policies and willingness to meet its financial commitments as they come due.”contracts, in accordance with their terms”. A + (Stable
Outlook)A+ (Stable)
 An obligor rated ‘A+’ has strong capacity to meet its“Strong financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.security characteristics” The “A”‘A’ grouping is the third highest out of nine main ratings. Main ratings from “AA”major rating categories. The first seven major rating categories may be modified by the addition of a plus or minus sign to “CCC” are subdivided into three subcategories: “+” indicatingshow relative standing within the high end of the main rating; no modifier, indicating the mid range of the main rating; and “-” indicating the lower end of the main rating.major rating categories.

A.M. Best

 “Best’s Financial Strength Ratings provide an opinionAn “opinion of an insurer’s financial strength and ability to meet its ongoing obligations to policyholders.”insurance policy and contract obligations”. A (Stable
Outlook)(Stable)
 Assigned to companies that have, in A.M. Best’s opinion, an excellent“Excellent ability to meet their ongoing obligations to policyholders.insurance obligations” The “A” rating‘A’ grouping is the third highest ratings category out of fifteen rating levels.fifteen. Ratings outlooks (‘Positive’, Negative’ and ‘Stable’) are assigned to indicate a ratings potential direction over an intermediate term, generally defined as 12 - 36 months.

Moody’s Investors Service

 Moody’s Insurance Financial Strength Ratings are opinionsOpinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations.” A2 (Stable
Outlook)(Stable)
 

Insurance companies

rated A offer good“Good financial security. However, elements may be present which suggest a susceptibility to impairment sometime in the future.

security”
 The “A2” rating‘A’ grouping is the sixththird highest out of twenty-one ratings.
nine rating categories. Each of the first seven rating categories is subdivided into three subcategories and Moody’s appends numerical modifiers ‘1’, ‘2’ and ‘3’ to indicate the subcategory. The ‘1’ modifier indicates that the obligation ranks in the higher end of the rating category, the ‘2’ modifier indicates a mid-category ranking and the ‘3’ modifier indicates a ranking in the lower end of the rating category.

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. Our $500 million Senior Notes are assigned a senior unsecured debt rating of Baa1 (stable) by Moody’s Investors Service and A- (stable) by S&P. Our Series A and B preferred shares are rated Baa3 (stable) by Moody’s Investors Service and BBB (stable) by S&P.

COMMITMENTSCONTRACTUAL OBLIGATIONS AND CONTINGENCIESCOMMITMENTS

The following table provides a breakdown of our contractual obligations and commitments at December 31, 20092010 by period due:

 

Contractual Obligations  Payment Due By Period 
Total  Less than 1
year
  

1-3

years

  

3-5

years

  More than 5
years
 
 Payment Due By Period 
Contractual Obligations and Commitments Total   

Less than

1 year

   1-3 years   3-5 years   

More than

5 years

 
 ��         

Operating activities

                     

Estimated gross loss payments(1)

  $  6,564,133  $  1,846,084  $  2,182,435  $  1,117,879  $1,417,735     

Estimated gross loss and loss expense payments(1)

 $7,032,375   $2,041,802   $2,314,796   $1,180,360   $1,495,417 

Operating lease obligations(2)

   104,585   14,670   31,341   28,412   30,162    121,830    18,909    40,397    31,837    30,687 

Reinsurance purchase commitments(3)

   50,204   50,204   -   -   -    50,893    50,893    -         -         -      

SERPs payments(4)

   25,525   1,188   2,486   2,638   19,213    24,337    1,224    2,560    2,717    17,836 

Financing activities

                     

Senior notes

           

(including interest payments)(5)

   641,354   28,750   57,500   555,104   -  

Senior notes (including interest payments)(5)

  1,394,063    58,125    116,250    587,500    632,188 
                                   

Total

  $7,385,801  $1,940,896  $2,273,762  $1,704,033  $  1,467,110   $ 8,623,498   $ 2,170,953   $ 2,474,003   $ 1,802,414   $ 2,176,128 
                                   
                               
(1)Estimated grossWe are obligated to pay claims for specified loss events covered by the insurance and reinsurance contracts we write. Such loss payments represent our most significant future payment obligation. In contrast to our other contractual obligations, our cash payments are not determinable from the terms specified within the underlying contracts. The total amount in the table above reflects our best estimate of our reserve for losses and loss expenses. However, the actual amounts and timing may differ materially; refer to the ‘Critical Accounting Estimates – Reserve for Losses and Loss Expenses.’ for further information. We have not taken into account corresponding reinsurance recoverable amounts that would be due to us. Given the limited loss payoutdevelopment pattern information specific to our experience, we have used industry data, on a line by line basis, to estimate our expected payments. The amount andestimated the timing of actual loss payments may differ materially from the estimated payouts in the table above. For further discussion referpayment by applying industry benchmark payout patterns to‘Critical accounting estimates’ section below. each underlying reserving class.
(2)Operating lease obligations:We lease office space in the countries in which we operate under operatinga number of locations, with such leases which expireexpiring at variousvarying dates. We renew and enter into new leases in the ordinary course of business, as required.
(3)Reinsurance purchase commitments:During 2009,2010, we purchased reinsurance coverageprotection for our insurance lines of business. The minimum reinsurance premiums for this protection are contractually duepayable in advance on a quarterly basis in advance.basis.
(4)SERPs payments: We have provided Supplemental Executive Retirement Plans (“SERPs”) tofor two senior executives. ReferFor further information, refer to Item 8, Note 14 (ii)14(b) to the Consolidated Financial Statements.
(5)Senior notes (including interest payments):For further informationdetails on the repayment terms of amounts due on our senior unsecured debt, refer to Item 8, Note 10 (a),10(a) to the Consolidated Financial Statements.

 

 

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

GeneralOverview

We believe the most significant accounting judgment made by managementwe make is the estimationestimate of our reserve for losses and loss expenses which we also refer to as (“loss reserves. We are required by U.S. GAAP to establishreserves”). Our loss reserves forrepresent management’s estimate of the estimated unpaid portion of theour ultimate liability for losses and loss expenses (“ultimate losses”) under the terms of our policies and agreements with ourfor insured and reinsured customers.events that have occurred at or before the balance sheet date. Our loss reserves comprise the following components:

Case reserves – cost ofreflect both claims that werehave been reported to us (“case reserves”) and claims that have been incurred but not yet paid,reported to us (“IBNR”). Our loss reserves represent our best estimate of what the ultimate settlement and

IBNR reserves – anticipated cost administration of claims incurred but not reported.will cost, based on our assessment of facts and circumstances known at that particular point in time.

Loss reserves also includeare not an exact calculation of liability but instead are complex estimates. The process of estimating loss reserves involves a number of variables (see ‘Selection of Reported Reserves (Management’s Best Estimate)’ section below for further details). We review our estimate of the expense associated with settling claims, including legalloss reserves each reporting period and consider all significant facts and circumstances then known. As additional experience and other feesdata become available and/or laws and legal interpretations change, we may adjust our previous estimates of loss reserves; these adjustments are recognized in the general expenses of administering the claims adjustment process. The following tables show our unpaid net lossperiod they are determined and, therefore, can impact that period’s underwriting results either favorably (when reserves segregated between caseestablished in prior periods prove to be redundant) or adversely (when reserves and IBNR and by segment at December 31, 2009 and 2008:

    2009  2008 
At December 31,  Gross  Ceded  Net  Gross  Ceded  Net 
  

Case Reserves

  $1,895,297  $369,459  $1,525,838  $2,055,027  $408,754  $1,646,273     

IBNR

   4,668,836   1,011,599   3,657,237   4,189,756   905,797   3,283,959  
                          

Total

  $  6,564,133  $  1,381,058  $  5,183,075  $  6,244,783  $  1,314,551  $  4,930,232  
                          
                          

   INSURANCE 
   2009  2008 
At December 31, Gross  Ceded Net  Gross Ceded Net 
  

Property

       

Case reserves

 $318,418   $144,401 $174,017   $519,871 $222,230 $297,641     

IBNR

  197,022    61,053  135,969    263,068  84,757  178,311  
                      
   515,440    205,454  309,986    782,939  306,987  475,952  
                      

Marine

       

Case reserves

  156,909    20,952  135,957    249,869  12,510  237,359  

IBNR

  155,008    39,544  115,464    147,192  25,599  121,593  
                      
   311,917    60,496  251,421    397,061  38,109  358,952  
                      

Aviation

       

Case reserves

  28,729    -  28,729    30,024  -  30,024  

IBNR

  47,322    1,548  45,774    55,131  2,389  52,742  
                      
   76,051    1,548  74,503    85,155  2,389  82,766  
                      

Credit and Political Risk

       

Case reserves

  (40,928  -  (40,928  13,788  -  13,788  

IBNR

  215,031    -  215,031    108,830  -  108,830  
                      
   174,103    -  174,103    122,618  -  122,618  
                      

Professional Lines

       

Case reserves

  264,735    109,700  155,035    225,878  95,036  130,842  

IBNR

  1,305,842    478,844  826,998    1,144,247  417,199  727,048  
                      
   1,570,577    588,544  982,033    1,370,125  512,235  857,890  
                      

Liability

       

Case reserves

  172,954    94,406  78,548    139,950  78,978  60,972  

IBNR

  681,638    392,695  288,943    649,223  347,642  301,581  
                      
   854,592    487,101  367,491    789,173  426,620  362,553  
                      

Insurance Total

       

Case reserves

  900,817    369,459  531,358    1,179,380  408,754  770,626  

IBNR

  2,601,863    973,684  1,628,179    2,367,691  877,586  1,490,105  
                      

Total

 $  3,502,680   $  1,343,143 $  2,159,537   $  3,547,071 $  1,286,340 $  2,260,731  
                      
                       

   REINSURANCE 
   2009 2008 
At December 31, Gross Ceded Net Gross Ceded Net 
  

Catastrophe, Property and Other

       

Case reserves

 $370,653 $- $370,653 $437,072 $- $437,072     

IBNR

  467,281  -  467,281  478,985  -  478,985  
                    
   837,934  -  837,934  916,057  -  916,057  
                    

Credit and Bond

       

Case reserves

  88,476  -  88,476  58,303  -  58,303  

IBNR

  131,038  -  131,038  81,316  -  81,316  
                    
   219,514  -  219,514  139,619  -  139,619  
                    

Professional Lines

       

Case reserves

  185,586  -  185,586  124,735  -  124,735  

IBNR

  688,832  790  688,042  653,018  3,313  649,705  
                    
   874,418  790  873,628  777,753  3,313  774,440  
                    

Motor

       

Case reserves

  229,132  -  229,132  165,470  -  165,470  

IBNR

  190,199  -  190,199  155,065  -  155,065  
                    
   419,331  -  419,331  320,535  -  320,535  
                    

Liability

       

Case reserves

  120,633  -  120,633  90,067  -  90,067  

IBNR

  589,623  37,125  552,498  453,681  24,898  428,783  
                    
   710,256  37,125  673,131  543,748  24,898  518,850  
                    

Reinsurance Total

       

Case reserves

  994,480  -  994,480  875,647  -  875,647  

IBNR

  2,066,973  37,915  2,029,058  1,822,065  28,211  1,793,854  
                    

Total

 $  3,061,453 $  37,915 $  3,023,538 $  2,697,712 $  28,211 $  2,669,501  
                    
                     

established in prior periods prove to be deficient).

Case Reserves

For reported losses, management primarily establishes case reserves based on the amounts reported from insureds or ceding companies. Case reserves are established on a case by case basis within the parameters of coverage provided in the insurance and reinsurance contracts. The method of establishing case reserves for reported losses differs among our segments.

With respect to our insurance operations, we are generally notified of insured losses by brokers andour insureds and record a case reserve for the estimated amount of theand/or their brokers. Based on this information, our claims personnel estimate our ultimate expected liabilitylosses arising from the claim. The estimate reflectsclaim, including the cost of administering the claims settlement process. These estimates reflect 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 legal counsel, loss adjusters and other relevant consultants.

The reserving process forFor our reinsurance operations is more complicated thanbusiness, case reserves for our insurance operations. For reported losses, weclaims are generally establish case reservesestablished based on reports received primarily from brokers and also from ceding companies. With respect to contracts written on ancompanies and/or their brokers. For excess of loss basis,contracts, we are 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 rataproportional basis, we typically receive aggregated claims information and record a case reserve based on thisthat information. However, our pro-rataproportional reinsurance contracts typically require that pre-defined large losses must be separately notified so that these losseswe can be adequately evaluated.evaluate them. Our claims department evaluates each specific loss notification we receive and records additional case reserves when a ceding company’s reserve for a claim is not considered adequate.

In deciding whether to provide treaty reinsurance, we carefully review and analyze thea cedant’s underwriting and risk management practices to ensure appropriate underwriting, data capture and reporting procedures. We also undertake an extensive program of cedant audits, utilizingusing outsourced legal and industry expertise whenexperience where necessary. This allows us to review a cedant’scedants’ 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 also allows us 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 additional case reserves if claims are not considered to be adequately reserved by the ceding company. This requires considerable judgment. At December 31, 2009, additional case reserves were $145 million, or 8% of our total case reserves compared to $106 million, or 5%, respectively at December 31, 2008.appropriately handled.

IBNR

The estimation of IBNR reserves areis necessary due to the time lags between when a loss event occurs and when it is actually reported and settled. This is oftento us, referred to as the “claim-tail”.reporting lag. Reporting lags may arise from a number of factors, including but not limited to the nature of the loss, the use of intermediaries to provide loss reports,and complexities in the claims adjusting process and other related factors.process. By definition, we do not have specific information on IBNR reserves areso it must be estimated. IBNR is calculated by projecting our ultimatededucting incurred losses on each class of business and subtracting(i.e. paid losses and case reserves.

Unlikereserves) from management’s best estimate of ultimate losses. In contrast to case reserves, which are established at the contract level, IBNR isreserves are generally calculatedestimated at an aggregate level and cannot usually be directly identified as reserves for a particular loss event or contract (see ‘Specific contract. Refer to the ‘Reserving For Significant Catastrophic Events’ section for additional information on reserving for such events.

Reserving Issues – Catastrophe losseProcess

Sources of Informations’

Our quarterly reserving process begins with the collection and analysis of paid and incurred claim data for discussioneach of specific IBNR provisions). Our loss and premiumour segments. The segmental data is aggregateddisaggregated by exposurereserving class and further disaggregated by accident year (i.e. the year in which losses were incurred)the loss event occurred).

The evaluation process We use underwriting year information (i.e. the year in which the contract incepted) to determine our ultimate losses involves the collaborationanalyze some of our underwriting, claims, internal actuarial, legalproportional treaties and finance departments, and includes various segmental committee meetings, culminating with the approval of a single point best estimate by senior management in our Group Reserving Committee. The evaluation process also includes consultation with an independent actuarial firm. The work performed by the actuarial firm is an important part of the process and we compare our recorded claims and claim expensesubsequently allocate reserves to those estimated by the actuarial firmrespective accident years. Our reserving classes are selected to determine whether our estimates are reasonable.

On an annual basis, our independent actuarial firm performs work forensure that the purposeunderlying contracts have homogeneous loss development characteristics, while remaining large enough to make the estimation of issuing an actuarial opinion on the reasonableness of our loss reserves for each of our operating subsidiaries. The actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm discusses its conclusions with management and presents its findings to our Board of Directors.

Reserving Methodology:

trends credible. We primarily use the following actuarial methods inreview our reserving process:

Initial expected loss ratio method (“IELR”): This method calculates an estimate of ultimate losses by applying an estimated loss ratio to an estimate of ultimate earned premium for each accident 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.

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. This method is generally appropriate where there are few reported claims and a relatively less stable pattern of reported losses.

Loss development (Chain Ladder): This method uses actual loss data and the historical development profiles on older accident years to project more recent, less developed years to their ultimate position. This method is appropriate when there is a relatively stable pattern of loss emergence and a relatively large number of reported claims.

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

Our Key Reserving Assumptions:

Implicit inour business evolves. This data serves as a key input to many of the actuarial methodologies utilized above are two critical reserving assumptions; the selected IELR for each accident year and the expected loss development profiles. We regularly monitor these assumptions and, at each quarter end, undertake a full actuarial review. Any adjustments that result frommethods employed by our actuaries. Given our relatively limited operating history, this review are recorded in the quarter in which they are identified. The historic loss information we usedata is also assumed to be indicative of future loss development and trends.

supplemented with industry benchmarks. The IELR selections in our insurance segment are primarily developed using industry benchmarks with varying degrees of weight givenrelative weights assigned to our own historical loss data versus industry data vary according to the length of the development profile for the reserving class being evaluated. At present, we generally give more weight to our own experience (and, correspondingly, less weight to industry data) for reserving classes with short and medium claim tails; the converse is true for reserving classes with longer claim tails. (See ‘Claim Tail Class Analysis’ for more detailed information by claim tail class.)

Actuarial Analysis

Multiple actuarial methods are available to estimate ultimate losses. Each method has its own assumptions and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all reserving classes. The relative strengths and weakness of the particular estimation methods when applied to a particular group of claims can also change over time.

The following is a brief description of the reserve estimation methods commonly employed by our actuaries and a discussion of their particular strengths and weaknesses:

Expected Loss Ratio Method (“ELR”): This method estimates ultimate losses for an accident year by applying an expected loss ratio to the earned premium for that accident year. Generally, expected loss ratios are based on one or more of (a) an analysis of historical loss experience to date, (b) pricing information and (c) industry data, adjusted as appropriate, to reflect changes in rates and terms and conditions. This method is insensitive to actual incurred losses for the accident year in question and is, therefore, often useful in the early stages of development when very few losses have been incurred. Conversely, the lack of sensitivity to incurred/paid losses for the accident year in question means that this method is usually inappropriate in later stages of that accident year’s development.

Loss Development Method (also referred to as the Chain Ladder Method or Link Ratio Method): This method assumes that the losses incurred/paid for each accident year at a particular development stage follow a relatively similar pattern. It assumes that on average, every accident year will display the same percentage of ultimate losses incurred/paid at the same point in time after the inception of the accident year. The percentages incurred/paid are established for each development stage (e.g. 12 months, 24 months, etc.) after examining historical averages from historical loss development data and/or external industry benchmark information. Ultimate losses are then estimated by multiplying the actual incurred/paid losses by the reciprocal of the established incurred/paid percentage. The strengths of this method are that it reacts to loss emergence/payments and that it makes full use of historical claim emergence/payment experience. However, this method has weaknesses when the underlying assumption of stable loss development/payment patterns is not valid. This could be the consequence of changes in business mix, claim inflation trends or claim reporting practices and/or the presence of large claims, amongst

other things. Furthermore, this method tends to produce volatile estimates of ultimate losses where there is volatility in the underlying incurred/paid patterns. In particular, where the expected percentage of incurred/paid losses is low, small deviations between actual and expected claims can lead to very volatile estimates of ultimate losses. As a result, this method is often unsuitable at early development stages of an accident year.

Bornhuetter-Ferguson Method (“BF”): This method can be seen as a combination of the ELR and Loss Development Methods, under which the Loss Development Method is given progressively more weight as an accident year matures. The main advantage of the BF Method is that it provides a more stable estimate of ultimate losses than the Loss Development Method at earlier stages of development, while remaining more sensitive to emerging loss development than the ELR Method. In addition, the BF Method allows for the incorporation of external market information through the use of expected loss ratios, whereas the Loss Development Method does not incorporate such information.

As part of our quarterly loss reserve review process, our actuaries employ the estimation method(s) that they believe will produce the most reliable estimate of ultimate losses, at that particular evaluation date, for each reserving class and accident year combination. Often, this is a blend (i.e. weighted average) of the results of two or more appropriate actuarial methods. These ultimate loss estimates are generally utilized to evaluate the adequacy of our ultimate loss estimates for previous accident years, as established in the prior reporting period. For the initial estimate of the current accident year, the available claim data is typically insufficient to produce a reliable estimate of ultimate losses. As a result, our initial estimate for an accident year is generally based on the ELR Method. The initial ELR for each reserving class is established collaboratively by our actuaries, underwriters and management at the start of the accident year as part of the planning process, taking into consideration prior accident years’ experience and industry benchmarks, adjusted after considering factors such as exposure trends, rate differences, changes in contract terms and conditions, business mix changes and other known differences between the current accident year and prior accident years. The initial expected loss ratios for a given accident year may be modified over time if the underlying assumptions, such as loss development or premium rate changes, differ from the original assumptions.

Reserving for Credit and Political Risk Business

Our credit and political risk insurance business consists primarily of credit insurance and confiscation, expropriation, nationalization and deprivation coverages (“CEND”). Claims for this business tend to be characterized by their severity risk, as opposed to their frequency risk. Therefore, claim payment and reporting patterns are anticipated to be volatile. Under the notification provisions of our credit insurance, we anticipate being advised of an insured event within a relatively short time period. As a result, we generally estimate ultimate losses based on a contract-by-contract analysis which considers the contracts’ terms, the facts and circumstances of underlying loss events and qualitative input from claims managers.

An important and distinguishing feature of many of these contracts, though, is our contractual right, subsequent to payment of a claim to our insured, to be subrogated to, or otherwise have an interest in, the insured’s rights of recovery under an insured loan or facility agreement. These estimated recoveries are recorded as an offset to our credit and political risk loss reserves. The lag between the date of a claim payment and our ultimate recovery from the corresponding security can result in negative case reserves at a point in time (as was the case at December 31, 2010 and 2009). The nature of the underlying collateral is specific to each transaction and we also estimate the value of this collateral on a contract-by-contract basis. This valuation process is inherently subjective and involves the application of management’s judgment because active markets for the collateral often do not exist. Our estimates of value are based on numerous inputs, including information provided by our insured, as well as third party sources including rating agencies, asset valuation specialists and other publicly available information. We also assess any post-event circumstances, including restructurings, liquidations and possession of asset proposals/agreements.

In some instances, upon becoming aware of a loss event related to our credit and political risk business, we negotiate a final settlement of all of our policy liabilities for a fixed amount. In most circumstances, this occurs when the insured moves to realize the benefit of the collateral that underlies the insured loan or facility and presents us with a net settlement proposal that represents a full and final payment by us under the terms of the policy. In consideration for this payment, we secure a cancellation of the policy, or a release of all claims, and waive our right to pursue a recovery of these settlement payments against the security that may have been available to us under the insured loan or facility agreement. In certain circumstances, cancellation by way of net settlement or full payment can result in an adjustment of the net premium to be received and earned on the policy.

Reserving For Significant Catastrophic Events

We cannot estimate losses from widespread catastrophic events, such as hurricanes, using the traditional actuarial methods described above. Rather, loss reserves for such events are estimated by management after a catastrophe occurs by completing an in-depth analysis of individual contracts which may potentially be impacted by the catastrophic event. This in-depth analysis may rely on several sources of information, including: (1) estimates of the size of insured industry losses from the catastrophic event and our corresponding market-share; (2) a review of our portfolio of contracts performed to identify those contracts which may be exposed to the catastrophic event; (3) a review of modeled loss estimates based on information previously reported by customers and brokers, including exposure data obtained during the underwriting process; (4) discussions of the impact of the event with our customers and brokers and (5) catastrophe bulletins published by various independent statistical reporting agencies. We generally use a blend of these information sources to arrive at our aggregate estimate of the ultimate losses arising from the catastrophic event. In subsequent reporting periods, we review changes in paid and incurred losses in relation to each significant catastrophe and adjust our estimates of ultimate losses for each event if there are developments that are different from our previous expectations; such adjustments are recorded in the period in which they are identified.

There are additional risks affecting our ability to accurately estimate ultimate losses for catastrophic events. For example, the estimation of loss reserves related to hurricanes and earthquakes can be affected by factors including but not limited to: the inability to access portions of impacted areas, infrastructure disruptions, the complexity of factors contributing to losses, legal and regulatory uncertainties, complexities involved in estimating business interruption losses and additional living expenses, the impact of demand surge, fraud and the limited nature of information available. For hurricanes, additional complex coverage factors may include determining whether damage was caused by flooding versus wind, evaluating general liability and pollution exposures, and mold damage. The timing of a catastrophe, for example near the end of a reporting period, can also affect the level of information available to us to estimate reserves for that reporting period.

Key Actuarial Assumptions

The use of the above actuarial methods requires us to make certain explicit assumptions, the most significant of which are: (1) expected loss ratios and (2) loss development patterns.

We began operations in late 2001. In our earlier years, we placed significant reliance on industry benchmarks in establishing our expected loss ratios. Over time, we have placed more reliance on our historical loss experience in establishing these ratios where we believe the weight of our own actual experience has become sufficiently credible for consideration. The weight given to our experience differs for each of our three claim tail classes and is discussed further in the ‘Claim Tail Analysis’ section below. In establishing expected loss ratios for our insurance segment, we give consideration to a number of other factors, including exposure trends, rate adequacy on new and renewal business, ceded reinsurance costs, changes in claims emergence and our underwriters’ view of terms and conditions in the market environment. InFor our reinsurance segment, our IELR selectionsexpected loss ratios are based on

a contract by contractcontract-by-contract review, which incorporatesconsiders information provided by clients together with estimates provided by our underwriters and actuaries concerningabout the impact of changes in pricing, terms and conditions and coverage. Our estimate of the impact of these changes includes assumptions whichWe also consider among other things, the market experience of ouran independent actuarial firm.firm, as appropriate.

OurSimilarly, we also placed significant reliance on industry benchmarks in selecting our loss development profiles are primarily developed using industry benchmarks withpatterns in earlier years. Over time, we have given varying degrees of weight given to our own historical loss experience. Having begun operationsexperience, as further discussed in late 2001the ‘Claim Tail Analysis’ section.

Selection of Reported Reserves (Management’s Best Estimate)

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

The quarterly evaluation process also includes consultation with an independent actuarial firm. The work performed by the actuarial firm is an important part of the reserving process. We compare our recorded loss reserves to those estimated by the actuarial firm to determine whether our single point best estimate is reasonable. On an annual basis, the independent actuarial firm provides an actuarial opinion on the reasonableness of our loss reserves for each of our operating subsidiaries; such actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm discusses its conclusions with management and presents its findings to our Board of Directors.

Claim Tail Analysis

The following table shows our total loss reserves for each of our reportable segments, segregated between case reserves and IBNR and by significant line of business. This table is presented on a gross basis and, therefore, does not include the benefit of reinsurance recoveries.

   2010  2009 
At December 31, Case Reserves  IBNR   Total  Case Reserves  IBNR   Total 
          

Insurance segment:

         

Property

 $295,669  $206,139   $501,808  $318,418  $197,022   $515,440 

Marine

  147,250   151,400    298,650   156,909   155,008    311,917 

Aviation

  25,054   41,978    67,032   28,729   47,322    76,051 

Credit and Political Risk

  (129,953  106,788    (23,165  (40,928  215,031    174,103 

Professional Lines

  335,069   1,371,700    1,706,769   264,735   1,305,842    1,570,577 

Liability

  174,282   785,154    959,436   172,954   681,638    854,592 

Other

  85   1,388    1,473   -        -         -      
                           

Total Insurance

  847,456   2,664,547    3,512,003   900,817   2,601,863    3,502,680 
                           
  

Reinsurance segment:

         

Catastrophe and Property

  564,282   463,552    1,027,834   370,653   467,281    837,934 

Credit and Bond

  69,488   140,560    210,048   88,476   131,038    219,514 

Professional Lines

  223,277   742,024    965,301   185,586   688,832    874,418 

Motor

  252,047   236,483    488,530   229,132   190,199    419,331 

Liability

  140,934   687,725    828,659   120,633   589,623    710,256 
                           

Total Reinsurance

  1,250,028   2,270,344    3,520,372   994,480   2,066,973    3,061,453 
                           

Total

 $ 2,097,484  $ 4,934,891   $ 7,032,375  $ 1,895,297  $ 4,668,836   $ 6,564,133 
                           
                           

In order to capture the key dynamics of our loss reserve development and potential volatility, our reserving classes should be considered according to their potential expected length of loss emergence and settlement, generally referred to as the “tail”. We consider our business substantially since,to consist of three claim tail classes: short-tail, medium-tail and long-tail. Below is a discussion of the credibilityspecifics of our own loss reserve process as they apply to each claim tail class, as well as commentary on the factors contributing to our historical loss reserve development profiles have generally been limited. Ourfor each class. Favorable development profiles are only adjusted when the weight of our own actual experience becomes sufficiently credible to identify deviations from the market based assumptions. As this happens, we incorporate the experience from these accident years in our actuarial analysis to determine futureon prior accident year expected loss ratios, adjusted for the occurrence or lack of large losses, changes in pricing, loss trends, terms and conditions and reinsurance structure.

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.reserves indicates that our current estimates are lower than our previous estimates, while adverse development indicates that our current estimates are higher than our previous estimates.

Short-Tail Business:Business

Short-tailOur short-tail business generally includes exposures describe classes of business for which losses are usually known and paid within a relatively short period of time after athe underlying loss event has occurred. Our short-tail exposures includebusiness primarily relates to property coverages and includes the majority of theour property, terrorism and marine lines of businessclasses within our insurance segment, together with the property, catastrophe and crop lines of businessclasses within our reinsurance segment.

The initial estimates of our ultimate losses for our short-tail business in our early accident years were developed primarily with reference to industry benchmarks for both expected loss ratios and loss development patterns. Over time, our own historical loss experience has increased and, therefore, gained credibility and became relevant for consideration in our loss reserve estimation process. As a result, commencing in 2005, we have gradually

increased the weighting assigned to our own historical experience in selecting the expected loss ratios and loss development patterns utilized to establish our initial estimates of ultimate losses. Given that our own loss experience has generally been more favorable than we expected based on industry benchmarks, the incorporation of this data has generally led to a reduction in our loss ratios and the recognition of favorable development on prior accident years. See ‘Underwriting Results – Group – Prior Period Development’ for a discussion of the net favorable development recognized when re-estimating our ultimate losses for our short-tail business in the last three years.

As claims on this business are generally reported to us in close proximity to the loss event, by the end of any particular accident year we have received data on a number of loss events and utilize the BF Method to establish loss reserves. Due to the relatively short reporting developmentand settlement pattern for our short-tail lines of business, our estimatesubsequent re-estimates of ultimate losses respondsrespond quickly to actual developments in claims reported to us. The majority of the latest loss data. We therefore typically assign higher credibilitydevelopment in our initial estimates for short-tail business is recognized in the subsequent one to methods that incorporate actual loss emergence, soonerthree years. As a result, our estimates of ultimate losses for our short-tail business for our most recent accident years are subject to greater uncertainty than would be the casethose for long-tail lines at a similar stage of development.more mature accident years.

Although our reserve estimateestimates of ultimate losses for short tailour short-tail business hasare inherently less uncertaintyuncertain than longer tailfor our medium and long-tail business, itsignificant judgment is still subject to significant judgment.required. For example, because much of our excess insurance and excess of loss reinsurance business has high attachment points, it is often difficult to estimate whether claims will exceed those attachment points. Also, the inherent uncertainties relating to coverage and damage assessment on catastrophe events (see below),previously discussed, together with our typically large line sizes, further add to the complexity of estimating our potential exposure. Additionally, for workers compensation catastrophe reinsurance business, our estimate of ultimate losses requires us to estimate longer term and potentially more variable costs, such as ongoing medical expenses. This business therefore generally has a longer development profile when compared to property catastrophe business.

The reserving process for losses arising from catastrophic events typically involves the determination by our claims department, in conjunction with our underwriters and actuaries, of our exposure and likely losses immediately following an event with subsequent refinement of those losses as our clients provide updated actual loss information. When a catastrophe event occurs, we review our contracts to determine those that could be potentially exposed to the 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 commercial vendor models to estimate loss exposures under the actual event scenario. As part of the underwriting process, we obtain exposure data from our clients, so that when an event occurs we can run 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. Natural catastrophe losses were low in 2009 due to the absence on the whole of major catastrophes and a benign North Atlantic hurricane season.

For the 2009 accident year, our short-tail line loss reserves were typically established using the BF method, which, as noted previously, requires initial expected loss ratios by line of business, adjusted for actual experience during the year.

During 2009, we continued to incorporate more of our own historical loss experience within short-tail lines of business. Given our own loss experience has generally been more favorable than we expected, the incorporation of this data into our reserving analysis had the impact of reducing net loss ratios on several lines of business, relative to 2008. Otherwise, for short-tail businesses taken as a whole, our loss trend assumptions for accident year 2009 did not differ significantly from prior years.

In terms of prior accident years, changes to ultimate loss estimates on short-tail lines of business in 2009 were primarily in response to the latest reported loss data rather than any significant changes to underlying actuarial assumptions such as loss development patterns. As discussed in the ‘Underwriting Results – Group – Prior Period Development’ section, we have experienced significant net favorable reserve development on short-tail lines of business during the last three years.

This favorable development partly stemmed from the fact that historically we had relied heavily upon industry-based profiles. Due to the inherent limitations of this, our loss reserves in prior years have also included a provision for 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. Also, within our insurance segment, for certain business,addition, we use managing general agents and other producers whichfor certain business within our insurance segment; this can delay the reporting of loss information to us. As it has transpired, our actual claims experience in the last three years has been more favorable than we projected, with late reporting being less prevalent than we anticipated.

In addition to this broader claims experience, favorable prior period reserve development has also occurred as a result of reductions to individual case reserves following updated loss information received from insureds or ceding companies. Also, for certain specific catastrophe events, we have also taken down our own provisions from prior periods. 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.

Medium-Tail Business:Business

Our medium-tail exposures include the majoritybusiness primarily consists of theprofessional lines insurance and reinsurance and trade credit and bond reinsurance business. Certain other classes, including aviation hull and offshore energy offshore, professional linesinsurance and engineering reinsurance, are also considered to have a medium-tail. Claim reporting and settlement periods on these reserving classes are generally longer than those of our short-tail reserving classes. We also consider our credit and political risk linesinsurance business to have a medium tail, due to the complex nature of claims and the potential additional time that may be required to realize our insurance segment together with mostsubrogation assets.

Our initial estimates of ultimate losses for a given accident year are generally established by application of the trade creditELR Method, due to the longer claim reporting and bond, professional lines and engineering linessettlement periods for this business. We generally utilized industry expected loss ratio benchmarks to establish our initial estimates of ultimate losses for our reinsurance segment. For mediumearlier accident years. Due to the longer claim tail, the length of time required to develop our own credible historical loss history for utilization in the loss reserving process is greater for our medium-tail business we generally usethan for our short-tail business. As a result, the IELR method on more recentnumber of accident years and the BF methodwhere we relied heavily on older accident years. Theindustry benchmarks to estimate our initial ultimate losses for our medium-tail business is greater. Our reserving approach for medium-tail business is tailored by line of business, with our significant changes to our reserving for medium tail business in 2009 are describedlines being specifically addressed below.

Professional Lines Insurance/Reinsurance

For our professional lines business, claim payment and reporting patterns are typically medium to long tail in nature. The underlying business is predominatelypredominantly written on a claims-made basis, with the majority of reinsurance treaties being written on a riskrisks attaching basis. During 2009,Generally, when we continued to give weight to our own loss experience, in particular business written on a claims-made basis from accident years 2006 and prior, which has developed a reasonable level of credible data. Generally oncebelieve the percentage of reportedincurred losses infor a particular accident year is assumed to havehas reached 70% of estimated ultimate losses, the selected reserving methodology iswe gradually transitioned away fromtransition to sole reliance on the IELR method and,BF Method over the course of the next two years, towards sole reliance oncalendar years.

Our transition from the ELR Method for estimating professional lines ultimate losses began during 2008, when we commenced the gradual transition from the ELR Method to the BF method. For more recentMethod for the 2004 and prior accident years. As our loss history continues to develop, additional accident years are included in the transition process; at the end of 2010, the transition had begun for the 2007 and prior accident years. This transition means that our own historical loss experience is gradually incorporated when we continue to use the IELR method, althoughre-estimate our ultimate losses for these accident years. As our actual loss estimates for accident year 2007 and 2008 are weightedexperience has generally been more heavily towards ourfavorable than we expected when establishing the initial expected loss exposure toratios, this transition has generally resulted in the economic downturn andrecognition of net favorable prior period reserve development over the sub-prime lending credit crisis. Our reserves for the credit crisis incorporate analyses by our claims personnel, actuaries and underwriters of known notifications of potential loss, as well as a review of accounts that may have exposure to this area, but have not yet provided notice of a claim. Duringlast three years. However, during 2009, we strengthened our 2008 accident year 2008 professional lines reserves in response to the continuedcontinuing economic downturndownturn. (See ‘Underwriting Results – Group – Prior Period Development’ for further details). As a result of the global financial crisis, there continues to be relatively high levels of uncertainty around ultimate losses for the 2007-2009 accident years. This is mainly attributable to both the higher than average volume of reported claims on these years, as well as the higher proportion of open claims, relative to earlier accident years at the same stage of development. As a result, loss development patterns on these accident years may ultimately differ from prior years.

Our estimates of ultimate losses for more recent accident years continue to rely on the ELR Method. We are progressively giving more weight to our own experience when establishing our expected loss ratios. Our assumed loss development patterns for this business continue to be based primarily on industry benchmarks.

Trade Credit and credit crisis.Bond Reinsurance

For accident year 2009our trade credit and bond reinsurance business, we increased our IELRs relative to prior years due to the weaker economic environment. We also strengthened our accident year 2008 reserves in 2009 due to deteriorating loss experience reported by our cedants. For earlier accident years, we continued to give weight to our own loss experience, in particular accident years 2005 to 2007. Our selected reserving methodology is gradually transitionedtransition from a sole reliance on the IELR methodELR Method to the BF method, generallyMethod starting after two years for trade credit business and after three years for bond reinsurance business.

ClaimsCredit and Political Risk Insurance

Refer to the previous discussion of this business under ‘Reserving Process – Actuarial Analysis’ above for a discussion of specific loss reserve issues related to this business. When considering prior accident year reserve development for this line of business, it is important to consider that the multi-year nature of the credit business distorts loss ratios when a single accident year is considered in isolation. In recent years, the average term of these contracts has been four to five years. The premiums we receive are generally earned evenly over the contract term, thus spanning multiple accident years. In contrast, losses incurred on these contracts, which can be characterized as low in frequency and high in severity, are reflected in a single accident year.

As previously described, the estimation of the value of our recoveries on credit and political risk business tend to be characterized by their severity risk as opposed to their frequency risk and tend to be heterogeneous in nature. Therefore, claim payment and reporting patterns are anticipated to be volatile. Under the notification provisions of our non-sovereign credit insurance, we anticipate being advised of an insured event within a relatively short time period. Generally, these contracts include waiting periods following the event which specify that the claim payment is due only after specified waiting periods. In some cases, resolution can be achieved during the waiting period. Also of note, a feature of many of these contracts is that after the date we pay a claim, we are generally subrogated to all of the insured’s rights of recovery under the insured agreement. In some situations, we may also receive a transfer or assignment of the insured’s rights. This can lead to the situation where we pay a claim in the short term, but receive a recovery over a longer period of time. We anticipate that this will likely lead to claim reporting patterns that will have a medium development tail.requires significant management judgment. At December 31, 2009, we had negative gross case reserves of $41 million.

During 2009, the level of2010, our total estimated recoveries due on credit insurance business (within our creditwere $163 million, of which $135 million related to contracts where we had already paid losses, $19 million related to contracts where case reserves were recognized and political risk line of business) increased significantly relative$9 million related to prior years (see below). AtIBNR reserves. Comparatively, at December 31, 2009, our estimate ofestimated recoveries due waswere $340 million, of whichwith $87 million, related to recoveries on paid losses, $160 million onand $93 million relating to paid losses, case reserves and $93 million on IBNR, reserves.respectively. The estimateoverall reduction in 2010 reflects the settlement of suchcertain claims, the realization of recoveries requires significant management judgment. Our estimate requires us to assessfor certain claims and the post event circumstances, including any restructuring, liquidation or possession of asset proposals/agreements. The process involves compiling information from our insureds, several third party sources, including rating agencies, asset valuation specialists and publicly available information.reduction in recovery estimates (see ‘Underwriting Results – Group – Prior Period Development’ for further details).

Our expected current accident year loss ratio for credit and political risk business increased significantly from prior years as a result of increased loss activity emanating from the global financial crisis. The increase included a reserving provision related to one peak credit insurance risk which has been stressed by the global economic downturn. No claim has been presented to date. However, we have been closely monitoring the status of the project and identified an opportunity to work and negotiate with interested parties to settle our exposure. We have reserved for the amount that we believe will ultimately be payable to eliminate our exposure. In terms of prior accident years, in 2009 we experienced favorable reserve development from credit related business, largely from accident year 2007, and to a lesser extent, accident years 2006 and 2005, driven by the recognition of lower than expected loss activity.

Long-Tail Business:Business

Long-tail lines ofIn contrast to our short and medium-tail business, describe lines ofthe claim tail for our long-tail business for which specific losses may notis expected to be known for some period.notably longer, as claims are often reported and ultimately paid or settled years, even decades, after the related loss events occur. Our long tail exposures include most of thelong-tail business primarily relates to liability business we writewritten in our insurance and reinsurance segmentsegments, as well as motor reinsurance business. There are many factors contributing to the uncertainty and volatility

As a general rule, our estimates of accident year ultimate losses for our long-tail business including the following:are notably more uncertain than those for our short and medium-tail business. Factors that contribute additional uncertainty to estimates for our long-tail business include, but are not limited to:

 

Our historical loss data and experience is generally too immature and lackingThe more significant weight given to industry benchmarks in actuarial credibility to place reliance upon for reserving purposes. Instead, we place reliance on industry loss ratios and industry benchmark development profiles that we anticipate reflect the nature and coverage offorming our business and its future development. Actual loss experience is likely to differ from industry loss statistics that are based on averages as well as loss experience of previous underwriting years;estimates.

 

The inherent uncertainty aroundInherent uncertainties about loss trends, claims inflation (e.g., medical, judicial, social) and judicial) and underlying general economic conditions; and

 

The possibility of future litigation, legislative or judicial change that mightmay impact future loss experience relative to the prior industry loss experience relied upon in loss reserve analyses.estimation.

ForGiven our liability lines ofrelatively short operating history, we do not believe that our own historical loss development for our long-tail business has amassed an appropriate volume to serve as a credible input to the actuarial methodologies previously outlined. As a result, we predominately usehave predominantly used the IELR method acrossELR Method to derive our initial estimated ultimate loss ratios for all accident years. DueOur expected loss ratios have been derived almost exclusively from industry benchmarks, rather than our own historical experience. While we utilize industry benchmarks that we believe reflect the nature and coverage of our business, our actual loss experience may differ from industry benchmarks that are based on averages.

As part of our quarterly reserving process, we monitor actual paid and incurred loss emergence relative to expected loss emergence based on industry-benchmark loss development patterns. At this stage, we generally believe that it remains too early to recognize any potentially favorable loss emergence that may be noted through this analysis. However, the long-term reporting and settlement period for liability business, additional facts regarding coverage’s written in prior years, as well as actual claims and trends may become knowndrivers of any unfavorable loss emergence are investigated and, as a result, we may be requiredlead to adjust our reserves accordingly. During 2009, we experienced netan immediate recognition of adverse prior period reserve development on E&S liability business, primarily impacting accident year 2007, and to a lesser extent, accident year 2008. We adjusted our loss development profile on these accident years having observed higher than expected frequency and severity of claims emergence on this business over the last twelve months. This was partially offset by net favorable development on E&S umbrella lines, predominately from accident years 2005 and 2006, reflecting the incorporation of more of our own actual experience with respect to reinsurance recoveries on this business.

development.

Potential Volatility in Our EstimatesSensitivity Analysis

While we believe that our loss reserves at December 31, 20092010 are adequate, new information, events or circumstances unknown at the original valuation date, may lead to future developmentsresult in our ultimate losses significantlythat are materially greater or less than the reserves currently provided. The actual final cost of settling claims outstanding at December 31, 2009 as well as claims expected to arise from unexpired period of risk is uncertain.provided for in our loss reserves. As previously noted, above there are many factors that may cause our reserves to increase or decrease, particularly those related to catastrophe losses and long-tail lines of business.

Our expected loss ratios are a key assumption in our estimate of ultimate losses for business at an early stage of development. All else remaining equal, a higher expected loss ratio would result in a higher ultimate loss estimate, and vice versa. Our assumed loss development patterns are another significant assumption in estimating our loss reserves. All else remaining equal, accelerating a loss reporting pattern (i.e. shortening the claim tail) would result in lower ultimate losses, as the estimated proportion of losses already incurred would be higher. The uncertainty in our reserve estimatethe timing of the emergence of claims (i.e. the length of the development pattern) is generally greater for a company like ours that haswith a limited operating history andwhich, therefore, reliesmust rely on industry benchmarks to a certain extent upon industry benchmarks when establishing our loss reserve estimates. To reduce some of the uncertainty, management performs an analysis of additional factors to be considered when establishing our IBNR, intended to enhance our best estimate beyond quantitative techniques. At December 31, 2009, we recorded additional IBNR for uncertainties relating to the timing of the emergence of claims. Although time lags are incorporated within the actuarial methods discussed above, these rely on 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.

The following tables below quantifyshow the impacteffect on our estimate of gross loss reserves of reasonably likely scenarios tochanges in the two key actuarial assumptions used to estimate our gross loss reserves at December 31, 2009. The changes to IELR selections represent percentage increases or decreases to our current IELR selections. The change to reporting patterns represents claims reporting that is both faster and slower than our current reporting patterns. The variability factors chosen below are consistent with commonly accepted actuarial practice given our own historical data regarding variability is generally limited. 2010:

INSURANCE

 

Development Pattern

    Expected Loss Ratio 
              
Property    5% lower     Unchanged     5% higher 

3 months shorter

    $(23,258    $(18,849    $(14,441

Unchanged

     (5,351     -           5,351 

3 months longer

     31,676      38,976      46,275 
    
Marine    5% lower     Unchanged     5% higher 

3 months shorter

    $(16,208    $(10,793    $(5,379

Unchanged

     (5,954     -           5,954 

3 months longer

     9,232      15,985      22,739 
    
Aviation    5% lower     Unchanged     5% higher 

3 months shorter

    $(4,462    $(2,894    $(1,326

Unchanged

     (1,713     -           1,713 

3 months longer

     2,086      3,999      5,911 
    
Credit and Political Risk    10% lower     Unchanged     10% higher 

3 months shorter

    $(20,200    $-          $20,200 

Unchanged

     (20,200     -           20,200 

3 months longer

     (20,200     -           20,200 
    
Professional Lines    10% lower     Unchanged     10% higher 

6 months shorter

    $(225,008    $(71,236    $83,116 

Unchanged

     (157,559     -           161,599 

6 months longer

     (66,014     94,894      266,656 
    
Liability    10% lower     Unchanged     10% higher 

6 months shorter

    $ (127,246    $ (14,106    $83,920 

Unchanged

     (99,437     -           99,437 

6 months longer

     (82,854     18,425      128,459 
                      

REINSURANCE

 

Development Pattern

    Expected Loss Ratio 
              
Catastrophe, Property and Other    5% lower     Unchanged     5% higher 

3 months shorter

    $(87,189    $(37,810    $11,569 

Unchanged

     (51,270     -           51,270 

3 months longer

     (7,161     46,430      100,022 
    
Credit and Bond    10% lower     Unchanged     10% higher 

6 months shorter

    $(31,417    $(8,742    $13,933 

Unchanged

     (24,122     -           24,122 

6 months longer

     (11,024     15,537      42,098 
    
Professional Lines    10% lower     Unchanged     10% higher 

6 months shorter

    $ (113,461    $ (33,922    $45,617 

Unchanged

     (85,959     -           85,959 

6 months longer

     (58,872     33,553       125,977 
    
Motor    10% lower     Unchanged     10% higher 

6 months shorter

    $(53,250    $-          $53,250 

Unchanged

     (53,313     -           53,313 

6 months longer

     (53,414     29      53,472 
    
Liability    10% lower     Unchanged     10% higher 

6 months shorter

    $(92,222    $(587    $91,047 

Unchanged

     (92,027     -           92,027 

6 months longer

     (91,856     597      93,049 
                      

The results show the cumulative increase (decrease) in our loss reserves across all accident years.

INSURANCE 
Reporting Pattern  Initial Expected Loss Ratio 
Property  5% lower  Unchanged  5% higher 
  

3 months faster

  $(26,051 $(17,643 $(9,235

Unchanged

   (1,916  -    16,985  

3 months slower

   38,930    50,373    61,816  
Marine  5% lower  Unchanged  5% higher 
  

3 months faster

  $(15,480 $(10,598 $(5,717

Unchanged

   (1,623  -    9,429  

3 months slower

   17,913    24,297    30,681  
Aviation  5% lower  Unchanged  5% higher 
  

3 months faster

  $(9,171 $(7,783 $(6,396

Unchanged

   (1,800  -    1,751  

3 months slower

   7,899    10,185    12,471  
Credit and Political Risk  10% lower  Unchanged  10% higher 
  

3 months faster

  $(45,216 $-   $45,216  

Unchanged

   (45,216  -    45,216  

3 months slower

   (45,216  -    45,216  
Professional Lines  10% lower  Unchanged  10% higher 
  

6 months faster

  $  (212,192 $  (70,139 $75,435  

Unchanged

   (139,972  -    159,922  

6 months slower

   (84,391  84,405    251,387  
Liability  10% lower  Unchanged  10% higher 
  

6 months faster

  $(108,759 $(21,306 $66,147  

Unchanged

   (87,802  -    91,669  

6 months slower

   (63,601  28,385      120,370  
              

REINSURANCE 
Reporting Pattern  Initial Expected Loss Ratio 
Catastrophe, Property and Other  5% lower  Unchanged  5% higher 
  

3 months faster

  $(80,840 $(41,684 $(2,529

Unchanged

   (39,990  -    39,990  

3 months slower

   8,684    49,843    91,001  
Credit and Bond  10% lower  Unchanged  10% higher 
  

6 months faster

  $(28,480 $(5,722 $17,035  

Unchanged

   (23,330  -    23,330  

6 months slower

   (17,882  6,053    29,988  
Professional Lines  10% lower  Unchanged  10% higher 
  

6 months faster

  $  (103,902 $  (29,486 $44,930  

Unchanged

   (80,111  -    80,111  

6 months slower

   (58,532  25,359    110,862  
Motor  10% lower  Unchanged  10% higher 
  

6 months faster

  $(37,475 $(622 $36,232  

Unchanged

   (36,916  -    36,916  

6 months slower

   (36,262  726    37,714  
Liability  10% lower  Unchanged  10% higher 
  

6 months faster

  $(77,832 $(183 $77,465  

Unchanged

   (77,667  -    77,667  

6 months slower

   (77,418  276    77,971  
              

For example, if our assumed loss development pattern for our property insurance business was three months shorter with no accompanying change in our ELR assumption, our loss reserves may decrease by approximately $19 million. Each of the impacts set forth in the tables is estimated individually, without consideration for any correlation among key assumptions or among reserving classes. Therefore, it would be inappropriate to take each of the amounts and add them together in an attempt to estimate total volatility. While we believe the variations in the expected loss ratios and loss development patterns presented could be reasonably expected, our own historical data regarding variability is generally limited and actual variations may be greater or less than these amounts. It is not appropriate to add together the total impact for a specific factor or the total impact for a specific reserving line as the lines of business are not perfectly correlated. It isalso important to note that the variations set forth in the tables above are not meant to be a “best-case” or “worst-case” series of scenarios and, therefore, it is possible that future variations in our loss reserves may be more or less than the amounts set forth above.presented. While we believe that these are reasonably likely scenarios, we do not believe youthis sensitivity analysis should consider the above sensitivity analysisbe considered an actual reserve range.

REINSURANCE RECOVERABLE BALANCES

Reinsurance recoverable balances include amounts owedIn the normal course of business, we purchase reinsurance to us inprotect our business from losses due to exposure aggregation and to limit ultimate losses from catastrophic events. The purchase of reinsurance does not discharge our liabilities under contracts written by us. Consequently, an exposure exists with respect of paid and unpaid ceded losses and loss expenses and are presented net of a reserve for non-recoverability. At December 31, 2009,to reinsurance recoverable balances were $1,424 million (2008: $1,379 million), respectively. In establishingto the extent that any of our reinsurers is unwilling or unable to pay our claims.

The following table shows the composition of our reinsurance recoverable balances,on unpaid losses for each of our reportable segments, segregated between those related to case reserves and those related to IBNR and by significant judgment is exercised by management in determining the amountline of business:

    2010   2009 
At December 31,  Case
Reserves
   IBNR   Total   Case
Reserves
   IBNR   Total 

Insurance segment:

             

Property

  $134,022   $49,946   $183,968   $144,401   $61,053   $205,454 

Marine

   46,448    41,193    87,641    20,952    39,544    60,496 

Aviation

   501    66    567    -         1,548    1,548 

Credit and Political Risk

   -         -         -         -         -         -      

Professional Lines

   154,237    505,271    659,508    109,700    478,844    588,544 

Liability

   96,806    465,319    562,125    94,406    392,695    487,101 

Other

   -         3    3    -         -         -      
                               

Total Insurance

   432,014    1,061,798    1,493,812    369,459    973,684    1,343,143 
                               
  

Reinsurance segment:

             

Catastrophe and Property

   -         -         -         -         -         -      

Credit and Bond

   -         -         -         -         -         -      

Professional Lines

   -         433    433    -         790    790 

Motor

   -         -         -         -         -         -      

Liability

   -         46,388    46,388    -         37,125    37,125 
                               

Total Reinsurance

   -         46,821    46,821    -         37,915    37,915 
                               
  

Total

  $ 432,014   $ 1,108,619   $ 1,540,633   $ 369,459   $ 1,011,599   $ 1,381,058 
                               

The recognition of reinsurance recoverable on unpaid losses and loss expenses requires two key estimates. The first estimate is the amount of loss reserves to be ceded as well asto our ability to cede losses and loss expenses under our reinsurance contracts.

Our ceded unpaid losses and loss expenses consistreinsurers. This amount consists of two elements, those forrelated to our gross case reserves and those forrelated to our gross IBNR. Recoveries onReinsurance recoveries related to our gross case estimatesreserves are determinedestimated on a case-by-case basis by applying the terms of any applicable reinsurance recoveriescoverage to theour individual case reserve estimates. As the gross case estimates are adjusted over time in accordance with the settlementOur estimate of the claim, the corresponding ceded case estimates will be adjusted. Recoveries on gross IBNR areis generally developed as part of our loss reserving process. Consequently, theprocess and, consequently, its estimation of ceded unpaid losses and loss expenses is subject to similar risks and uncertainties as the estimation of gross IBNR (see‘ReserveIBNR. Estimates of amounts to be ceded under non-proportional reinsurance contracts also take into account pricing information for Lossesthose contracts and Loss Expenses’).require greater judgment than estimates for proportional contracts.

AsThe second estimate is the amount of reinsurance recoverable on unpaid and paid losses that we will ultimately be unable to recover from reinsurers. The majority of theour reinsurance recoverable balanceson unpaid losses will not be due for collection until some point in the future,future. As a result, the recoverability of such amountsamount we ultimately collect may ultimately differ materially from the recorded amountsour estimate due to the ability and willingness of reinsurers to pay our claims, for reasons includingclaims. This willingness may be negatively impacted by factors such as insolvency, a contractual dispute over contract language or coverage and forand/or other reasons. Additionally, over thisthe period of time before the amounts become due to us, economic conditions andand/or operational performance of a particular reinsurer may changedeteriorate and consequently these changes maythis could also affect the reinsurer’s willingness and ability of a reinsurer to meet their contractual obligations to us. Accordingly, we review our reinsurance recoverable balances on a quarterly basis toand estimate and record a valuationan offsetting provision for potential uncollectible amounts, withamounts. Any changes in thethis provision flowing through earnings.are reflected in net income. We are selective in choosing our reinsurers, placing reinsurance principally with reinsurers with a strong financial condition and industry ratings.

To estimate this valuation provision, we begin by applying

We apply case-specific valuation allowancesprovisions against any reinsurance recoverable balancescertain recoveries that we deem unlikely to collectbe collected in full. We also incorporateIn addition, we use a default analysis to estimate our provision for uncollectible amounts on the remainder of the balance. The principal components of the default analysis are reinsurance recoverable by reinsurer and default factors applied to estimate uncollectible amounts based on the financial strength rating of the reinsurer. These percentagesour reinsurers’ credit ratings. The default factors are based on historical industry default statisticsa model developed by a major rating agencies. Lastly, we evaluate the overall adequacy of the valuation allowance for the totalagency. The provision recorded against reinsurance recoverable balances based on qualitativewas $17 million and judgmental factors. Based on this process,$23 million at December 31, 2010 and 2009, we recorded a valuation provision against reinsurance recoverable balances of $23 million (2008: $20 million).respectively. We have not written off any significant reinsurance recoverable balances in the last three years. At December 31, 2010, the use of different assumptions within our approach could have a material effect on our provision for uncollectible reinsurance recoverable. To the extent the creditworthiness of our reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than our provision. Given the various considerations used to estimate our uncollectible provision, we cannot precisely quantify the effect a specific industry event may have on our provision.

See Item 8, Note 8 to the Consolidated Financial Statements for an analysis of reinsurance recoverable and valuation provision by segment. For an analysis of the credit risk associated with respect our reinsurance recoverable balances at December 31, 2009,2010, refer to Item 8, Note 11 to the Consolidated Financial Statements.

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.

Insurance Segment

For the majority of our insurance business, we receive a fixed premium which is identified in the policy and recorded as unearned premium on the inception date of the contract. This premium will be adjusted only if the underlying insured values adjust. Accordingly, we actively monitor underlying insured values and record adjustment premiums in the period in which amounts are reasonably determinable. Gross premiums written on a fixed premium basis accounted for approximately 96%97%, 95%96% and 91%95% of the segment’s total for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. A portion of this business is written through managing general agents (“MGAs”), third parties granted authority to bind risks on our behalf in accordance with our underwriting guidelines. For this business, we record premiums based on monthly statements received from the MGAs. Due to inherent reporting delays on this business bound by third parties, we generally record premiums written via MGAs one month in arrears. In the event an individual statement, which is considered significant, is not received we would record our best estimate based upon our historical experience.

A limited portion of our insurance business is written on a line slip or proportional 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. Although premiums on this business are not contractually stated, we recognize gross premiums written based on an estimate provided by the client via the broker. For further details on the estimation process, see the discussion provided for the reinsurance segment below. We review these estimates on a quarterly basis and record significant adjustments in premium estimates when identified. Gross premiums written on a line slip/proportional basis comprised 4%3%, 5%4% and 9%5% of the segment’s total for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively, and therefore the associated impact of these estimates on our pre-tax net income was immaterial.

In our credit and political risk line of business, we write certain policies on a multi-year basis with premiums generally payable in installments. We record premiums at the inception of the policy based on our best estimate of total premiums to be received over the policy term and exclude premiums for the period during which the client has the ability to unilaterally commute or cancel coverage. Furthermore, certain contracts within this line of business meet the definitions of aare deemed financial guarantee insurance contract.contracts. In accordance with the new accounting guidance issued for these contracts effective January 1, 2009, we record premiums based on the present value of the contractual premiums due or expected to be collected using a discount rate that reflects the risk-free rate at the inception of contract. The determination of the applicability of this new accounting guidance to certain credit and political risk contracts requires significant management judgment due to the interpretation of the scope exemption for insurance contracts that are similar to financial guarantee insurance contracts. For the yearyears ended December 31, 2010 and 2009, our total premiums from financial guarantee insurance contracts were immaterial in the context of total gross premiums written for the segment. At December 31, 2009,2010, the average duration of the outstanding unearned premiums written for our credit and political line of business was 4.74.6 years (2008: 5.4(2009: 4.7 years).

Reinsurance Segment

We provide excess of loss and proportional coverage to cedants. In most cases, cedants (i.e. insurance companies) seek protection from us for business that they have not yet written at the time they enter into agreements with us. As a result, cedants must estimate their underlying premiums when purchasing reinsurance coverage from us.

Our excess of loss reinsurance contracts with cedants generally include provisions for a deposit or minimum premium payable to us. The minimum/deposit premium is generally adjusted at the end of the contract period to reflect changes in the underlying risks in force during the contract period. Minimum/deposit premiums generally cover the majority of premiums due under excess of loss contracts, with the adjustable portion typically comprising an insignificant portion of the total premium receivable by us. Therefore, the deposit/minimum premiums are generally considered to be the best estimate of the reinsurance contracts’ written premiums at inception. We record adjustments to the deposit/minimum premiums in the period during which they become determinable. Excess of loss contracts accounted for 60%55%, 67%60% and 70%67% of our reinsurance segment’s total gross premiums written for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively.

Many of our excess of loss contracts also include provisions that require an automatic reinstatement of coverage in the event of a loss. In a year of large loss events, reinstatement premiums will be higher than in a year in which there are no such events. Reinstatement premiums are recognized when a triggering loss event occurs and losses are recorded by us. While the reinstatement premium amount is defined by contract terms, our recognition of reinstatement premiums is dependent on our estimate of losses and loss expenses, which reflect management’s best judgment as described above in ‘Reserves for Losses and Loss Expenses’.

For business written under proportional contracts, we record an initial estimate of premiums based on an initial estimate of premiums written provided by the cedant via a broker. We may exercise our judgment to modify the initial premium estimates provided by the cedants based on our prior experience with the cedant. We review these premium estimates on a quarterly basis and evaluate their reasonability in light of actual premiums reported to date by cedants, communications between us and the cedants/brokers and our view of changes in the marketplace and the cedants’ competitive positions therein. Factors contributing to changes from the initial premium estimates may include:

 

changes in renewal rates or rates of new business accepted by cedants (such changes could result from changes in the relevant insurance market that could affect more than one of our cedants or could be a consequence of changes in the marketing strategy or risk appetite of an individual cedant);

changes in underlying exposure values; and/or

 

changes in rates being charged by cedants.

As a result of this review process, any adjustments to estimates are recognized in gross premiums written during the period they are determined. Such changes in premium estimates could be material and the resulting adjustments may directly and significantly impact net premiums earned favorably or unfavorably in the period they are determined because the estimated premium may be substantially or fully earned. Proportional contracts accounted for 40%45%, 33%40% and 30%33% of our reinsurance segment’s gross premiums written for the years ended December 31, 2010, 2009 and 2008, and 2007, respectively.

We made estimates on proportional treaties incepting during the year as follows:

 

  
Year ended December 31,  2009  2008  2007   2010   2009   2008 
        

Catastrophe

  $1,980  $2,261�� $5,029       $5,187   $1,980   $2,261 

Property

   148,748   124,804   117,469     206,269    148,748    124,804 

Professional lines

   180,407   118,061   77,357     168,897    180,407    118,061 

Credit and bond

   181,728   127,666   107,546     226,858    181,728    127,666 

Motor

   17,943   8,043   7,701     64,893    17,943    8,043 

Liability

   133,904   71,507   90,261     121,004    133,904    71,507 

Engineering

   48,787   59,740   55,090     54,505    48,787    59,740 

Other

   8,443   10,812   10,405     8,617    8,443    10,812 
                      

Total estimated premiums

  $721,940  $522,894  $470,858    $856,230   $721,940   $522,894 
                      
  

Gross premiums written (reinsurance segment)

     1,811,705     1,548,454     1,550,876      1,834,420     1,811,705     1,548,454 
  

As a % of total gross premiums written

   40%   34%   30%     47%     40%     34%  
                    

Since inception, our historical experience has shown that cumulative adjustments to our annual initial premium estimates on proportional reinsurance contracts have ranged from a negative revision of 3% to a favorable revision of 9%. Giving more weight to recent years where premium volume was consistent withcomparable to current levels, we believe that a reasonably likely change in our 20092010 proportional reinsurance gross premiums written estimate would be 5%. Such a change would result in a variance in our gross premiums written of approximately $36$43 million and an immaterial impact on our pre-tax net income. However, larger variations, both positive and negative, are possible.

Earning Basis

Our premiums are earned over the period during which we are exposed to the insured or reinsuredunderlying risk. For example, certain of our multi-year credit and political risk contracts reached their exposure limits during 2009 and, therefore, we fully earned the associated premiums.

Our fixed premium insurance and excess of loss reinsurance contracts are generally written on a “losses occurring” or “claims made” basis over the term of the contract. Accordingly, we earn the premium ratablyevenly over the term, which is generally 12 months.

Line slip and proportional insurance and reinsurance contracts are generally written on a “risks attaching” basis, which covercovering claims that attach to the underlying policies written during the terms of such contracts. Generally, we earn these premiums ratablyevenly over a 24-month period as the underlying exposures incept throughout the contract term, which is typically one year, and such underlying exposures generally have a one year coverage period.

FAIR VALUE MEASUREMENTS

Our estimates of fair value for financial assets and financial liabilities are based on the framework established in U.S. GAAP. This framework is based on the inputs used in valuation and gives the highest priority to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect our significant market assumptions. The three levels of the hierarchy are as follows:

 

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.

 

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

 

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

Our estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction. Additionally, the valuation of fixed maturities is more subjective when markets are less liquid due to the lack of market based inputs. This may lead us to change the selection of our valuation technique (from market to cash flowincome approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance may require significant management judgment and could cause an instrument to be reclassified between levels of the fair value hierarchy.

The following section is a summary of the valuation methodologies we used to measure our financial instruments.

Fixed Maturities

WeAt December 31, 2010 and 2009, we used substantially the market approach valuation techniques (e.g. use of quoted market values and other relevant observable market data provided by independent pricing sources as inputs into our processsources) for estimating the fair values of fixed maturities. The pricing sources are primarily nationally recognized pricing services and broker-dealers.

Pricing Services

At December 31, 2009,2010, pricing for approximately 86% (2009: 84% (2008: 87%) of our total fixed maturities was based on prices provided by nationally recognized independent pricing services (67%(70% index providers and 17%16% pricing vendors). Prices are sourced from multiple pricing services, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. Generally, we receive prices are received from multiple pricing services for each security and select the pricing from the pricing service ranked highest in ourthe vendor hierarchy.hierarchy is selected. This hierarchy is based on prioritizing pricing services based on availability and reliability. Generally, pricing services provide pricing for less-complex, liquid securities based on market quotations in active markets when available. For fixed maturities that do not trade on a listed exchange, the pricing service will use its proprietary “pricing matrix models” and use observable market inputs to estimate the fair value of a security. These observable market models consider various assumptions/inputs include:including: reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-side markets, benchmark

securities, bids, offers, reference data, and industry and economic factors. Substantially all of these assumptions/inputs are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Additionally, pricing vendors may use an Option Adjusted Spread model commonly used to develop prepayment and interest rate scenarios for the purpose of estimating fair values of mortgage-backed and asset-backed securities.

At December 31, 20092010 and 2008,2009, we have not adjusted any pricing provided by independent pricing services (see ‘Management Pricing Validation’ below). Accordingly, except for U.S. Treasury securities, we have classified all the remaining fixed maturities priced by pricing services as Level 2. As U.S. Treasury securities are liquid and trade in an active market, we have classified these securities as Level 1.

Broker-Dealers

Generally, we obtain quotes directly from broker-dealers who are active in the corresponding markets when prices are unavailable from independent pricing services. This may also be the case if the pricing from these pricing services is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities.

If we conclude the quote from a broker does not reflect an orderly transaction, we will place little weight on the non-binding broker quote and a greater weight on the use of an internal modelincome approach valuation technique to estimate fair value of illiquid securities. The evaluation of whether or not actual transactions in the current financial markets represent distressed sales requires significant management judgment. Our income approach valuation technique consists of an internal cash flow model whereby the underlying contractual cash flows of the security are discounted. At December 31, 2010 and 2009, the use of an internal cash flow model for fixed maturities was limited to CLO – CLO—debt tranche securities, given the lack of relevant observable trades. The significant inputs used in our cash flow model were similar as those used for CLO—Equities (see below and Item 8, Note 6 of the Consolidated Financial Statements).

At December 31, 2009,2010, approximately 10% (2009: 9% (2008: 8%) of fixed maturities were priced by non-binding quotes from broker-dealers. Where we have the ability to corroborate the non-binding broker quote with either a quote from a pricing vendor or another independent broker, and the price quotations do not vary significantly, we classify these securities as Level 2 within our fair value hierarchy. We classify securities priced by a single non-binding independent broker quote and/or use of internal cash flow model as Level 3 in our fair value hierarchy. At December 31, 2009,2010, these securities consisted primarily of CLO debt tranched securities and private corporate debt securities. The total estimated fair value for Level 3 fixed maturities was $64 million (2009: $71 million (2008: nil)million) or less than 1% of our total fixed maturity portfolio.

Other Pricing Sources

For certain securities within the corporate bond portfolio such as medium-term notes, we use prices provided by independent administrators which are marked to market daily. Pricing is based on the mid point of the bid-ask quotes, where available; otherwise it is obtained from a sample of non-binding quotes from broker-dealers in active markets. For medium-term notes, we have transparency with respect to their underlying securities, and therefore we can corroborate the pricing received with relevant observable market data. Accordingly, these securities were also classified as Level 2.

Management Pricing Validation

As management is ultimately responsible for determining the fair value measurements for all securities, we validate prices received by comparing the fair value estimates to our knowledge of the current markets. We challenge any prices we believe may not be representative of fair value under current market conditions. Our review process includes, but is not limited to: (i) initial and ongoing evaluation of the pricing methodologies and valuation models used by outside parties to calculate fair value; (ii) quantitative analysis and attribution analysis; (iii) a review of multiple quotes obtained in the pricing process and the range of resulting fair values for each security, if available, and (iv) randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources and broker-dealers.

Equity Securities

Equity securities include U.S. and foreign common stocks as well as a foreign bond mutual fund. For common stocks we classified these within Level 1 as their fair values are based on quoted market prices in active markets provided by independent pricing sources. Our investment in the foreign bond mutual fund has daily liquidity, with redemption price based on the net asset value of the fund. Accordingly, we have classified this investment as Level 2.

Other Investments

Alternative Investments:

We have one open-end short duration high yield fund with daily liquidity that is measured using the net asset value as reported by a third party administrator. Accordingly, we have classified this fund as Level 2.

For hedge and credit funds, we measure fair value by obtaining the net asset value as advised by our external fund manager or third party administrator, which involves limited management judgment. For any funds for which we did not receive a December 31, 20092010 net asset value, we have recorded an estimate of the change in fair value for the latest period based on return estimates obtained from the fund managers. Accordingly, we diddo not have a reporting lag in our fair value measurements for these funds. The financial statements of each fund in our portfolio are generally prepared using fair value measurements for the underlying investments and are audited annually. In addition to reviewing these audited financial statements, we regularly review fund performance directly with the fund managers and perform qualitative analysis to corroborate the reasonableness of the reported net asset values. We have classified the hedge and credit funds as Level 3 within the fair value hierarchy as we do notthese funds have full access to the underlying investment holdings for mostredemption restrictions (see Item 8, Note 5(b) of the funds to enable us to corroborate the fair value measurement used by the fund managers.

Consolidated Financial Statements for further details).

CLO – Equity Securities:

We have also invested in equity tranche CLO securities (also(“CLO – Equities”), also known as “cash flow CLOs” in the industry).industry. For these securities, we estimate fair value based on observable relevant trades in active secondary markets where available or the use of our internalan income approach valuation modeltechnique (internal cash flow model) where the market is inactive. Following the credit market dislocation in 2008, the

The CLO – Equity market continues to be depressed. At or near December 31, 2009,mostly inactive with only a small number of transactions being observed in the market and none of them involving deals we have not observed any relevant market trades for CLO – Equity securities.hold. Accordingly, we continue to rely on the use of our internal modelscash flow model to estimate the fair value of CLO – Equities. For our cash flow CLOs. The key assumptions used in our models are: default and recovery rates and collateral spreads. Of these assumptions,projections, we consider the default and recovery rates are the most judgmental inputs to which the valuation of CLO – Equities is most sensitive. The projected cash flows for CLO – Equities are also discounted using the current risk free interest rate.

Each CLO structure must maintain certainminimum over-collateralization ratios (“OC ratios”) of each CLO that must be maintained in order to makereceive cash distributions tofrom the equity tranche holders.CLOs. Generally, the OC ratio is calculated as: a) the remaining collateral adjusted for marked-to-market defaulted loans, net of estimated recoveries, and certain credit downgrades, divided by b) the total remaining debt obligations. Additionally, the following table presents a range of other significant inputs used in our valuation model.

During

 

At December 31,

  2010    2009
        

Default rates

  3.8% - 5.0%    4.4% - 6.0%

 

Loss severity rate

  65.0%    50.0%

 

Collateral spreads

  2.4% - 4.2%    2.6% - 4.4%

 

Estimated maturity dates

  1.5 - 10.5 years    2.5 -11.5 years
        
         

Of these significant inputs, the firstdefault and loss severity rates are the most judgmental unobservable market inputs to which the valuation of CLO – Equities is most sensitive. In the second half of 2009, we notedactual defaults experienced by certain of our CLO – Equities began to stabilize after experiencing an acceleration in actual defaults onearlier in 2009. This stabilization continued throughout 2010 and, at the underlying collateral for certainend of 2010, many of the CLO – Equities that we continuedcontinue to hold. Consequently, for certain CLO – Equitieshold are at or near historic low default rates. These lower actual defaults have positively impacted the defaults had significantly eroded the valuevalues of the collateral balances to the extent that somemany OC ratios that were previously out-of-compliance are currently out-of-compliance. As a result, for these CLO – Equities, the income distributions that would have normally flowednow back in compliance, triggering additional or larger cash payments to us as an equity tranche holder were diverted to the debt tranche holders to pay down on the debt principal until the OC ratio is back in compliance. However, the rate of defaults has stabilized for most CLO – Equities and for some theholders. Actual default rates have decreased during the second half of 2009. The cumulative actual default rates up toat November 30, 2009,2010 for our CLO – Equities varied from 0.0% to 2.5% (November 30, 2009: 1.1% to 7.0%. At) on the remaining underlying collateral. Further, at November 30, 2009,2010, all CLO – Equities were in compliance with their respective OC ratios. In light of the above events, we have further revised our projected default rates as well as projected recovery rates for all of our CLO – Equities during 2009. To establishthe fourth quarter of 2010. In establishing the revised projected default and recoveryloss severity rates for our valuation models,cash flow model, we have considered the actual defaults and recoveriesexperience for our CLO – Equities, as well as credit rating agencies’ forecasts on projected default and recoveryloss severity rates for U.S. corporate speculative-grade securities.securities, and the default rate forecast from our largest CLO manager. The lower recoveries on actual defaults, as well aschanges made to our significant inputs in 2010 (as noted in the revised recovery rate assumptions wereabove table) did not impact significantly the principal driversfair value of the $23CLO – Equities at December 31, 2010. The $22 million decreaseincrease in fair value of CLO – Equities in 2009. The following table presents2010 was driven primarily by lower than anticipated default rates, resulting in higher cash distributions than previously expected. Due to the weighted averageuse of each significant unobservable input used in our valuation model.

   
As at December 31,  2009  2008 
  

Default rates:

     

- for next twelve months

  4.6%  7.6%     

- thereafter until maturity of securities

  4.4%  4.4%  
  

Recovery rate until maturity of securities

  50.0%  60.0%  
  

Collateral spreads until maturity of securities

  3.3%  2.8%  
        

in internal cash flow model, we have classified the CLO – Equities as Level 3.

As a sensitivity analysis, we believe it is reasonably likely that our estimated fair value of the CLO - Equities could further deteriorate by $11$14 million within the next 12 months in the event default rates accelerate to 7%5% for all of our CLO – Equities in 20102011 should the U.S. economic recovery not be sustainable. Other stress test scenarios were performed but none of the reasonably likely changes to other key inputs would result in a significant deterioration in the fair value of our CLO – Equities.

Derivative Instruments

Foreign Currency Forward Contracts and Options

The foreign currency forward contracts and options we use to economically hedge currency risk are characterized as over-the-counter (“OTC”) due to their customized nature, and the fact that they do not trade on a major exchange. These instruments are valued using market transactions and other market evidence whenever possible, including market-based inputs to models. Forward contracts trade in a very deep and liquid market, providing substantial price transparency, while our vanilla currency options are priced using a Black-Scholes option-pricing model. This model is a widely-accepted pricing source, and requires the use of transparent market inputs to calculate values, involving minimal management judgment. Accordingly, we have classified these derivatives as Level 2.

Insurance Derivative Contract

As previously noted, we entered into a cancellation agreement for our insurance derivative contract during the fourth quarter of 2009. The following provides some background on the contract and our valuation methodology including the most significant assumptions used for estimating its fair value during the first nine months of 2009 and in prior years.

In September 2007 we issued a policy which indemnifies a third party in the event of a non-payment of a $400 million asset-backed note (“Note”). This Note had a 10 year term with the full principal amount due at maturity and was collateralized by a portfolio of life settlement contracts held by a special purpose entity (“SPE”). At the inception of the contract, we concluded that it was a derivative instrument requiring fair value accounting. Given the bespoke nature of this indemnity contract, there was no observable market transaction for this insurance product. Accordingly, we developed an internal valuation model to estimate its fair value.

Our valuation model incorporated all significant expected cash flows in the underlying SPE to estimate the potential indemnity amount on the insured Note due in 2017. This estimated indemnity payment with an appropriate risk margin, net of our contractual premiums for providing the indemnity, were then discounted using the risk free yield curve, adjusted for counterparties’ credit risk.

The most significant and subjective inputs in our valuation model were:

the timing of the receipt of death benefits as well as the amount of premiums to be paid to maintain the policies in force, both of which are directly correlated to life expectancy (“LE”) assumptions for a portfolio of 188 lives;

the proceeds of selling the unmatured settlement contracts in 2017; and

the risk margin that a market participant would require for providing this indemnity.

To select our LE assumptions for each reporting period, we analyzed the actual longevity experience of the above portfolio as well as emerging LE data for the life settlement industry. We used significant judgment in selecting the LE assumptions due to the relative infancy stage of the life settlement industry and the limited LE data sample. These LE assumptions were also used to estimate the proceeds of selling the unmatured settlement contracts. The calculation of these proceeds was also inherently judgmental as the marketplace for the remaining life settlement contracts in 2017 (the year the Note matures) can be significantly different than at the reporting date.

Until the third quarter of 2009, our valuation model maintained the longevity expectancy assumptions in place at inception of the insurance derivative contract. These assumptions were a function of data and information accumulated by certain life settlement industry service providers. Because of the high value death benefits for the lives in the underlying portfolio of the insurance indemnity contract and the small population (initially 188 lives), the early lag in mortality experience was not believed to be indicative of experience that should be expected for the broader portfolio of lives.

However, during the third quarter of 2009, due to the persistency of this lag over two years we then believed that there was statistical credibility that should be attached to the actual mortality experience thus far in the portfolio. The combination of this lag in mortality experience and life settlements market data indicating increased life expectancy in a much larger sample of lives led us to reflect an increase in life expectancy throughout the underlying pool of lives in our valuation model. As a result, we have adjusted the life expectancy upward for the remaining 184 lives by approximately 17 months, resulting in an increase of $136 million in the fair value liability with a corresponding charge to earnings during the third quarter of 2009. No other change in assumptions was made to our internal model for estimating the fair value of this contract except for market inputs such as credit spreads and risk free rates during 2009.

OTHER-THAN-TEMPORARY IMPAIRMENTS (“OTTI”)

We review quarterly whether a decline in the fair values of available-for-sale (“AFS”) securities below their amortized costs is other-than-temporarily impaired. The OTTI assessment is inherently judgmental, especially where securities have experienced severe declines in fair value in a short period.

Our OTTI review process is a rigorous quantitative and qualitative approach. We identify securities for review based on credit quality, relative health of industry sector, yield analysis, security performance and topical issues. For identified securities, we prepare a fundamental analysis at the security level and consider the following the qualitative factors:

 

The length of time and extent to which the fair value has been less than the amortized cost for fixed maturities or cost for equity securities.

 

The financial condition, near-term and long-term prospects for the issuer of the security, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices.

 

The historical and implied volatility of the fair value.

 

The collateral structure and credit support.

The following provides further details regarding our OTTI recognition and processes for fixed maturities and equity securities.

Fixed Maturities

In accordance with the adoption of the recentlynewly issued accounting standard in 2009, we recognize an OTTI in earnings for a fixed maturity security in an unrealized loss position when we either:we:

 

 1)have the intent to sell the security,

 

 2)more likely than not will be required to sell the security before its anticipated recovery, or

 

 3)do not anticipate to recover fully recover the amortized cost based on projected cash flows to be collected.

This new guidance overrides the previous requirement to assert both the “intent and ability” to hold the security for a period of time sufficient to allow for a recovery in its fair value to its amortized cost for not impairing a fixed maturity in an unrealized loss position.

A security is “impaired” when the fair value is below its amortized cost. If the impaired fixed maturity security meets either of the first two criteria above, the entire difference between the security’s fair value and its amortized cost is recorded as an OTTI charge in the Consolidated Statements of Operations. However, if the impairment arises due to an anticipated credit loss on the security (third criterion above), we recognize only the credit component of the OTTI amount in earnings with a corresponding adjustment to amortized cost (new cost basis). The non-credit component (e.g. interest rates, market conditions, etc.) of the OTTI amount is recognized in other comprehensive income in our shareholders’ equity. The new amortized cost is accreted into net investment income.

From time to time, we may sell fixed maturities subsequent to the balance sheet date that we did not intend to sell at the balance sheet date. Conversely, we may not sell fixed maturities that we previously asserted that we intended to sell at the balance sheet date. Such changes in intent may arise due to events occurring subsequent to the balance sheet date. The types of events that may result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the specific issuer, changes in liquidity needs, or changes in tax laws or the regulatory environment.

For impaired securities that we do not intend to sell and it is more likely that we will not be required to sell, we have established some parameters for identifying securities in an unrealized loss position with potential credit impairments. Our parameters focus primarily on the extent and duration of the decline, including but not limited to:

 

declines in value greater than 20% for nine consecutive months,

 

declines in value greater than 10% for twelve consecutive months, and

 

declines in value greater than 5% and rated less than BBB.BBB (non-investment grade).

If a security meets one of the above criteria, we then perform a fundamental analysis by considering the qualitative factors noted above. Our OTTI review process for credit impairment excludes all fixed maturities guaranteed by the U.S. government and its agencies because we anticipate these securities will not be settled below amortized costs.

The credit loss component of OTTI recognized in earnings is generally calculated based on the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to the impairment. The significant inputs and the methodology used to estimate the credit losses for which a portion of the OTTI was recognized in other comprehensive income (loss) were as follows:

Corporate Debt:

Our projected cash flows for corporate debt securities are primarily driven by our assumptions regarding the probability of default and the timing and amount of recoveries associated with defaults. Our default and recovery rate assumptions are based on credit rating, credit analysis, industry analyst reports and forecasts, Moody’s historical default data and any other data relevantdisclosed in Item 8, Note 5(d) to the recoverability of the security. Additionally, for medium-term notes, our projected cash flows include significant inputs such as future credit spreads and use of leverage over the expected duration of each medium-term notes.

Residential MBS, Commercial MBS:

We use models to determine the estimated credit losses for structured securities, such as MBS and ABS. We project expected cash flows to be collected, by utilizing underlying data from widely accepted third-party data sources as well as the following significant assumptions: expected defaults, delinquencies, recoveries, foreclosure costs, and prepayments. These assumptions require significant management judgment and vary for each structured security based on the underlying property type, vintage, loan to collateral value ratio, geographic concentration, and current level of subordination. We also corroborate our principal loss estimate with the independent investment manager’s principal loss estimate for each structured debt security with a significant unrealized loss position.

ABS:

The majority of the unrealized losses on ABS at December 31, 2009 were related to CLO debt tranched securities. We use the same internal model as for CLO - Equities (see discussion above) to project estimated cash flows to be collected on the various CLO debt tranched securities. The significant inputs used in the model include default and recovery rates and collateral spreads. Our assumptions on default and recovery rates are established based on an assessment of actual experience to date for each CLO debt tranche and review of recent credit rating agencies’ default and recovery forecasts.Consolidated Financial Statements.

Equities

Because equity securities were specifically excluded from the above new OTTI recognition model, we continue to consider our “ability and intent” to hold an equity security in an unrealized position for a reasonable period of time to allow for a full recovery. As an equity security does not have a maturity date, the forecasted recovery for an equity security is inherently more judgmental than for a fixed maturity security.

In light of the volatile global equity markets we have experienced in the past twelve months,last two years, we generally impair any equities for which we do not forecast a recovery to cost within three years. Further, we generally impair an equity security if its value has declined by more than 50%30% for nine consecutive months.

We have also established parameters for identifying potential impaired equity securities for fundamental analysis based on the severity and the duration of the unrealized loss position. One parameterFor example, we use is when an equity security’s fair value isreview all equities with a 50% less than its costand greater severity for sixthree or more consecutive months.

From time to time, we may sell our available-for-sale equities subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. This may occur due to events occurring subsequent to the balance sheet date that result in a change in our intent or ability to hold an equity security. Such subsequent events that may result in a sale include significant deterioration in the financial condition of the issuer, significant unforeseen changes in our liquidity needs, or changes in tax laws or the regulatory environment.

OTTI Charge

During 20092010, we recorded a total OTTI charge in earnings of $337$18 million (2008: $78(2009: $337 million). Refer to the‘Net Investment Income and Net Realized Investment Gains/Losses’ section above for further details.

 

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

 

See Item 8, Note 2 (m)2(n) to the Consolidated Financial Statements for a discussion onof recently issued accounting pronouncements we have not yet adopted.

 

 

OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS

 

 

At December 31, 2009,2010, we have not entered into any off-balance sheet arrangements, as defined by Item 303 (a) 303(a)(4) of Regulation S-K.

 

 

NON-GAAP FINANCIAL MEASURES

 

 

In this report, we have presented operating income, which is a “non-GAAP financial measure” as defined in Regulation G. Operating income represents after-tax operational results without consideration of after-tax net realized investment gains (losses). In addition, we have presented diluted operating earnings per share and operating return on average common equity (“operating ROACE”), which is based onare derived from the non-GAAP operating income measure. These measures can be reconciled to the nearest GAAP financial measures as follows:

 

  
Year ended December 31,  2009 2008 2007   2010 2009   2008 
       

Net income available to common shareholders

  $819,848  $461,011   $350,501 

Net realized investment (gains) losses, net of tax(1)

   (193,124  305,230    85,461 
           

Operating income

  $766,241   $435,962   $1,049,633       $626,724  $766,241   $435,962 

Net realized investment gains (losses), net of tax

   (305,230  (85,461  5,610  
                     

Net income available to common shareholders

  $461,011   $350,501   $1,055,243  
           

Net income per share - diluted

  $6.02  $3.07   $2.26 

Net realized investment (gains) losses, net of tax

   (1.42  2.03    0.55 
           

Operating income per share - diluted

  $4.60  $5.10   $2.81 
           
 

Weighted average common shares and common share equivalents - diluted

   136,199   150,371    155,320 
  

Average common shareholders’ equity

  $  4,480,642   $  4,309,831   $  4,285,635    $ 5,062,607  $ 4,480,642   $ 4,309,831 
  

ROACE

   10.3%    8.1%    24.6%     16.2%    10.3%     8.1%  
  

Operating ROACE

   17.1%    10.1%    24.5%     12.4%    17.1%     10.1%  
                 
(1)Tax benefit (cost) of ($1,974), $6,354 and ($194) for 2010, 2009 and 2008, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.

We present our results of operations in the way we believe will be most meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. This presentation includes the use of “operating income” and “annualized operating“operating return on average common equity”, which is based on the “operating income” measure. Although the investment of premiums to generate income and realized investment gains (or losses) is an integral part of our operations, the determination to realize investment gains (or losses) is independent of ourthe underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (or losses) areis somewhat opportunistic for many companies. In this regard, certain users of our financial statements evaluate our earnings excluding after-tax net realized investment gains (losses) to understand the profitability of our recurring sources of income.

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

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

 

Market risk represents the potential for an economic loss due to adverse changes in the fair value of financial instruments. We are principally exposed to potential losses from three types of market related risk: interest rate risk (inclusive of credit spreads), equity price risk and foreign currency risk.

Our Balance Sheets include a substantial amount of assets whose fair values are subject to market risks. Our fixed income and equity securities are classified as available-for-sale and, as such, changes in fair value caused by changes in interest rates, equity prices and foreign currency exchange rates will have an immediate impact on our comprehensive income, shareholders’ equity and book value but may not have an immediate impact on consolidated net income. Changes in these market risks will only impact our consolidated net income when, and if, securities are sold or an OTTI charge is recorded. Further, we have madealternative investments inincluding hedge funds, credit funds, and CLO – Equity tranched securities at December 31, 2010 and a short duration high yield fund.2009. These investments are also exposed to market risks, with the change in fair value reported immediately in earnings.

The following is a discussion of our primary market risk exposures at December 31, 20092010 and 2008.2009. Our policies to address these risks in 20092010 were not materially different from 2008.2009. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods.

SENSITIVITY ANALYSIS

Interest Rate and Credit Spread Risk

Interest rate risk includes fluctuations in interest rates and credit spreads that have a direct impact on the fair value of our fixed maturities. As interest rates rise and credit spreads widen, the fair value of fixed maturities falls, and the converse is also true. We manage interest rate risk by selecting fixed maturities with durations, yields, currency and liquidity tailored to the anticipated cash outflow characteristics of our insurance and reinsurance liabilities. Refer to ‘Enterprise Risk and Capital Management’ section under Item 1 for further details on how we manage investment risks and credit risks relating to fixed maturities.

We monitor our sensitivity to interest rate changes and credit spread changes by revaluing our fixed maturities using a variety of different interest rates (inclusive of credit spreads). We use duration and convexity at the security level to estimate the change in fair value that would result from a change in each security’s yield. Duration measures the price sensitivity of an asset to changes in yield rate.rates. Convexity measures how the duration of the security changes with interest rates. The duration and convexity analysis takes into account changes in prepayment expectations for MBS and ABS securities. The analysis is performed at the security level and aggregated up to the asset category levels for reporting in the tables below.

The following table presents the estimated pre-tax impact on the fair value of our fixed maturities at December 31, 20092010 and 20082009 due to an instantaneous increase in the U.S. yield curve of 100 basis pointpoints and an additional 100 basis point for credit spreadsspread widening for corporate debt, non-agency residential and commercial MBS, ABS and municipal bond securities.

 

        Potential Adverse Change in Fair Value 
At December 31, 2009  Fair Value  Increase in
interest rate by
100 basis points
  Widening of
credit spreads by
100 basis points
  Total 
  

U.S. government and agency

  $1,856,659  $(69,164 $-   $(69,164

Non-U.S. government

   696,814   (12,964  -    (12,964

Agency residential MBS

   1,556,659   (49,049  -    (49,049
  

Securities exposed to credit spreads:

       

Corporate debt

   3,580,766   (109,278  (135,869  (245,147

Non agency residential MBS

   222,982   (134  (6,310  (6,444

Commercial MBS

   662,811   (23,451  (24,339  (47,790

ABS

   443,139   (5,727  (10,586  (16,313

Municipals

   698,525   (35,693  (36,692  (72,385
                  
   $  9,718,355  $  (305,460 $  (213,796 $  (519,256
                  
                  

        Potential Adverse Change in Fair Value 
At December 31, 2008  Fair Value  Increase in
interest rate by
100 basis points
  Widening of
credit spreads by
100 basis points
  Total 
  

U.S. government and agency

  $1,187,333  $(40,225 $-   $(40,225

Non-U.S. government

   279,225   (10,122  -    (10,122

Agency residential MBS

   2,365,751   (60,410  -    (60,410
  

Securities exposed to credit spreads:

       

Corporate debt

   2,061,317   (56,845  (68,256  (125,101

Non agency residential MBS

   358,507   (1,324  (8,263  (9,587

Commercial MBS

   750,838   (27,799  (28,644  (56,443

ABS

   381,006   (2,713  (8,996  (11,709

Municipals

   366,677   (20,835  (14,155  (34,990
                  
   $  7,750,654  $  (220,273 $  (128,314 $  (348,587
                  
                  

         Potential Adverse Change in Fair Value 
    Fair Value   Increase in
interest rate
by 100
basis points
  Widening of
credit spreads
by 100
basis points
  Total 
        

At December 31, 2010

       

U.S. government and agency

  $860,120   $(23,401 $-       $(23,401

Non-U.S. government

   772,798    (24,468  -        (24,468

Agency MBS

   2,593,582    (89,817  -        (89,817
  

Securities exposed to credit spreads:

       

Corporate debt

   4,162,908    (144,146  (159,060  (303,206

Non agency CMBS

   474,785    (16,161  (16,626  (32,787

Non agency RMBS

   244,202    (573  (7,685  (8,258

ABS

   661,843    (6,901  (16,736  (23,637

Municipals

   712,659    (33,953  (34,852  (68,805
                   
   $ 10,482,897   $ (339,420 $ (234,959 $ (574,379
                   
  

At December 31, 2009

       

U.S. government and agency

  $1,856,659   $(69,164 $-       $(69,164

Non-U.S. government

   696,814    (12,964  -        (12,964

Agency MBS

   1,566,259    (49,049  -        (49,049
  

Securities exposed to credit spreads:

       

Corporate debt

   3,580,766    (109,278  (135,869  (245,147

Non agency CMBS

   653,211    (23,451  (24,339  (47,790

Non agency RMBS

   222,982    (134  (6,310  (6,444

ABS

   443,139    (5,727  (10,586  (16,313

Municipals

   698,525    (35,693  (36,692  (72,385
                   
   $9,718,355   $(305,460 $(213,796 $(519,256
                   
                   

U.S. government agencies have a limited range of spread widening, 100 basis points of spread widening for these securities is highly improbable in normal market conditions. Further, ascertain of our holdings in non-agency residential MBSRMBS and ABS have floating interest rates, these securities are not significantly exposed towhich mitigate our interest rate risk.risk exposure.

The above sensitivity analysis reflects our view of changes that are reasonably possible over a one-year period. Note this should not be construed as our prediction of future market events, but rather an illustration of the impact of such events.

As the performance of our investment in credit funds are driven by the valuation of the underlying bank loans, these funds are also exposed to credit spreads movement. At December 31, 2009,2010, the impact of an instantaneous 15% decline in the fair value of our investment in credit funds was $16 million (2008: $15(2009: $16 million), on a pre-tax basis. Our investment in CLO – Equities is also exposed to interest rate risk. Refer to our ‘Critical Accounting Estimates - Fair Value Measurements’for sensitivity analysis.

Our

Additionally, our investment in a foreign bond mutual fund is also exposed to interest rate risk. At December 31, 2009,risk; however, this exposure is largely mitigated by the impact of an instantaneous 15% decline in the fair valueshort duration of the foreign bond mutual fund was $10 million (2008: nil), on a pre-tax basis.fund.

Equity Price Risk

Our portfolio of equity securities, excluding the foreign bond mutual fund, has exposure to equity price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. Our global equity portfolio is correlated with the MFCIMSCI World Index and changes in that index would approximate the impact on our portfolio. The fair value of our equity securities at December 31, 20092010 was $143$271 million (2008: $107(2009: $143 million). TheAt December 31, 2010, the impact of a 20% decline in the overall market prices of our equity exposures iswas $54 million (2009: $29 million (2008: $21 million), on a pre-tax basis.

Our investment in hedge funds has significant exposure to equity strategies with net long positions. At December 31, 2009,2010, the impact of an instantaneous 15% decline in the fair value of our investment in hedge funds was $53$54 million (2008: $38(2009: $53 million), on a pre-tax basis.

Foreign Currency Risk

Foreign exchangecurrency risk represents the risk of loss due to movements in foreign currency exchange rates. Through our subsidiaries and branches, we conduct our insurance and reinsurance operations in a variety of non-U.S. currencies. As our reporting currency is the U.S. dollar, fluctuations in foreign currency exchange rates will have a direct impact on the valuation of our assets and liabilities denominated in local currencies.

WeExcluding the foreign currency exposure in our global equity portfolios managed on a total return basis, we manage 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.on a net book value basis. When necessary, we may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts and currency options. Foreign currency forward contracts 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. For further information on the accounting treatment of our foreign currency derivatives, refer to Item 8, Note 9, of the Consolidated Financial Statements.

The table below provides a summary of our net foreign currency risk exposure at December 31, 2009 and 2008exposures, as well as foreign currency derivatives in place to manage this exposure:these exposures:

 

     
At December 31, 2009  Euro  Sterling  Other  Total 
  

Net assets denominated in foreign currencies, excluding derivatives

  $567,279   $  33,641  $  77,877  $678,797  

Total currency derivative amount

   (681,054  -   -     (681,054
                  

Net foreign currency exposure

  $  (113,775 $33,641  $77,877  $(2,257
                  

As a percentage of total shareholders’ equity

   (2.1%  0.6%   1.4%   (0.1%

Pre-tax impact on equity of hypothetical 10% movement of the U.S. dollar(1)

  $(10,343 $3,058  $7,080  $(205
                  
   

 

AUD

  NZD  CAD  EUR  GBP  JPY  Other  Total 

 

At December 31, 2010

         

Managed Foreign Currency Exposures

         

Net assets denominated in foreign currencies, excluding derivatives

 $(8,658 $ (131,387 $ 41,660  $578,469  $47,211  $20,145  $ (4,044 $543,396 

Foreign currency derivative amounts

  20,980   68,259   -        (638,958  -        -        -         (549,719
                                 

Net managed foreign currency exposures

  12,322   (63,128  41,660   (60,489  47,211   20,145   (4,044  (6,323
                                 

Other net foreign currency exposures(1)

  856   -        2,464   26,690   28,034   33,020   26,792   117,856 
                                 

Total net foreign currency exposure

 $13,178  $(63,128 $44,124  $(33,799 $75,245  $53,165  $ 22,748  $111,533 
                                 

Net foreign currency exposure as a percentage
of total shareholders’ equity

  0.2%    (1.1%  0.8%    (0.6%  1.3%    0.9%    0.4%    1.9%  

Pre-tax impact of net foreign currency exposure
on shareholders’ equity of a hypothetical
10% movement of the U.S. dollar(2)

 $1,198  $(5,739 $4,011  $(3,073 $6,841  $4,833  $2,068  $10,139 
  

At December 31, 2009

         

Managed Foreign Currency Exposures

         

Net assets denominated in foreign currencies, excluding derivatives

 $(19,295 $4,299  $36,431  $531,996  $13,671  $26,713  $(5,742 $588,073 

Foreign currency derivative amounts

  -        -        -        (672,975  -        -        -        (672,975
                                 

Net managed foreign currency exposures

 $ (19,295 $4,299  $36,431  $ (140,979 $ 13,671  $ 26,713  $(5,742 $(84,902
                                 

Other net foreign currency exposures(1)

  3,210   -        2,667   27,204   19,970   10,756   18,838   82,645 
                                 

Total net foreign currency exposures

 $(16,085 $4,299  $39,098  $(113,775 $33,641  $37,469  $13,096  $(2,257
                                 

Net foreign currency exposure as a percentage
of total shareholders’ equity

  (0.3%  0.1%    0.7%    (2.1%  0.6%    0.7%    0.2%    (0.1%

Pre-tax impact of net foreign currency exposure on shareholders’ equity of a hypothetical
10% movement of the U.S. dollar(2)

 $(1,461 $391  $3,554  $(10,343 $3,058  $3,406  $1,190  $(205
                                 
(1)Assumes 10% change in U.S. dollar relativeEquity investment managers have the discretion to the other currencies.

     
At December 31, 2008  Euro  Sterling  Other  Total 
  

Net assets denominated in foreign currencies, excluding derivatives

  $460,945   $75,288   $76,020   $612,253  

Total currency derivative amount(1)

   (598,345    (24,210  (1    (622,556
                  

Net foreign currency exposure

  $  (137,400 $51,078   $  76,019   $(10,303
                  

As a percentage of total shareholders’ equity

   (3.1%  1.1%    1.8%    (0.2%

Pre-tax impact on equity of hypothetical 10% movement of the U.S. dollar(2)

  $(12,491 $4,643   $6,911   $(937
                  
(1)Totalhold foreign currency derivative amount excludes short calls options (Item 8 – Note 9 to the Consolidated Financial Statements)exposures as a hypothetical 10% increase in the movementpart of the U.S. dollar would not have an impact on pre-tax income.their total return strategy.
(2)Assumes 10% change in U.S. dollar relative to the other currencies.

The December 31, 2009 short exposure Euro position is expected to be eliminated with the anticipated Euro denominated premiums written as part of the January renewal season.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

Index to Consolidated Financial Statements and Related Notes

  Page

Report of Independent Registered Public Accounting Firm

  121117

Consolidated Balance Sheets at December 31, 20092010 and 20082009

  122118

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 2008 and 20072008

  123119

Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 2008 and 20072008

  124120

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December  31, 2010, 2009 2008 and 20072008

  125121

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 2008 and 20072008

  126122

Notes to Consolidated Financial Statements

  127123

Note 1 – History

  127123

Note 2 – Significant Accounting Policies

  127123

Note 3 – Segment Information

  138130

Note 4 – Goodwill and Intangible Assets

  142134

Note 5 – Investments

  143135

Note 6 – Fair Value Measurements

  154145

Note 7 – Reserves for Losses and Loss Expenses

  161152

Note 8 – Reinsurance

  163154

Note 9 – Derivative Instruments

  165156

Note 10 – Debt and Financing Arrangements

  168158

Note 11 – Commitments and Contingencies

  168159

Note 12 – Earnings Per Common Share

  171162

Note 13 – Shareholders’ Equity

  171163

Note 14 – BenefitBenefits Plans

  174166

Note 15 – StockShare-Based Compensation Plans

  175167

Note 16 – Related Party Transactions

  178169

Note 17 – Income Taxes

  178169

Note 18 – Statutory Financial Information

  182172

Note 19 – Unaudited Condensed Quarterly Financial Data – Unaudited

  184173

Note 20 – Subsequent Events

173

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, 20092010 and 2008,2009, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009.2010. 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, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009,2010, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, on April 1, 2009 the Company adopted FSP FAS 115-2,Recognition and Presentation of Other-Than-Temporary Impairments(Codified (Codified in FASB ASC Topic 320, Investments - Debt and Equity Securities).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009,2010, 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 22, 201018, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Deloitte & Touche

/s/ Deloitte & Touche
Hamilton, Bermuda
February 18, 2011

Hamilton, Bermuda

February 22, 2010

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 20092010 AND 20082009

 

  2009 2008   2010 2009 
  (in thousands)   (in thousands) 

Assets

      

Investments:

      

Fixed maturities, available for sale, at fair value
(Amortized cost 2009: $9,628,287; 2008: $8,404,994)

  $9,718,355   $7,750,654  

Equity securities, available for sale, at fair value
(Cost 2009: $195,011; 2008: $164,330)

   204,375    107,283  

Fixed maturities, available for sale, at fair value
(Amortized cost 2010: $10,346,243; 2009: $9,628,287)

  $ 10,482,897  $ 9,718,355 

Equity securities, available for sale, at fair value
(Cost 2010: $327,207; 2009: $195,011)

   349,254   204,375 

Other investments, at fair value

   570,276    492,082     519,296   570,276 

Short-term investments

   129,098    261,879  

Short-term investments, at amortized cost

   172,719   129,098 
              

Total investments

   10,622,104    8,611,898     11,524,166   10,622,104 

Cash and cash equivalents

   788,614    1,697,581     929,515   788,614 

Restricted cash and cash equivalents

   75,440    123,092     115,840   75,440 

Accrued interest receivable

   89,559    79,232     96,364   89,559 

Insurance and reinsurance premium balances receivable

   1,292,877    1,185,785     1,343,665   1,292,877 

Reinsurance recoverable on unpaid and paid losses

   1,424,172    1,378,630     1,577,547   1,424,172 

Deferred acquisition costs

   302,320    273,096     359,300   302,320 

Prepaid reinsurance premiums

   301,885    279,553     221,396   301,885 

Securities lending collateral

   129,814    412,823     -        129,814 

Net receivable for investments sold

   12,740    -     -        12,740 

Goodwill and intangible assets

   91,505    60,417     103,231   91,505 

Other assets

   175,494    180,727     174,707   175,494 
              

Total assets

  $15,306,524   $14,282,834    $16,445,731  $15,306,524 
              

Liabilities

      

Reserve for losses and loss expenses

  $6,564,133   $6,244,783    $7,032,375  $6,564,133 

Unearned premiums

   2,209,397    2,162,401     2,333,676   2,209,397 

Insurance and reinsurance balances payable

   173,156    202,145     164,927   173,156 

Securities lending payable

   132,815    415,197     -        132,815 

Senior notes

   499,476    499,368     994,110   499,476 

Other liabilities

   227,303    233,082     275,422   227,303 

Net payable for investments purchased

   -    64,817     20,251   -      
              

Total liabilities

   9,806,280    9,821,793     10,820,761   9,806,280 
              

Commitments and Contingencies

      

Shareholders’ equity

      

Preferred shares - Series A and B

   500,000    500,000  

Common shares(2009: 132,140; 2008: 136,212 shares issued and outstanding)

   1,903    1,878  

Preferred shares—Series A and B

   500,000   500,000 

Common shares(2010: 154,912; 2009: 152,465 shares issued and 2010: 112,393; 2009: 132,140 shares outstanding)

   1,934   1,903 

Additional paid-in capital

   2,014,815    1,962,779     2,059,708   2,014,815 

Accumulated other comprehensive income (loss)

   85,633    (706,499

Accumulated other comprehensive income

   176,821   85,633 

Retained earnings

   3,569,411    3,198,492     4,267,608   3,569,411 

Treasury shares, at cost(2009: 20,325; 2008: 14,243 shares)

   (671,518  (495,609

Treasury shares, at cost(2010: 42,519; 2009: 20,325 shares)

   (1,381,101)   (671,518
              

Total shareholders’ equity

   5,500,244    4,461,041     5,624,970   5,500,244 
              

Total liabilities and shareholders’ equity

  $  15,306,524   $  14,282,834    $16,445,731  $ 15,306,524 
              

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, 2008, AND 20072008

 

  2009 2008 2007  2010 2009 2008 
  (in thousands, except for per share amounts)  (in thousands, except for per share data) 

Revenues

       

Net premiums earned

  $  2,791,764   $  2,687,181   $  2,734,410   $ 2,947,410  $ 2,791,764  $ 2,687,181 

Net investment income

   464,478    247,237    482,873    406,892   464,478   247,237 

Other insurance related income (loss)

   (129,681  (38,667  3,911    2,073   (129,681  (38,667

Net realized investment gains (losses)

    

Net realized investment gains (losses):

   

Other-than-temporary impairment losses

   (339,994  (77,753  (8,562  (19,216  (339,994  (77,753

Portion of impairment losses transferred to other comprehensive income

   2,559    -    -    1,284   2,559   -      

Other realized investment gains (losses)

   25,851    (7,514  13,792    213,030   25,851   (7,514
                   

Total net realized investment gains (losses)

   (311,584  (85,267  5,230    195,098   (311,584  (85,267
                   

Total revenues

   2,814,977    2,810,484    3,226,424    3,551,473   2,814,977   2,810,484 
          
         

Expenses

       

Net losses and loss expenses

   1,423,872    1,712,766    1,370,260    1,677,132   1,423,872   1,712,766 

Acquisition costs

   420,495    366,509    384,497    488,712   420,495   366,509 

General and administrative expenses

   370,157    335,758    303,831    449,885   370,157   335,758 

Foreign exchange losses (gains)

   28,561    (43,707  (16,826  (15,535  28,561   (43,707

Interest expense and financing costs

   32,031    31,673    51,153    55,876   32,031   31,673 
                   

Total expenses

   2,275,116    2,402,999    2,092,915    2,656,070   2,275,116   2,402,999 
                   

Income before income taxes

   539,861    407,485    1,133,509    895,403   539,861   407,485 

Income tax expense

   41,975    20,109    41,491    38,680   41,975   20,109 
                   

Net income

   497,886    387,376    1,092,018    856,723   497,886   387,376 

Preferred share dividends

   36,875    36,875    36,775    36,875   36,875   36,875 
                   

Net income available to common shareholders

  $461,011   $350,501   $1,055,243   $819,848  $461,011  $350,501 
                   

Weighted average common shares and common share equivalents:

    

Basic

   137,279    140,322    147,524  
          

Diluted

   150,371    155,320    164,515  
          

Earnings per common share:

    

Basic

  $3.36   $2.50   $7.15  
          

Diluted

  $3.07   $2.26   $6.41  
          

Per share data

   

Net income per common share:

   

Basic net income

 $6.74  $3.36  $2.50 

Diluted net income

 $6.02  $3.07  $2.26 

Weighted average number of common shares outstanding - basic

  121,728   137,279   140,322 

Weighted average number of common shares outstanding - diluted

  136,199   150,371   155,320 

Cash dividends declared per common share

  $0.810   $0.755   $0.680   $0.86  $0.81  $0.755 
          

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, 2008, AND 20072008

 

  2010 2009 2008 
  2009 2008 2007   (in thousands) 
  (in thousands) 

Net income

  $497,886   $387,376   $1,092,018    $856,723  $497,886  $387,376 

Other comprehensive income, net of tax:

        

Available for sale investments:

        

Unrealized gains (losses) arising during the period

   522,562    (818,989  70,377     266,294   522,562   (818,989

Portion of other-than-temporary impairment losses recognized in other comprehensive income

   (1,572  -    -     (1,284)  (1,572  -      

Adjustment for re-classification of realized investment losses and net impairment losses recognized in net income

   307,330    91,251    (5,536

Adjustment for re-classification of realized investment (gains) losses and net impairment losses recognized in net income

   (190,646  307,330   91,251 

Foreign currency translation adjustment

   803    -    -     16,026   803   -      

Supplemental Executive Retirement Plans (SERPs):

    

Supplemental Executive Retirement Plans (SERPs)

    

Net actuarial gain (loss)

   1,343    (3,951  -     798    1,343   (3,951

Change in the unrecognized prior service cost

   -    2,522    2,465     -        -        2,522 
                    

Comprehensive income (loss)

  $  1,328,352   $  (341,791 $  1,159,324    $947,911  $ 1,328,352  $ (341,791
                    

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, 2008, AND 20072008

 

  2009 2008 2007   2010 2009 2008 
  (in thousands)   (in thousands) 

Common shares (shares outstanding)

    

Balance at beginning of period

   136,212    142,520    149,982  

Shares issued

   2,010    2,469    791  

Shares repurchased and cancelled

   -    -    (2,787

Shares repurchased for treasury

   (6,082  (8,777  (5,466
          

Balance at end of period

   132,140    136,212    142,520  
          

Preferred shares - Series A and B

        

Balance at beginning and end of period

  $500,000   $500,000   $500,000    $500,000  $500,000  $500,000 
                    

Common shares (par value)

        

Balance at beginning of period

   1,878    1,850    1,875     1,903   1,878   1,850 

Shares issued

   25    28    10     31   25   28 

Shares repurchased and cancelled

   -    -    (35
                    

Balance at end of period

   1,903    1,878    1,850     1,934   1,903   1,878 
          
          

Additional paid-in capital

        

Balance at beginning of period

   1,962,779    1,869,810    1,929,406     2,014,815   1,962,779   1,869,810 

Shares issued

   537    2,448    1,385     635   537   2,448 

Shares repurchased and cancelled

   -    -    (103,469

Stock options exercised

   3,282    23,641    7,503     7,563   3,282   23,641 

Share-based compensation expense

   48,217    66,880    34,985     36,695   48,217   66,880 
                    

Balance at end of period

   2,014,815    1,962,779    1,869,810     2,059,708   2,014,815   1,962,779 
                    

Accumulated other comprehensive income (loss)

        

Balance at beginning of period

   85,633   (706,499  22,668 

Unrealized appreciation (depreciation) on available for sale investments, net of tax:

        

Balance at beginning of period

   (702,548  25,190    (39,651   87,438   (702,548  25,190 

Cumulative effect of change in accounting principle at April 1st(see Note 2)

   (38,334  -    -  

Unrealized gains (losses) arising during the period, net of reclassification adjustment

   829,892    (727,738  64,841  

Cumulative effect of change in accounting principle

   -        (38,334  -      

Unrealized gains arising during the period, net of reclassification adjustment

   75,648   829,892   (727,738

Portion of other-than-temporary impairment losses

   (1,572  -    -     (1,284  (1,572  -      
                    

Balance at end of period

   87,438    (702,548  25,190     161,802   87,438   (702,548
                    

Cumulative foreign currency translation adjustments, net of tax:

        

Balance at beginning of period

   -    - ��  -     803   -        -      

Foreign currency translation adjustment

   803    -    -     16,026   803   -      
                    

Balance at end of period

   803    -    -     16,829   803   -      
                    

Supplemental Executive Retirement Plans (SERPs):

        

Balance at beginning of period

   (3,951  (2,522  (4,987   (2,608  (3,951  (2,522

Net actuarial gain (loss)

   798   1,343   (3,951

Change in the unrecognized prior service cost

   -    2,522    2,465     -        -        2,522 

Net actuarial gain (loss)

   1,343    (3,951  -  
                    

Balance at end of period

   (2,608  (3,951  (2,522   (1,810  (2,608  (3,951
                    

Balance at end of period

   85,633    (706,499  22,668     176,821   85,633   (706,499
                    

Retained earnings

        

Balance at beginning of period

   3,198,492    2,968,900    2,026,004     3,569,411   3,198,492   2,968,900 

Cumulative effect of change in accounting principle at April 1st, net of tax (see Note 2)

   38,334    -    -  

Cumulative effect of change in accounting principle, net of tax

   -        38,334   -      

Net income

   497,886    387,376    1,092,018     856,723   497,886   387,376 

Series A and B preferred share dividends

   (36,875  (36,875  (36,775   (36,875  (36,875  (36,875

Common share dividends

   (128,426  (120,909  (112,347   (121,651  (128,426  (120,909
                    

Balance at end of period

   3,569,411    3,198,492    2,968,900     4,267,608   3,569,411   3,198,492 
          
          

Treasury shares, at cost

        

Balance at beginning of period

   (495,609  (204,606  -     (671,518  (495,609  (204,606

Shares repurchased for treasury

   (175,909  (291,003  (204,606   (709,583  (175,909  (291,003
                    

Balance at end of period

   (671,518  (495,609  (204,606    (1,381,101  (671,518  (495,609
                    

Total shareholders’ equity

  $  5,500,244   $  4,461,041   $  5,158,622    $5,624,970  $ 5,500,244  $ 4,461,041 
                    

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, 2008, AND 20072008

 

  2009   2008   2007  2010 2009 2008 
  (in thousands)  (in thousands) 

Cash flows from operating activities:

         

Net income

  $497,886    $387,376    $1,092,018   $856,723  $497,886  $387,376 

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

         

Net realized investment (gains) losses

   311,584     85,267     (5,230  (195,098  311,584   85,267 

Loss on insurance derivative contract

   132,595     41,493     -    -        132,595   41,493 

Settlement of insurance derivative contract

   (200,000   -     -    -        (200,000  -      

Net realized and unrealized (gains) losses of other investments

   (82,042   226,509     (23,251  (63,627  (82,042  226,509 

Amortization/(accretion) of fixed maturities

   19,334     25,169     (13,946

Amortization of fixed maturities

  61,122   19,334   25,169 

Other amortization and depreciation

   14,734     11,315     29,111    14,104   14,734   11,315 

Share-based compensation expense

   48,217     66,880     34,985    36,695   48,217   66,880 

Changes in:

         

Accrued interest receivable

   (10,327   8,106     (10,371  (6,805  (10,327  8,106 

Reinsurance recoverable balances

   (45,542   (21,737   2,261    (153,375  (45,542  (21,737

Deferred acquisition costs

   (29,224   3,705     (25,002  (56,980  (29,224  3,705 

Prepaid reinsurance premiums

   (22,332   (36,613   (1,119  80,489   (22,332  (36,613

Reserve for loss and loss expenses

   319,350     657,472     572,198    468,242   319,350   657,472 

Unearned premiums

   46,996     16,314     130,531    124,279   46,996   16,314 

Insurance and reinsurance balances, net

   (136,081   2,866     (155,058  (59,017  (136,081  2,866 

Other items

   (15,292   51,603     (54,111  81,025   (15,292  51,603 
                     

Net cash provided by operating activities

   849,856     1,525,725     1,573,016    1,187,777   849,856   1,525,725 
                     

Cash flows from investing activities:

         

Purchases of:

         

Fixed maturities

     (10,855,161     (9,497,227     (8,255,685   (12,429,332   (10,855,161  (9,497,227

Equity securities

   (146,240   (313,141   -    (257,674  (146,240  (313,141

Other investments

   (111,800   (141,000   (139,250  (65,000  (111,800  (141,000

Short-term investments

  (578,762  (788,878  (788,970

Proceeds from the sale of:

         

Fixed maturities

   8,332,724     8,505,278     5,777,923    10,622,948   8,332,724   8,505,278 

Equity securities

   85,319     82,616     -    126,076   85,319   82,616 

Other investments

   115,649     71,702     592,361    179,607   115,649   71,702 

Proceeds from the redemption of fixed maturities

   955,565     876,977     774,325  

Net purchases (sales) of short-term investments

   139,197     (143,946   (119,292

Short-term investments

  423,451   572,596   380,411 

Proceeds from redemption of fixed maturities

  1,236,076   955,565   876,977 

Proceeds from redemption of short-term investments

  113,074   355,479   264,613 

Purchase of other assets

   (41,776   (11,284   (47,026  (17,854  (41,776  (11,284

Change in restricted cash and cash equivalents

   47,652     (63,288   45,896    (40,400  47,652   (63,288
                     

Net cash used in investing activities

   (1,478,871   (633,313   (1,370,748  (687,790  (1,478,871  (633,313
                     

Cash flows from financing activities:

         

Repayment of repurchase agreement

   -     -     (400,000

Net proceeds from issuance of senior notes

  494,870   -        -      

Repurchase of shares

   (175,909   (291,003   (308,110  (709,583  (175,909  (291,003

Dividends paid - common shares

   (112,984   (106,368   (111,226  (108,302  (112,984  (106,368

Dividends paid - preferred shares

   (36,875   (36,875   (36,775  (36,875  (36,875  (36,875

Proceeds from issuance of common shares

   3,844     26,117     8,898    8,229   3,844   26,117 
                     

Net cash used in financing activities

   (321,924   (408,129   (847,213  (351,661  (321,924  (408,129
         
            

Effect of exchange rate changes on foreign currency cash

   41,972     (59,819   34,475    (7,425  41,972   (59,819
                     

Increase (decrease) in cash and cash equivalents

   (908,967   424,464     (610,470  140,901   (908,967  424,464 

Cash and cash equivalents - beginning of period

   1,697,581     1,273,117     1,883,587    788,614    1,697,581   1,273,117 
                     

Cash and cash equivalents - end of period

  $788,614    $1,697,581    $1,273,117   $929,515  $788,614  $ 1,697,581 
                     

Supplemental disclosures of cash flow information:

         

Income taxes paid

  $16,085    $30,099    $60,023   $37,688  $16,085  $30,099 
                     

Interest paid

  $28,750    $28,750    $47,970   $48,986  $28,750  $28,750 
                     

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

1.HistoryHISTORY

AXIS Capital Holdings Limited (“AXIS Capital”) is the Bermuda-based holding company for the AXIS group of companies, collectively the “Company”. AXIS Capital was incorporated on December 9, 2002, under the laws of Bermuda. Through its subsidiaries and branches organized in Bermuda, Europe, Australia, Singapore, Canada 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.Significant Accounting PoliciesSIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of AXIS Capital and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

Tabular dollars and share amounts are in thousands, except per share amounts. 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 reflectedWhile management believes that the amounts included in ourthe consolidated financial statements are:reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:

 

reserve for losses and loss expenses;

 

reinsurance recoverable balances,on unpaid losses, including the provision for unrecoverable reinsurance;uncollectible amounts;

 

premiums;gross and net premiums written and net premiums earned;

 

valuationrecoverability of deferred tax assets;

 

other-than-temporary-impairmentsother-than-temporary impairments (“OTTI”) toin the carrying value of available-for-sale investment securities; and

 

fair value measurement forvaluation of certain fixed maturities, other investments and derivatives.derivatives that are measured using significant unobservable inputs.

While the amounts included in the consolidated financial statements reflect management’s best estimates and assumptions, these amounts could ultimately differ from those estimates. Any such adjustments are reflected in income in the period in which they become known.

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

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.are:

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

2.Significant Accounting Policies (Continued)

 

a)Investments

Investments

Investments available for sale

FixedOur fixed maturities and equities classified as “available for sale” are reported at fair value at the balance sheet date. See Note 6 – Fair Value Measurements for additional information regarding the determination of fair value.

Net investment income includes interest and dividend income and the amortization of market premiums and discounting using the effective yield method and is net of investment expenses. Investment income is recognized when earned. Purchases and sales of investments are recorded on a trade date basis. Realized gains or trade-date basis and realized gains/losses on sales of investments are determined based on the specific identification method. 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 management fees and other expenses.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

2.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

We recognize investment income from fixed maturities based on the constant effective yield method, which includes an adjustment for estimated principal repayments, if any. The effective yield used to determine the amortization for fixed maturities subject to prepayment risk (e.g., asset-backed, loan-backed and other structured securities) is recalculated and adjusted periodically based upon actual historical and/or projected future cash flows. The adjustments to the yield for highly ratedhighly-rated (i.e. AA or above by Standard & Poor’s (“S&P”)) prepayable fixed maturities are accounted for using the retrospective method. The adjustments to the yield for non-highly ratedother prepayable fixed maturities are accounted for using the prospective method.

The net unrealized gain or loss on our available for sale investments, net of tax, is included as a separate component of accumulated other comprehensive income (loss) as a component of(“AOCI”) in shareholders’ equity. WeOn a quarterly basis, we assess quarterly whether unrealized losses on available for sale investments with unrealized losses represent impairments that are other than temporary. There are severalSeveral factors that are considered in thethis assessment of a security including, but not limited to: (i) the extent and duration of the decline, (ii) the reason for the decline (e.g. credit spread widening, credit event), (iii) the historical and implied future volatility of the fair value, (iv) the financial condition of, and near-term prospects of the issuer and (v) the collateral structure and credit support of the security, if applicable.

OnEffective April 1, 2009, we adopted new Financial Accounting Standards Board (“FASB”) guidance issued byfor the FASB on recognition and presentation of OTTI for fixed maturities. Accordingly, we recognize an OTTI charge in earnings for a fixed maturity security in an unrealized loss position when we eithereither: (a) have the intent to sell the security (b)or more likely than not will be required to sell the security before its anticipated recovery or (c)(b) do not anticipate to fully recover the amortized cost based on projected cash flows to be collected. Prior to the adoption of this new guidance, we recorded an OTTI charge for a fixed maturity security in an unrealized position when we could not assert that we had both the intent and ability to hold the security for a period of time sufficient to allow for a recovery in its fair value to its amortized cost.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

2.Significant Accounting Policies (Continued)

Under the new guidance, if the impaired fixed maturity security meets one of the first two criteria above, the entire difference between the security’s fair value and its amortized cost is recorded as an OTTI charge in the Consolidated Statements of Operations. However, if the impairment arises due to an anticipated credit loss on the security (third criterion(i.e. the second criteria above), we recognize only the credit component of the OTTI amount in earnings withand make a corresponding adjustment to amortized cost (new(establishing a new cost basis). The non-credit component (e.g. that related to interest rates, market conditions, etc.) of the OTTI amount is recognized in accumulated other comprehensive income (“AOCI”) in shareholders’ equity.AOCI. The new amortized cost is subsequently accreted into net investment income.

For equity securities, we continue to consider our ability and intent to hold an equity security in an unrealized loss position for a reasonable period of time to allow for a full recovery. When it is determinedwe determine that the decline in value of an equity security is other-than-temporary, we adjustreduce the carrying value of the equity security to its fair value withand recognize a corresponding charge to earnings.in the Consolidated Statements of Operations.

In periods subsequent to the recognition of an OTTI charge for either a fixed maturity or equity security, the new cost basis is not adjusted for subsequent increases in estimated fair value.

Other investments

We record other investments at fair value (see Note 6 – Fair Value Measurements), with the changeboth changes in fair value and realized gains andgains/ losses reported in net investment income.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

2.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Short-term investments

Short-term investments primarily comprise highly liquidhighly-liquid debt securities with maturitymaturities greater than three months but less than one year from the date of purchase. Short-term investments, which were previously included in fixed maturities, are now reported separately in the Consolidated Balance Sheets at December 31, 2009 and 2008, the Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007, and in the related disclosures. These investments are carried at amortized cost, which fairly approximates fair value.

 

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. Cash and cash equivalents are recorded at amortized cost, which approximates fair value due to the short-term, liquid nature of these securities.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

2.Significant Accounting Policies (Continued)

 

c)Premiums and Acquisition Costs

Premiums

Insurance premiums written are recorded in accordance with the terms of the underlying policies. For multi-year policies for whichwhere premiums are payable in annual installments, premiums are recorded at the inception of the policy based on management’s best estimate of total premiums to be received. However, this excludes premiums for the period during which the insured/reinsured has the ability to unilaterally commute or cancel coverage. Reinsurance premiums are recorded at the inception of the policy and are estimated based upon information received from ceding companies. Any subsequent differences arising on insurance and reinsurance premium estimates are recorded in the period they are determined.

Insurance and reinsurance premiums are earned ratably over the period during which we are exposed to the insured or reinsured risk.underlying risk, which is generally one to two years with the exception of multi-year policies. Unearned premiums represent the portion of premiums written thatwhich is applicable to the unexpired portion of the policiesrisks under contracts in force.

Reinstatement premiums for our insurance and reinsurance operations are recognized at the time a loss event occurs whereand coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms andterms; such premiums are earned on a pro-rata basis over the remaining risk period. The accrual of reinstatement premiums is based on anour estimate of losses and loss adjustment expenses, which reflects management’s judgment, as described in Note 2 (e)(d) – Losses and Loss Expenses below.

Premiums receivable balances in excess of 90 days past due are reviewed for impairment at least quarterly and an allowance is established for amounts considered uncollectible. The need for charge-off of any amounts previously reserved as uncollectible is assessed on a quarterly basis.

Acquisition Costs

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.insurance and reinsurance contracts and consist primarily of fees and commissions paid to brokers and premium taxes. Acquisition costs are shown net of commissions earned on ceded business. Thesereinsurance. Our net acquisition costs are deferred and amortized over the periods in whichcharged to expense as the related premium is earned. Anticipated losses and loss expenses, other costs and investment income related to these premiums are earned. As partconsidered in assessing the recoverability of our premium deficiency analysis, deferred acquisition costs are reviewed to determine if they are recoverable from future income, including investment income.costs. If such costsdeferred amounts are estimated to be unrecoverable, they are expensed.

d)Reinsurance

In the normal course of business, we seek to reduce the loss that may arise from events that could cause unfavorable underwriting results by reinsuring certain levels of risk Compensation expenses for personnel involved in various lines of business with other reinsurers. Reinsurance premiums cededcontract acquisition, as well as advertising costs, 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.

as incurred.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

2.Significant Accounting Policies (Continued)SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 our ability to cede unpaid losses and loss expenses under 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 includes several processes including case-specific allowances for coverage issues and a default analysis based on the financial strength rating of the reinsurers. These factors require considerable management judgment and the factors are reviewed in detail on a quarterly 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.

e)d)Losses and Loss Expenses

ReservesOur reserve for losses and loss expenses are established by management and representrepresents an estimate of the total costunpaid portion of our ultimate liability for losses and loss expenses for insured and reinsured events that have occurred at or before the balance sheet date. The balance reflects both claims that arehave been reported but not yet paidto us (“case reserves”) and the anticipated cost of claims that have been incurred but not yet reported to us (“IBNR”). These amounts are reduced for estimated amounts of salvage and subrogation recoveries.

For reportedWe review our reserve for losses managementand loss expenses on a quarterly basis. Case reserves are primarily establishes case reservesestablished based on amounts reported from insureds and/or ceding companies.their brokers. Management estimates IBNR after reviewing detailed actuarial analyses and applying informed judgment to consider qualitative factors that 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 providedbe fully reflected in the insuranceactuarial estimates. A variety of actuarial methods are utilized in this process, including the Expected Loss Ratio, Bornhuetter-Ferguson 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 reserves, IBNR is 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 utilizes the initial expected loss ratio method (“IELR”), Bornhuetter-Ferguson (“BF”) and chain ladder actuarialChain Ladder methods. The IELR method calculates an estimate 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. 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. This method uses actual loss data and the historical development profiles on older accident years to project more recent, less developed years to their ultimate position. The basis of our selected single point best estimate on a particular line of business is often a blend of the results from two or more methods (e.g. weighted averages). Our estimate is highly dependent on management’s judgment as to which method(s) isare most appropriate for a particular accident year and class of business. Our methodology changes over time asGiven our relatively limited operating history, our historical data is often supplemented with industry benchmarks when applying these methodologies.

Any adjustments to our previous reserve for losses and loss expenses estimates are recognized in the period they are determined. While we believe that our reserves for losses and loss expenses are adequate, this estimate requires significant judgment and new information, emerges regarding underlyingevents or circumstances may result in ultimate losses that are materially greater or less than provided for in the Consolidated Balance Sheets.

e)Reinsurance

In the normal course of business, we purchase reinsurance protection to limit our ultimate losses from catastrophic events and to reduce our loss activityaggregation risk. The premiums paid to our reinsurers (i.e. premiums ceded) are expensed over the coverage period. Prepaid reinsurance premiums represent the portion of premiums ceded which is applicable to the unexpired term of the contracts in force. Reinstatement-related premiums ceded are recorded at the time a loss event occurs and our coverage limits for the remaining life of a contract are reinstated under pre-defined contract terms; such premiums are expensed over the remaining risk period.

Reinsurance recoverable related to our case reserves is estimated on a case-by-case basis by applying the terms of any applicable reinsurance coverage to our individual case reserve estimates. Our estimate of reinsurance recoverable related to our IBNR reserves is generally developed as part of our loss reserving process.

Our reinsurance recoverable is presented net of a provision for uncollectible amounts, reflecting the amount we believe will ultimately not be recovered due to reinsurer insolvency, contractual disputes over contract language or coverage and/or some other data issues.

Management also performs an analysis of additional factorsreason. We apply case-specific provisions against certain recoveries that we deem unlikely to be collected in full. In addition, we use a default analysis to estimate our provision for uncollectible amounts on the remainder of the balance. The estimates of our reinsurance recoverable and the associated provision require management’s judgment and are reviewed in detail on a quarterly basis. Any adjustments to amounts recognized in prior periods are reported in our net losses and loss expenses in the Consolidated Statement of Operations for the period when the adjustments were identified. The charge-off of amounts previously reserved as uncollectible is also considered when establishingon a case-by-case basis as part of this quarterly process.

f)Foreign Exchange

The Company’s reporting currency is the U.S. dollar. In translating the financial statements of our IBNR, intended to enhance our best estimate beyond quantitative techniquessubsidiaries or branches where the functional currency is other than the U.S. dollar, assets and reflect uncertainties specific to our business. These uncertainties may vary over time, but generally contemplate matters suchliabilities are converted into U.S. dollars using the rates of exchange in effect at the balance sheet dates and revenues and expenses are converted using the weighted average foreign exchange rates for the period. The effect of translation adjustments is reported as the timing and emergencea separate component of claims or short term market trends.

AOCI in shareholders’ equity.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

2.Significant Accounting Policies (Continued)SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

While we believe that our reserves for lossesIn recording foreign currency transactions, revenue and loss expensesexpense items are sufficientconverted to pay losses that fall within the coverages we assume, actual losses and loss expenses may be materially greater or less thanrelevant functional currency at the reserve provided. Our losses and loss expense reserves are reviewed quarterly, and any adjustments are reflected in earnings inexchange rate prevailing at the period in which they become known.

f)Foreign Exchange

transaction date. Assets and liabilities of foreign operations whoseoriginating in currencies other than the functional currency is not the U.S. dollar are translated into the functional currency at the rates of exchange rates in effect at the balance sheet date. Revenues and expenses of suchThe resulting foreign operationscurrency gains or losses are translated at weighted average exchange rates for the period. The effect of the translation adjustments is reported in accumulated other comprehensive income (loss) as a component of shareholders’ equity.

Transactions in currencies other than the functional currencies are measured in the functional currency of the applicable operation at the exchange rate prevailing at the date of the transaction. Foreign denominated asset and liability balances are measured at period end rates. The change in realized and unrealized gains and losses from non-functional currencies is recognized in the Consolidated Statements of Operations, with the exception of non-functional currency denominatedthose related to foreign-denominated available for sale investments. In the case ofFor these investments, the change in exchange rates between the underlying currency and functional currency representsrate fluctuations represent an unrealized appreciation/depreciation in the value of thesethe securities and isare included as ain the related component of accumulated other comprehensive income.AOCI.

 

g)Stock-Based Compensation

We determine theThe Company is authorized to issue restricted stock awards and units, stock options and other equity-based awards to its employees and directors. The fair value of stock-based awardsthe compensation cost is measured at the grant date and expensed over the period for which the employee is required to provide services in exchange for the award. The expense associated with awards subject to graded vesting is recognized on a straight-line basis. Forfeiture benefits are estimated at the time of grant and recognizeincorporated in the share-based compensation expense over the period the award is earned by the employee, netdetermination of our best estimate of forfeiture benefits.stock-based compensation.

 

h)Derivative Instruments

Derivative Instruments not Designated as Hedging Instruments

We may enter into derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts as part of our overall foreign currency risk management strategy, or to obtain exposure to a particular financial market andor for yield enhancement. From time to time we may also enter into insurance and reinsurance contracts that meet the definition of a derivative contract, as defined by the Financial Accounting Standards Board (“FASB”).FASB.

We measure all derivative instruments at fair value (see Note 6 – Fair Value Measurements) and recognize them as either assets or liabilities in the Consolidated Balance Sheets. We record the changechanges in fair value and any realized gains or losses on derivative instruments in the Consolidated Statements of Operations.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

2.Significant Accounting Policies (Continued)

Derivative Instruments Designated as Hedging Instruments

We may designate a currency derivative as a hedge onof movements in the fair value of certain investment portfolios attributable to changes in foreign currency exchange rates. This is referred to as a fair value hedge. Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with the changes in the fair value of the hedged asset or liability that is attributable to the hedged risk, are recorded in net realized investment gains (losses), includingalong with any hedge ineffectiveness.

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in value of the hedged item. Further, the hedge relationship must be designated and formally documented at the inception, detailing the particular risk management objective and strategy for the hedge, including the item and risk that is being hedged, the derivative that is being used, and how effectiveness is beingwill be assessed. We formally measure the hedge effectiveness both at the inception and on an ongoing basis. We evaluate the effectiveness of our designated hedges on a retrospective and prospective basis, using the period-to-period dollar offset method. Using this method, if the hedge correlation is within the range of 80% to 125%, we consider the hedge effective and apply hedge accounting. Cash flows from derivative instruments designated as hedging instruments are presented as operating activities in the Consolidated Statements of Cash Flows.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

2.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

i)Goodwill and 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.

We amortize intangible assets with finite lives over their estimated useful lives in proportion to the estimated economic benefits of the intangible assets. We also test these assets for impairment if existing conditions existindicate that indicate the carrying value may not be fully recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. If, as a result of such an evaluation, we determine that the carrying value of the finite lived intangible assets is not recoverable, the value of the assets will be reduced to fair value with the difference being charged to income.expensed in the Consolidated Statement of Operations.

IntangibleOur intangible assets with indefinite lives include licenses held by certain subsidiaries in various jurisdictions that allow such subsidiaries to write insurance and/or reinsurance business. These intangible assets are carried at or below estimated fair value and are tested on an annual basisannually for impairment, or more frequently if circumstances indicate that a possible impairment has occurred.

arisen.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

2.Significant Accounting Policies (Continued)

We have recorded goodwill in connection with certain acquisitions. Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired and is assigned to applicable reporting unit(s) on the acquisition date based upon the expected benefit to be received by the reporting unit. Reporting units are generally one level below our business segments. We determine the expected benefit based on several factors, including the purpose of the business combination, our strategy subsequent to the business combination and the structure of the acquired company subsequent to the business combination. Goodwill is not subject to amortization. We test goodwill for potential impairment annually during the fourth quarter each year and between annual tests if an event occurs or circumstances change that may indicate that potential exists for the fair value of a reporting unit to be reduced to a level below its carrying amount. We test forOur impairment evaluation is a two-step process and is conducted at the reporting unit level and the impairment evaluation is a two step process.level. First, we identify potential impairment by comparing the fair value of the reporting units to estimated book values, including goodwill. The fair value of each reporting unit is derived based upon valuation techniques and assumptions that we believe market participants would use to value theour business. The estimated fair values are generally determined utilizing methodologies that incorporate discounted cash flow analyses. The values derived from the analyses are then compared to recent market transactions for reasonableness. We derive the net book value of our reporting units by estimating the amount of shareholders’ equity required to support the activities of each reporting unit. If the estimated fair value of a reporting unit exceeds the estimated book value, goodwill is not considered impaired. If the book value exceeds the estimated fair value, the second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill in order to determine the magnitude of impairment to be recognized. The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole. The excess of the carrying value of goodwill above the implied goodwill, if any, would be recognized as an impairment charge in the Consolidated Statement of Operations.

 

j)TaxationIncome Taxes

We have certainCertain subsidiaries whichand branches of the Company operate in jurisdictions where they are subject to taxation. Current and deferred income taxes are providedcharged or credited to net income, or, in certain cases, to AOCI, based upon enacted tax laws and rates applicable in the relevant jurisdictions.jurisdiction in the period in which the tax becomes accruable or realizable. Deferred income taxes are provided onfor all temporary differences between the carrying amountsbases of assets and liabilities for financial reporting purposesused in the Consolidated Balance Sheets and those used in the amounts used for incomevarious jurisdictional tax purposes. A valuation allowance against deferred tax assets is recorded whenreturns. When our assessment indicates that it is more likely than not that a portion of thea deferred tax asset will not be realized in the foreseeable future. Thefuture, a valuation allowance against deferred tax assets is recorded. We recognize the tax benefits of uncertain tax positions are only recognized when the position is more-likely-than-not to be sustained upon audit by the relevant taxing authorities.

k)Treasury Shares

Treasury shares are common shares repurchased by the Company and not subsequently cancelled. These shares are recorded at cost and result in a reduction of the shareholders’ equity in the Consolidated Balance Sheets.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

2.Significant Accounting Policies (Continued)SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

k)Treasury Shares

Common shares repurchased by the Company and not subsequently cancelled are classified as treasury shares and are recorded at cost. This results in a reduction of shareholders’ equity in the Consolidated Balance Sheets.

l)Variable Interest Entities

We consolidate a variable interest entity (“VIE”) if we are the primary beneficiary of the VIE, such that we are subject to a majority of the risk of loss from the VIE’s activities or are entitled to receive a majority of the VIE’s residual returns, or both. A VIE is an entity that either: (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.

m)Other New Accounting Standards Adopted in 20092010

Fair Value Measurements

Effective April 1, 2009, we adopted the following issued by FASB:

New guidance on determining fair value when the volumeMeasurement and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. In these circumstances, the use of alternative valuation models may be appropriate to determine fair value. The new accounting standard also expands disclosure requirements to include disaggregation of the fair value disclosures by defining major categories, and must be applied prospectively. Refer to Note 6 – Fair Value Measurements for required disclosures.

New guidance amending the previous recognition and presentation of OTTI for debt securities, as disclosed above. This guidance requires new interim and annual disclosure of both fixed maturities and equities, including more disaggregated information (refer to Note 5 – Investments). As of April 1, 2009, the adoption of this standard resulted in $38 million net after-tax increase to retained earnings with a corresponding decrease to accumulated other comprehensive income (loss), resulting in no change to our total shareholders’ equity. This adjustment reflects the non-credit portion of the total OTTI of $86 million previously recognized in retained earnings for fixed maturity securities still outstanding at March 31, 2009. As part of the cumulative effect adjustment, we also recorded a corresponding adjustment to the amortized cost of our fixed maturities.

New guidance requiring disclosure about fair value of financial instruments for interim reporting periods as well as in annual financial statements. Refer to Note 6 – Fair Value Measurements.

Business CombinationsDisclosures

In April 2009, we adopted revised guidance issued by FASB on the accounting for assets and liabilities assumed in a business combination that arise from contingencies, resulting in no impact to our results of operations or financial position. This guidance amends the previously issued standard on business combinations, by requiring that assets acquired or liabilities assumed in a business combination that arise from contingencies be recognized at fair value only if fair value can be reasonably estimated; otherwise the asset or liability should generally be recognized in accordance with guidance on accounting for contingencies, and removes the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date.

Determination of the Useful Life of Intangible Assets

Effective January 1, 2009, we adopted new guidance issued by FASB for determination of the useful life of intangible assets, resulting in no significant impact on our results of operations or financial position. The guidance amends the factors considered in developing assumptions used to determine the useful life of an intangible asset, and its intent is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

2.Significant Accounting Policies (Continued)

Financial Guarantee Insurance Contracts

Effective January 1, 2009, we adopted new guidance issued by FASB for financial guarantee insurance contracts issued by insurance enterprises, resulting in no significant impact on our results of operations or financial position. This guidance amends the previous recognition and measurement of premium revenue and claim liabilities. A claim liability is recognized prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. The determination of the applicability of this new guidance to certain of our insurance contracts required significant management judgment due to the interpretation of the scope exemption for insurance contracts that are similar to financial guarantee insurance contracts.

Earnings per Share

Effective January 1, 2009, we adopted new guidance issued by FASB for the calculation of earnings per share, and the requirement that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) be included in the computation of earnings per share pursuant to the two-class method. As the dividends on all of our outstanding unvested stock awards are restricted and forfeitable, the adoption of this guidance did not impact the calculation of our earnings per share.

Subsequent Events

Effective April 1, 2009, we adopted new accounting and disclosure guidance issued by FASB on management’s assessment of subsequent events. This new guidance clarifies that management must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or available to be issued. The adoption of this standard did not have an impact on our results of operations or financial position. In preparing our Consolidated Financial Statements, we have evaluated subsequent events through February 22, 2010, which is the date that these financial statements were issued.

Fair Value Measurement of Liabilities

In October 2009, we adopted new guidance issued by the FASB issued for measuring the fair value of liabilities. The fair value should be measured based on the price that would be paid to transfer the liability in an orderly transaction between market participants, including the company’s own non-performance risk. In the absence of a quoted price in an active market for an identical liability at the measurement date, an entity should use a valuation technique that is consistent with the fair value measurement principles (see Note 6 – Fair Value Measurements). As the loss reserves relating to our insurance and reinsurance contracts are not measured at fair value, the adoption of this guidance did not materially impact our results of operations, financial condition and liquidity.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

2.Significant Accounting Policies (Continued)

Fair Value Measurement of Certain Alternative Investments

In October 2009, we adopted new guidance issued by the FASB for measuring the fair value of certain alternative investments. As a practical expedient for measuring fair value, an entity may use the net asset value per share (“NAV”) if the NAV is calculated in accordance with AICPA Audit and Accounting Guide for investment companies. The adoption of this guidance did not impact our results of operations, financial condition and liquidity. Additionally, its adoption did not result in a change in the fair value hierarchy disclosure in Note 6 – Fair Value Measurements.

m)Recently Issued Accounting Policies Not Yet Adopted

Transfers and Servicing of Financial Assets

In June 2009, the FASB issued new guidance for accounting for transfers of financial assets, which amends the derecognition guidance and eliminates the exemption from consolidation for qualifying special-purpose entities (“QSPEs”). Consequently, a transferor will need to evaluate all existing QSPEs to determine whether they must now be consolidated in accordance with the new guidance on consolidations (see below). This new guidance is effective for financial asset transfers occurring after January 1, 2010 and early adoption is prohibited. We do not anticipate the adoption of this guidance will impact our results of operations, financial condition and liquidity.

Fair Value Measurement Disclosures

In January 2010, the FASB issued guidance requiring additional disclosures about transfers into and out of Levels 1 and 2 of the fair value hierarchy and separate disclosures about purchases, sales, issuances,issuance, and settlements relating to Level 3 measurements. This guidance also clarified existing fair value disclosure requirements about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This new guidance is effective for January 1, 2010, except for certain requirements related to Level 3, which will be effective for January 1, 2011. As these new requirements relaterelated solely to disclosures, the adoption of this guidance willdid not impact our results of operations, financial conditionscondition or liquidity. The additional disclosures have been provided in Note 6 – Fair Value Measurements.

Consolidations

In June 2009, theEffective January 1, 2010, we adopted amended FASB amendedguidance related to the consolidation of VIEs. This new guidance applicable to variable interest entities (“VIEs”). The amendments will significantly affect the overall consolidation analysis, in particular it modifies the approach for determining the primary beneficiary of a VIE.VIE by eliminating the initial quantitative assessment and requiring ongoing qualitative reassessments. The primary beneficiary is the party that has: (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (2) the obligation to absorb the losses that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity. The amended guidance is effective as of January 1, 2010, and early adoption is prohibited. As we are not party to any significant VIEs at December 31, 2009, the adoption of this guidance willdid not result in the consolidation of additional VIEs.

Embedded Credit Derivatives

Effective July 1, 2010, we adopted amended FASB guidance that clarified the bifurcation scope exemption for embedded credit-derivative features. Embedded credit-derivative features related only to the transfer of credit risk in the form of subordination of one financial instrument to another (e.g. a mortgage-backed or asset-backed security with multiple tranches) are not subject to bifurcation and separate accounting. The adoption of this guidance did not impact our results of operations, or financial condition or liquidity.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

Effective October 1, 2010, we adopted new guidance issued by the FASB requiring disclosures about the nature of credit risk in financing receivables and how that risk is analyzed in determining the related allowance for credit losses, as well as details on adoption.

changes in the allowance for credit losses during the reporting period. Additional disclosures with respect to this guidance have been provided in sections (c) and (e) of this note, as well as Note 11 – Commitments and Contingencies.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

2.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

n)Recently Issued Accounting Policies Not Yet Adopted

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued guidance modifying the definition of the types of costs that can be capitalized in relation to the acquisition of new and renewal insurance contracts. The amended guidance requires costs to be incremental or directly related to the successful acquisition of new or renewal contracts in order to be capitalized as a deferred acquisition cost. Capitalized costs would include incremental direct costs, such as commissions paid to brokers. Additionally, the portion of employee salaries and benefits directly related to time spent for acquired contracts would be capitalized. Costs that fall outside the revised definition must be expensed when incurred. This new guidance is effective for January 1, 2012 and may be adopted either prospectively or retrospectively. Earlier adoption is permitted, provided the guidance is applied at the beginning of the company’s financial year. The transitional provisions of this guidance also indicate that if the application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized, we may elect not to capitalize those types of costs. We intend to early adopt this guidance prospectively at January 1, 2011 and expect that adoption will not impact our results of operations, financial condition or liquidity.

 

3.Segment InformationSEGMENT INFORMATION

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

Insurance

Our insurance segment provides insurance coverage on a worldwide basis. The product lines in this segment are property, marine, terrorism, aviation, credit and political risk, professional lines, liability and other.other (including accident & health).

Reinsurance

Our reinsurance segment provides treaty and facultative property and casualty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, professional liability, credit and bond, motor, liability, engineering and other.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008, 2007 AND 2006

3.SEGMENT INFORMATION (CONTINUED)

The following tables summarize the underwriting results of our operating segments for the last three years and the carrying values of goodwill and intangible assets:

 

    
At and year ended December 31, 2009  Insurance  Reinsurance  Total 
  

Gross premiums written

  $  1,775,590   $  1,811,705   $3,587,295   

Net premiums written

   1,025,061    1,791,368    2,816,429  

Net premiums earned

   1,157,966    1,633,798    2,791,764  

Other insurance related income (loss)

   (130,946  1,265    (129,681

Net losses and loss expenses

   (612,694  (811,178    (1,423,872

Acquisition costs

   (113,187  (307,308  (420,495

General and administrative expenses

   (216,954  (76,127  (293,081
              

Underwriting income

  $84,185   $440,450    524,635  
            

Corporate expenses

     (77,076

Net investment income

     464,478  

Net realized investment losses

     (311,584

Foreign exchange (losses) gains

     (28,561

Interest expense and financing costs

     (32,031
        

Income before income taxes

    $539,861  
        

Net loss and loss expense ratio

   52.9%    49.6%    51.0%  

Acquisition cost ratio

   9.8%    18.8%    15.1%  

General and administrative expense ratio

   18.7%    4.7%    13.2%  
              

Combined ratio

   81.4%    73.1%    79.3%  
              

Goodwill and intangible assets

  $91,505   $-   $91,505  
              
              

 

At and year ended December 31, 2010

  Insurance  Reinsurance  Total 
      

Gross premiums written

  $ 1,916,116  $ 1,834,420  $ 3,750,536 

Net premiums written

   1,332,220   1,815,320   3,147,540 

Net premiums earned

   1,206,493   1,740,917   2,947,410 

Other insurance related income

   2,073   -        2,073 

Net losses and loss expenses

   (569,869  (1,107,263  (1,677,132

Acquisition costs

   (152,223  (336,489  (488,712

General and administrative expenses

   (276,435  (98,001  (374,436
              

Underwriting income

  $210,039  $199,164   409,203 
            

Corporate expenses

     (75,449

Net investment income

     406,892 

Net realized investment gains

     195,098 

Foreign exchange gains

     15,535 

Interest expense and financing costs

     (55,876
        

Income before income taxes

    $895,403 
        

Net loss and loss expense ratio

   47.2%    63.6%    56.9%  

Acquisition cost ratio

   12.6%    19.3%    16.6%  

General and administrative expense ratio

   23.0%    5.7%    15.2%  
              

Combined ratio

   82.8%    88.6%    88.7%  
              

Goodwill and intangible assets

  $103,231  $-       $103,231 
              
              

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

3.Segment Information (Continued)SEGMENT INFORMATION (CONTINUED)

 

    
At and year ended December 31, 2008  Insurance  Reinsurance  Total 
  

Gross premiums written

  $  1,841,934   $1,548,454   $3,390,388  

Net premiums written

   1,133,843    1,533,037    2,666,880  

Net premiums earned

   1,183,143    1,504,038    2,687,181  

Other insurance related income (loss)

   (39,862  1,195    (38,667)   

Net losses and loss expenses

   (659,668    (1,053,098    (1,712,766

Acquisition costs

   (102,475  (264,034  (366,509

General and administrative expenses

   (193,881  (68,690  (262,571
              

Underwriting income

  $187,257   $119,411    306,668  
            

Corporate expenses

     (73,187

Net investment income

     247,237  

Net realized investment losses

     (85,267

Foreign exchange (losses) gains

     43,707  

Interest expense and financing costs

     (31,673
        

Income before income taxes

    $407,485  
        

Net loss and loss expense ratio

   55.8%    70.0%    63.7%  

Acquisition cost ratio

   8.6%    17.5%    13.6%  

General and administrative expense ratio

   16.4%    4.6%    12.5%  
              

Combined ratio

   80.8%    92.1%    89.8%  
              

Goodwill and intangible assets

  $60,417   $-   $60,417  
              
              

 

At and year ended December 31, 2009

  Insurance  Reinsurance  Total 
      

Gross premiums written

  $ 1,775,590  $ 1,811,705  $ 3,587,295 

Net premiums written

   1,025,061   1,791,368   2,816,429 

Net premiums earned

   1,157,966   1,633,798   2,791,764 

Other insurance related income (loss)

   (130,946  1,265   (129,681

Net losses and loss expenses

   (612,694  (811,178  (1,423,872

Acquisition costs

   (113,187  (307,308  (420,495

General and administrative expenses

   (216,954  (76,127  (293,081
              

Underwriting income

  $84,185  $440,450   524,635 
            

Corporate expenses

     (77,076

Net investment income

     464,478 

Net realized investment losses

     (311,584

Foreign exchange losses

     (28,561

Interest expense and financing costs

     (32,031
        

Income before income taxes

    $539,861 
        

Net loss and loss expense ratio

   52.9%    49.6%    51.0%  

Acquisition cost ratio

   9.8%    18.8%    15.1%  

General and administrative expense ratio

   18.7%    4.7%    13.2%  
              

Combined ratio

   81.4%    73.1%    79.3%  
              

Goodwill and intangible assets

  $91,505  $-       $91,505 
              
              
    

 

At and year ended December 31, 2008

  Insurance  Reinsurance  Total 
      

Gross premiums written

  $ 1,841,934  $ 1,548,454  $ 3,390,388 

Net premiums written

   1,133,843   1,533,037   2,666,880 

Net premiums earned

   1,183,143   1,504,038   2,687,181 

Other insurance related income (loss)

   (39,862  1,195   (38,667

Net losses and loss expenses

   (659,668  (1,053,098  (1,712,766

Acquisition costs

   (102,475  (264,034  (366,509

General and administrative expenses

   (193,881  (68,690  (262,571
              

Underwriting income

  $187,257  $119,411   306,668 
            

Corporate expenses

     (73,187

Net investment income

     247,237 

Net realized investment losses

     (85,267

Foreign exchange gains

     43,707 

Interest expense and financing costs

     (31,673
        

Income before income taxes

    $407,485 
        

Net loss and loss expense ratio

   55.8%    70.0%    63.7%  

Acquisition cost ratio

   8.6%    17.5%    13.6%  

General and administrative expense ratio

   16.4%    4.6%    12.5%  
              

Combined ratio

   80.8%    92.1%    89.8%  
              

Goodwill and intangible assets

  $60,417  $-       $60,417 
              
              

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

3.Segment Information (Continued)SEGMENT INFORMATION (CONTINUED)

 

    
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 (loss)

   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 (losses) 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  
              
              

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

 

    
Year ended December 31,  2009  2008  2007 
  

Bermuda

  $802,577  $861,533  $933,058   

Europe

   1,057,427   1,027,178   974,225  

United States

   1,727,291   1,501,677   1,682,807  
              

Total gross premium written

  $  3,587,295  $  3,390,388  $  3,590,090  
              
              

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

3.Segment Information (Continued)

 

Year ended December 31,

  2010   2009   2008 
        

Bermuda

  $822,530   $802,577   $861,533 

Europe

   1,203,091    1,057,427    1,027,178 

United States

   1,724,915    1,727,291    1,501,677 
                

Total gross premium written

  $ 3,750,536   $ 3,587,295   $ 3,390,388 
                
                

The following table presents our net premiums earned by segment and line of business:

 

    
Year ended December 31,  2009  2008  2007 
  

Insurance

       

Property

  $268,469  $328,709  $317,497  

Marine

   139,196   151,809   156,981  

Terrorism

   34,001   42,629   59,674  

Aviation

   64,245   65,259   88,280  

Credit and political risk

   188,311   144,481   112,837  

Professional lines

   381,364   340,929   330,646  

Liability

   82,286   97,898   109,005  

Other

   94   11,429   33,520  
              

Total Insurance

   1,157,966   1,183,143   1,208,440  
              
  

Reinsurance

       

Catastrophe

   451,085   453,091   463,068  

Property

   311,272   305,483   333,154  

Professional lines

   266,792   221,531   245,672  

Credit and bond

   179,362   139,861   107,618  

Motor

   99,497   97,773   98,627  

Liability

   227,511   181,858   212,689  

Engineering

   66,428   53,524   30,800  

Other

   31,851   50,917   34,342  
              

Total Reinsurance

   1,633,798   1,504,038   1,525,970  
              

Total

  $  2,791,764  $  2,687,181  $  2,734,410   
              
              

 

Year ended December 31,

  2010   2009   2008 
        

Insurance

       

Property

  $337,525   $268,469   $328,709 

Marine

   145,356    139,196    151,809 

Terrorism

   32,486    34,001    42,629 

Aviation

   66,636    64,245    65,259 

Credit and political risk

   89,773    188,311    144,481 

Professional lines

   444,663    381,364    340,929 

Liability

   87,481    82,286    97,898 

Other

   2,573    94    11,429 
                

Total Insurance

   1,206,493    1,157,966    1,183,143 
                

Reinsurance

       

Catastrophe

   454,954    451,085    453,091 

Property

   323,201    311,272    305,483 

Professional lines

   285,224    266,792    221,531 

Credit and bond

   217,809    179,362    139,861 

Motor

   127,404    99,497    97,773 

Liability

   232,014    227,511    181,858 

Engineering

   71,229    66,428    53,524 

Other

   29,082    31,851    50,917 
                

Total Reinsurance

   1,740,917    1,633,798    1,504,038 
                

Total

  $ 2,947,410   $ 2,791,764   $ 2,687,181 
                
                

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

4.Goodwill and Intangible AssetsGOODWILL AND INTANGIBLE ASSETS

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

 

  Goodwill  Intangible
assets with an
indefinite life
  Intangible
assets with a
finite life
 Total   

Goodwill

   

Intangible

assets with an

indefinite life

   

Intangible

assets with a

finite life

 

Total

 
 

Net balance at December 31, 2007

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

Amortization

   -   -   (1,236  (1,236)   
                     

Net balance at December 31, 2008

   26,753   26,036   7,628    60,417    $ 26,753   $26,036   $7,628  $60,417 

Acquisition of Dexta

   15,484   -   19,760    35,244     15,484    -         19,760   35,244 

Amortization

   -   -   (4,156  (4,156   -         -         (4,156  (4,156
                            

Net balance at December 31, 2009

  $42,237  $26,036  $23,232   $91,505     42,237    26,036    23,232   91,505 

Amortization

   -         -         (2,670  (2,670

Foreign currency translation

   7,060    -         7,336   14,396 
                            

Gross balance

  $42,237  $26,036  $35,596   $  103,869  

Accumulated impairement charges

   -   -   -    -  

Accumulated amortization

   -   -     (12,364  (12,364
             

Net balance at December 31, 2009

  $42,237  $26,036  $23,232   $91,505  
             

Gross balance

  $26,753  $26,036  $15,836   $68,625  

Accumulated impairement charges

   -   -   -    -  

Accumulated amortization

   -   -   (8,208  (8,208
             

Net balance at December 31, 2008

  $  26,753  $  26,036  $7,628   $60,417  

Net balance at December 31, 2010

  $ 49,297   $ 26,036   $ 27,898  $ 103,231 
                            
             

Gross balance at December 31, 2010

  $42,237   $26,036   $35,596  $103,869 

Accumulated amortization

   -         -         (15,034  (15,034

Accumulated foreign currency translation

   7,060    -         7,336   14,396 

Accumulated impairment charges

   -         -         -        -      
               

Net balance at December 31, 2010

  $ 49,297   $ 26,036   $ 27,898  $ 103,231 
               
            

On January 7, 2009, we acquired Dexta Corporation Pty Ltd (“Dexta”), an underwriting agency in Australia. The total purchase consideration to acquire Dexta was not material to our consolidated financial position. This acquisition resulted in the recognition of $15 million and $20 million of goodwill and intangible assets with a finite life, respectively. TheseThe functional currency of Dexta is the Australian dollar; accordingly, in the above table goodwill and intangible assets were translated at the exchange rate in effect at December 31, 2010. The acquired intangible assets with a finite life consist primarily of Dexta’s distribution network.

We estimate that the annual amortization expense for our total intangible assets with a finite life will be approximately $3 million for the next two years, andyear, $2 million for each of the following three years.a year from 2012 to 2014 and $1 million in 2015. The estimated remaining useful lives of these assets range from one to twenty-ninetwenty-eight years.

Intangible assets with an indefinite life consist primarily of U.S. state licenses that provide a legal right to transact business indefinitely. Our impairment reviews for goodwill and indefinite lived intangibles did not result the recognition of impairment losses for the years ended December 31, 2010, 2009 2008 and 2007.

2008.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

5.InvestmentsINVESTMENTS

 

a)

Fixed Maturities and Equities

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

 

At December 31, 2009  Amortized
Cost or Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  

Fair

Value

  Non-credit
OTTI in
AOCI(3)
 
  

Fixed maturities:

          

U.S. government and agency

  $  1,859,874  $8,511  $(11,726 $1,856,659  $-  

Non-U.S. government

   687,843   11,937   (2,966  696,814   -  

Corporate debt

   3,482,450   126,093   (27,777  3,580,766   (6,071

Residential MBS(1)

   1,777,793   41,429   (39,581  1,779,641   (8,673

Commercial MBS

   680,229   10,865   (28,283  662,811   (505

ABS(2)

   455,831   6,926   (19,618  443,139   (10,798

Municipals

   684,267   18,495   (4,237  698,525   (389
                      

Total fixed maturities

  $9,628,287  $  224,256  $  (134,188 $  9,718,355  $  (26,436)   
                      

Equities:

          

Common stock

  $195,011  $17,834  $(8,470 $204,375   

Preferred stock

   -   -   -    -   
                    

Total equities

  $195,011  $17,834  $(8,470 $204,375   
                    

At December 31, 2008

          
  

Fixed maturities:

          

U.S. government and agency

  $1,148,767  $39,474  $(908 $1,187,333   

Non-U.S. government

   272,006   19,915   (12,696  279,225   

Corporate debt

   2,517,059   19,640   (475,382  2,061,317   

Residential MBS(1)

   2,736,811   71,523   (96,336  2,711,998   

Commercial MBS

   933,315   90   (170,307  763,098   

ABS(2)

   433,266   390   (52,650  381,006   

Municipals

   363,770   6,479   (3,572  366,677   
                    

Total fixed maturities

  $8,404,994  $157,511  $(811,851 $7,750,654   
                    

Equities:

          

Common stock

  $132,935  $1,522  $(48,620 $85,837   

Preferred stock

   31,395   -   (9,949  21,446   
                    

Total equities

  $164,330  $1,522  $(58,569 $107,283   
                    
                      
    

Amortized

Cost or

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

  

Fair

Value

   

Non-credit

OTTI

in AOCI(4)

 
           

At December 31, 2010

          

Fixed maturities

          

U.S. government and agency

  $856,711   $7,101   $(3,692 $860,120   $-      

Non-U.S. government

   777,236    9,321    (13,759  772,798    -      

Corporate debt

   4,054,048    144,956    (36,096  4,162,908    -      

Agency MBS(1)

   2,571,124    43,160    (20,702  2,593,582    -      

Non-Agency CMBS

   454,288    21,998    (1,501  474,785    -      

Non-Agency RMBS

   252,460    3,287    (11,545  244,202    (7,443)  

ABS(2)

   668,037    8,856    (15,050  661,843    (1,275)  

Municipals(3)

   712,339    11,870    (11,550  712,659    (350)  
                         

Total fixed maturities

  $ 10,346,243   $ 250,549   $ (113,895 $ 10,482,897   $ (9,068
                         

Equity securities

  $327,207   $26,761   $(4,714 $349,254    
                       
  

At December 31, 2009

          

Fixed maturities

          

U.S. government and agency

  $1,859,874   $8,511   $(11,726 $1,856,659   $-      

Non-U.S. government

   687,843    11,937    (2,966  696,814    -      

Corporate debt

   3,482,450    126,093    (27,777  3,580,766    (6,071)  

Agency MBS(1)

   1,529,208    41,425    (4,374  1,566,259    -      

Non-Agency CMBS

   670,949    10,545    (28,283  653,211    (505)  

Non-Agency RMBS

   257,865    324    (35,207  222,982    (8,673)  

ABS(2)

   455,831    6,926    (19,618  443,139    (10,798

Municipals(3)

   684,267    18,495    (4,237  698,525    (389)  
                         

Total fixed maturities

  $9,628,287   $224,256   $(134,188 $9,718,355   $ (26,436
                         

Equity securities

  $195,011   $17,834   $(8,470 $204,375    
                       
                         
(1)ResidentialAgency mortgage-backed securities (“MBS”)(MBS) include agency pass-through securitiesresidential MBS (RMBS) and collateralized mortgage obligations.agency commercial MBS (CMBS).
(2)Asset-backed securities (“ABS”)(ABS) include debt tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, and other asset types. This asset class also includes an insignificant position in collateralized loan obligations (“CLOs”)(CLOs) and collateralized debt obligations (“CDOs”)(CDOs).
(3)Includes bonds issued by states, municipalities, and political subdivisions.
(4)Represents the non-credit component of OTTIthe other-than-temporary impairment (OTTI) losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.

In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we also invest in limited partnerships (hedge and credit funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 5(b)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly we are not the primary beneficiary for any of these VIEs. Our

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

5.Investments (Continued)INVESTMENTS (CONTINUED)

 

maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.

Contractual Maturities

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

 

At December 31, 2009  Amortized
Cost
  

Fair

Value

  % of Total
Fair Value
 
  

Maturity

       

Due in one year or less

  $692,141  $707,884  7.3%   

Due after one year through five years

   4,122,478   4,181,230  43.0%  

Due after five years through ten years

   1,535,061   1,580,492  16.3%  

Due after ten years

   364,754   363,158  3.7%  
             
    6,714,434   6,832,764  70.3%  

Residential MBS

   1,777,793   1,779,641  18.3%  

Commercial MBS

   680,229   662,811  6.8%  

ABS

   455,831   443,139  4.6%  
             

Total

  $  9,628,287  $  9,718,355  100.0%  
             
             

At December 31, 2008  Amortized
Cost
  Fair Value  % of Total
Fair Value
 
  

Maturity

       

Due in one year or less

  $416,178  $343,570  4.4%   

Due after one year through five years

   2,798,157   2,512,428  32.4%  

Due after five years through ten years

   814,175   803,331  10.4%  

Due after ten years

   273,092   235,223  3.0%  
             
    4,301,602   3,894,552  50.2%  

Residential MBS

   2,736,811   2,711,998  35.0%  

Commercial MBS

   933,315   763,098  9.9%  

ABS

   433,266   381,006  4.9%  
             

Total

  $  8,404,994  $  7,750,654  100.0%  
             
             

    Amortized
Cost
   

Fair

Value

   % of Total
Fair Value
 
        

At December 31, 2010

       

Maturity

       

Due in one year or less

  $476,807   $489,190    4.7%  

Due after one year through five years

   4,096,477    4,144,144    39.5%  

Due after five years through ten years

   1,605,419    1,655,061    15.8%  

Due after ten years

   221,631    220,090    2.1%  
                
    6,400,334    6,508,485    62.1%  

Agency MBS

   2,571,124    2,593,582    24.7%  

Non-Agency CMBS

   454,288    474,785    4.5%  

Non-Agency RMBS

   252,460    244,202    2.4%  

ABS

   668,037    661,843    6.3%  
                

Total

  $ 10,346,243   $ 10,482,897    100.0%  
                

At December 31, 2009

       

Maturity

       

Due in one year or less

  $692,141   $707,884    7.3%  

Due after one year through five years

   4,122,478    4,181,230    43.0%  

Due after five years through ten years

   1,535,061    1,580,492    16.3%  

Due after ten years

   364,754    363,158    3.7%  
                
    6,714,434    6,832,764    70.3%  

Agency MBS

   1,529,208    1,566,259    16.1%  

Non-Agency CMBS

   670,949    653,211    6.7%  

Non-Agency RMBS

   257,865    222,982    2.3%  

ABS

   455,831    443,139    4.6%  
                

Total

  $9,628,287   $9,718,355    100.0%  
                
                

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

5.Investments (Continued)INVESTMENTS (CONTINUED)

 

Credit Ratings

The following summarizes the credit ratings of fixed maturities as assigned by S&P:

 

  Amortized
Cost
  

Fair

Value

  % of Total
Fair Value
   Amortized
Cost
   

Fair

Value

   % of Total
Fair Value
 

At December 31, 2009

       

Investment grade:

       
       

At December 31, 2010

       

Investment grade

       

U.S. government and agencies

  $1,859,874  $1,856,659  19.1%     $856,711   $860,120    8.2%  

AAA(1)

   3,967,510   4,007,688  41.2%     4,810,926    4,852,558    46.3%  

AA

   916,664   914,454  9.4%     1,071,513    1,081,535    10.3%  

A

   1,723,081   1,760,929  18.1%     2,094,261    2,150,324    20.5%  

BBB

   1,002,715   1,036,359  10.7%     1,129,352    1,163,168    11.1%  
                      
   9,469,844   9,576,089  98.5%     9,962,763    10,107,705    96.4%  

Non-investment grade:

       

Non-investment grade

       

Below BBB

   158,443   142,266  1.5%     383,480    375,192    3.6%  
                      

Total

  $  9,628,287  $  9,718,355  100.0%    $ 10,346,243   $ 10,482,897    100.0%  
                      

At December 31, 2008

       

Investment grade:

       

At December 31, 2009

       

Investment grade

       

U.S. government and agencies

  $1,148,767  $1,187,333  15.3%    $1,859,874   $1,856,659    19.1%  

AAA(1)

   4,708,259   4,504,963  58.1%     3,967,510    4,007,688    41.2%  

AA

   521,697   491,185  6.3%     916,664    914,454    9.4%  

A

   1,076,980   944,841  12.2%     1,723,081    1,760,929    18.1%  

BBB

   912,340   601,196  7.8%     1,002,715    1,036,359    10.7%  
                      
   8,368,043   7,729,518  99.7%     9,469,844    9,576,089    98.5%  

Non-investment grade:

       
 

Non-investment grade

       

Below BBB

   36,951   21,136  0.3%     158,443    142,266    1.5%  
                      

Total

  $8,404,994  $7,750,654  100.0%    $9,628,287   $9,718,355    100.0%  
                      
                    

Note: In the absence of an S&P rating, we used the lower rating established by Moody’s or Fitch.

(1)Includes U.S. government-sponsored agency, residential MBS and commercial MBS.

At December 31, 2009,2010, we held insurance enhanced bonds, (MBS, ABS and municipal securities), in the amount of approximately $217$169 million (2008: $215(2009: $217 million), which represented approximately 1.6% (2009: 2.2% (2008: 2.8%) of our total fixed maturities and a weighted average credit rating of AAAA- (2009: AA) by S&P. If we exclude the insurance enhancement, the weighted average credit quality of our insured bond portfolio was A- (2009: AA- (2008: A+) by S&P. At December 31, 2009,2010, our largest exposures to financial guarantors were Financial Security Assurance Inc.Assured Guaranty Corp. for $69$66 million (2008: $72(2009: $8 million), MBIA InsuranceNational Public Finance Guarantee Corporation for $69$57 million (2008: $70(2009: $69 million) and Ambac Financial Group, Inc. for $57$23 million (2008: $60(2009: $57 million). We do not have any significantdirect investments in these companies which guarantee securities at December 31, 2009. Effective February, 2009, MBIA provides insurance indemnity through its wholly owned subsidiary, National Public Finance Guarantee Corporation.

2010.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

5.Investments (Continued)INVESTMENTS (CONTINUED)

 

Gross Unrealized Losses

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

 

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

At December 31, 2009

           

Fixed maturities:

           

U.S. government and agency

  $22,902  $(915 $1,252,602  $(10,811 $1,275,504  $(11,726)   

Non-U.S. government

   -   -    352,313   (2,966  352,313   (2,966

Corporate debt

   160,213   (19,245  630,678   (8,532  790,891   (27,777

Residential MBS

   183,287   (32,867  440,067   (6,714  623,354   (39,581

Commercial MBS

   273,845   (27,180  79,561   (1,103  353,406   (28,283

ABS

   51,626   (18,721  94,008   (897  145,634   (19,618

Municipals

   13,432   (1,624  117,825   (2,613  131,257   (4,237
                          

Total fixed maturities

  $705,305  $(100,552 $2,967,054  $(33,636 $3,672,359  $(134,188
                          

Equities:

           

Common stock

  $31,368  $(6,025 $86,947  $(2,445 $118,315  $(8,470

Preferred stock

   -   -    -   -    -   -  
                          

Total equities

  $31,368  $(6,025 $86,947  $(2,445 $118,315  $(8,470
                          

At December 31, 2008

           

Fixed maturities:

           

U.S. government and agency

  $-  $-   $84,208  $(908 $84,208  $(908

Non-U.S. government

   -   -    162,203   (12,696  162,203   (12,696

Corporate debt

   428,311   (329,445  1,057,684   (145,937  1,485,995   (475,382

Residential MBS

   75,916   (16,266  385,527   (80,070  461,443   (96,336

Commercial MBS

   138,132   (49,091  611,631   (121,216  749,763   (170,307

ABS

   59,597   (18,878  300,585   (33,772  360,182   (52,650

Municipals

   -   -    71,510   (3,572  71,510   (3,572
                          

Total fixed maturities

  $  701,956  $  (413,680 $  2,673,348  $  (398,171 $  3,375,304  $  (811,851
                          

Equities:

           

Common stock

  $2,286  $(3,083 $71,071  $(45,537 $73,357  $(48,620

Preferred stock

   -   -    21,446   (9,949  21,446   (9,949
                          

Total equities

  $2,286  $(3,083 $92,517  $(55,486 $94,803  $(58,569
                          
                          

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

5.Investments (Continued)

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

At December 31, 2010

           

Fixed maturities

           

U.S. government and agency

  $-        $-       $453,207   $(3,692 $453,207   $(3,692

Non-U.S. government

   83,572    (6,062  302,431    (7,697  386,003    (13,759

Corporate debt

   160,161    (13,123  1,087,683    (22,973  1,247,844    (36,096

Agency MBS

   735    (42  1,308,690    (20,660  1,309,425    (20,702

Non-Agency CMBS

   1,164    (59  48,701    (1,442  49,865    (1,501

Non-Agency RMBS

   100,074    (10,030  57,095    (1,515  157,169    (11,545

ABS

   40,617    (12,871  155,491    (2,179  196,108    (15,050

Municipals

   23,681    (3,118  288,130    (8,432  311,811    (11,550
                             

Total fixed maturities

  $410,004   $(45,305 $3,701,428   $(68,590 $4,111,432   $(113,895
                             

Equity securities

  $4,347   $(601 $122,317   $(4,113 $126,664   $(4,714
                             

At December 31, 2009

           

Fixed maturities

           

U.S. government and agency

  $22,902   $(915 $1,252,602   $(10,811 $1,275,504   $(11,726

Non-U.S. government

   -         -        352,313    (2,966  352,313    (2,966

Corporate debt

   160,213    (19,245  630,678    (8,532  790,891    (27,777

Agency MBS

   1,587    (80  427,025    (4,294  428,612    (4,374

Non-Agency CMBS

   273,845    (27,180  79,561    (1,103  353,406    (28,283

Non-Agency RMBS

   181,700    (32,787  13,042    (2,420  194,742    (35,207

ABS

   51,626    (18,721  94,008    (897  145,634    (19,618

Municipals

   13,432    (1,624  117,825    (2,613  131,257    (4,237
                             

Total fixed maturities

  $ 705,305   $ (100,552 $ 2,967,054   $ (33,636 $ 3,672,359   $ (134,188
                             

Equity securities

  $31,368   $(6,025 $86,947   $(2,445 $118,315   $(8,470
                             
                             

Fixed Maturities

At December 31, 2009, 8322010, 1,150 fixed maturities (2008: 1,202)(2009: 832) were in an unrealized loss position of $134$114 million (2008: $812(2009: $134 million) of which $15 million (2009: $20 million (2008: $16 million) of this balance was related to securities below investment grade or not rated. During 2009, the gross unrealized losses have declined by $678 million primarily due to $317 million of impairments and $361 million of improved valuations as a result of the significant credit spread tightening and losses realized during the year. The reduction of gross unrealized losses on our fixed maturity portfolio at December 31, 2009, are primarily attributable to a partial recovery of the historic wide credit spreads experienced during the credit crisis of 2008.

At December 31, 2009, 3122010, 206 (2009: 312) securities have been in continuous unrealized loss position for 12 months or greater and have a fair value of $410 million (2009: $705 million. Thesemillion). At December 31, 2010, the securities in an unrealized loss position were primarily corporate debt, non-agency residential MBS, non-agency commercial MBS,RMBS, and ABS with a weighted average S&P credit rating of A+, A-, and BBB- respectively while at December 31, 2009, the securities were primarily corporate debt, non-agency RMBS, non-agency CMBS and ABS with a weighted averaged S&P credit rating of BBB+, A, AA and A-, respectively.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

5.INVESTMENTS (CONTINUED)

We concluded that these securities as well as the remaining securities in an unrealized loss position wereare temporarily impaired based on a detailed analysis ofdepressed and are expected to recover in value as the underlying credit, projected cash flowssecurities approach maturity or as market spreads return to be collected, and other qualitative factors.more normalized levels. Further, at December 31, 2009,2010, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that we will not be required to sell these securities before the anticipated recovery of their amortized costs.

At December 31, 2008, 266 securities have been in continuous unrealized loss position for 12 months or greater and have a fair value of $702 million. These securities were primarily corporate debt and non-agency commercial MBS with a weighted average S&P credit rating of A and AAA, respectively. Within our corporate debts, $248 million of the $329 million gross unrealized losses was attributable to our holdings in medium-term notes (MTNs). The MTNs are a highly diversified pool of corporate and sovereign debt securities and were significantly impacted by the unprecedented widening of credit spreads experienced during the credit crisis, rather than credit losses. We had the ability and intent to hold these securities to recovery.

Equity Securities

At December 31, 2009, 952010, 71 securities (2008: 149)(2009: 95) were in an unrealized loss position and 5612 of these securities (2008: nil)(2009: 56) have been in a continuous unrealized loss position for 12 months or greater. In 2009, the gross unrealized losses have declined by $50 million from December 31, 2008, of which $20 million was due to impairments and the remaining $30 million was due to price appreciation driven by the recovery in the equity markets and realized losses during the year.

Based on our OTTI quarterly review process and our ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, of fair value, we concluded that the above equities in an unrealized loss position were temporarily impaired at December 31, 20092010 and 2008.2009.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

5.Investments (Continued)

 

b)Other Investments

The table below shows our portfolio of other investments reported at fair value:

 

At December 31,

  2010     2009 
                 
  December 31, 2009  December 31, 2008 
 

Funds of hedge funds

  $ 235,240      45.3%      $256,877      45.0%  

Hedge funds

  $94,630  16.6%  $55,496  11.3%        123,036      23.7%       94,630      16.6%  

Funds of hedge funds

   256,877  45.0%   196,291  40.0%  
             

Total hedge funds

   351,507  61.6%   251,787  51.3%  
             

Distressed securities

   22,957  4.0%   50,187  10.2%  

Long/short credit

   84,392  14.8%   50,907  10.3%  
             

Total credit funds

   107,349  18.8%   101,094  20.5%  
             

Long/short credit funds

   82,846      16.0%       84,392      14.8%  

Distressed securities fund

   21,911      4.2%       22,957      4.0%  

CLO - equity tranched securities

   61,332  10.8%   97,661  19.8%     56,263      10.8%       61,332      10.8%  

Short duration high yield fund

   50,088  8.8%   41,540  8.4%     -           -     %       50,088      8.8%  
                                   

Total other investments

  $  570,276  100.0%  $  492,082  100.0%    $519,296      100.0%      $ 570,276      100.0%  
                                   
                                

The major categorycategories and related investment strategystrategies for our investments in hedge and credit funds are as follows:

 

Type of funds

Investment Strategy
   

Hedge Fund TypeFunds of hedge funds

  

Investment Strategy

Seek to achieve attractive risk-adjusted returns by investing in a large pool of hedge funds across a diversified range of hedge fund strategies.

Hedge funds

  Seek to achieve attractive risk-adjusted returns primarily through multi-strategy and long/short equity approaches. Multi-strategy funds invest in a variety of asset classes on a long and short basis and may employ leverage. Long/short equity funds invest primarily in equity securities (or derivatives) on a long and short basis and may employ leverage.
  

Funds of hedge fundsLong/short credit

  Seek to achieve attractive risk-adjusted returns by investingexecuting a credit trading strategy involving selective long and short positions in a large pool of hedge funds across a diversified range of hedge fund strategies.

primarily below investment-grade credit.
  

Credit Fund Type

Investment Strategy

Distressed securities

  

Seek to achieve attractive risk-adjusted returns by executing a strategy which assesses the issuer’s ability to improve its operations and often attempts to influence the process by which the issuer restructures its debt.

   

Long/short credit

 Seek to achieve attractive risk-adjusted returns by executing a credit trading strategy involving selective long and short positions in primarily below investment-grade credit.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

5.Investments (Continued)INVESTMENTS (CONTINUED)

 

In aggregate, 94%all of our hedge fund allocation is redeemable within one year, and 100% is redeemable within two years, subject to prior written redemption notice varying from 45 to 95 days. This includes recognition of certain funds we hold which restrict new investor redemptions during a lock-up period. A lock-up period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. Another common restriction is the suspension of redemptions (known as “gates”) which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund’s net assets or to prevent certain adverse regulatory, or any other reasons that may render the manager unable to promptly and accurately calculate the fund’s net asset value. During 20092010, and 2008,2009, no gates were imposed on our redemption requests. Additionally, certain hedge funds may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible debt. In such cases, a common mechanism used is a side-pocket, whereby the illiquid security is assigned to a designated account. Generally, the investor loses its redemption rights in the designated account. Only when the illiquid security is sold, or otherwise deemed liquid by the fund, may investors redeem their interest. At December 31, 2009, outstanding2010, the fair value of our hedge funds held in side-pockets was $4 million (2009: $4 million). At December 31, 2010, redemptions receivable amountedwas insignificant (2009: $34 million).

At December 31, 2010, we had $46 million (2009: $54 million) of a long/short credit fund that we do not have the ability to $34 million or 10% of hedgeliquidate at our own discretion as the fund holdings, $25 million of which we anticipate collection within the next three months.is beyond its investment period and is currently distributing capital to its investors. Of the remainder, $3 million is subject to holdback until the completion of the fund’s annual audit and $6 million will remain invested in special purpose vehicles.

Of ourremaining credit fund holdings, 58%32% of the carrying value has annual or semi-annual liquidity and 42%68% has quarterly liquidity, subject to prior written redemption notice varying from 65 to 95 days. Similar to hedge funds, credit funds may be subject to redemption restrictions such as lock-up periods or gates. No gates have been imposed on our redemption requests in 2009 and 2008. At December 31, 2010 and 2009, outstanding redemptions receivable onnone of our credit funds were insignificant.had established side-pockets.

At December 31, 2010 and 2009, we have no unfunded commitments relating to bothour investments in hedge and credit funds.

 

c)Net Investment Income

Net investment income was derived from the following sources:

 

    
Year ended December 31,  2009  2008  2007 
  

Fixed maturities

  $385,418   $428,416   $366,746     

Other investments

   82,042    (220,981  34,351  

Cash and cash equivalents

   8,302    41,576    90,700  

Equities

   3,765    7,862    -  

Short-term investments

   651    3,579    3,079  
              

Gross investment income

   480,178    260,452    494,876  

Investment expenses

   (15,700  (13,215  (12,003
              

Net investment income

  $  464,478   $  247,237   $  482,873  
              
              

 

Year ended December 31,

  2010   2009   2008 
        

Fixed maturities

  $352,357   $385,418   $428,416 

Other investments

   64,765    82,042     (220,981

Cash and cash equivalents

   5,836    8,302    41,576 

Equities

   2,900    3,765    7,862 

Short-term investments

   1,441    651    3,579 
                

Gross investment income

   427,299    480,178    260,452 

Investment expenses

   (20,407   (15,700   (13,215
                

Net investment income

  $ 406,892   $ 464,478   $247,237 
                
                

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

5.Investments (Continued)INVESTMENTS (CONTINUED)

 

d)Net Realized Investment Gains (Losses)

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

 

  
Year ended December 31,  2009 2008 2007   2010   2009   2008 
        

Gross realized gains

  $181,075   $107,170   $31,683       $326,930   $181,075   $107,170 

Gross realized losses

     (157,102    (120,474    (17,809    (116,082    (157,102    (120,474

Net OTTI recognized in earnings

   (337,435  (77,753  (8,562   (17,932   (337,435   (77,753
                      

Net realized losses on fixed maturities and equities

   (313,462  (91,057  5,312  

Net realized gains (losses) on fixed maturities and equities

   192,916    (313,462   (91,057

Change in fair value of investment derivatives(1)

   (1,032  6,650    (82   (3,641   (1,032   6,650 
  

Fair value hedges:(1)

            

Derivative instruments

   (13,655  7,248    -     35,886    (13,655   7,248 

Hedged investments

   16,565    (8,108  -     (30,063   16,565    (8,108
                      

Net realized investment gains (losses)

  $(311,584 $(85,267 $5,230    $195,098   $(311,584  $(85,267
                      
                  
(1)

Refer to Note 9 - Derivative Instruments

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

 

    
Year ended December 31,  2009  2008  2007 
  

Fixed maturities:

       

Corporate debt

  $277,979  $56,809  $3,683     

Residential MBS

   24,594   4,956   509  

Commercial MBS

   10,843   323   1,024  

ABS

   2,384   8,615   3,346  

Municipals

   1,280   394   -  
              
    317,080   71,097   8,562  
  

Equities

   20,355   6,656   -  
              

Total OTTI recognized in earnings

  $  337,435  $  77,753  $  8,562  
              
              

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

5.Investments (Continued)

Fixed maturities

 

Year ended December 31,

  2010     2009     2008 
            

Fixed maturities:

           

Corporate debt

  $3,156     $277,979     $56,809 

Agency MBS

   -           345      -      

Non-Agency CMBS

   413      10,843      323 

Non-Agency RMBS

   4,715      24,249      4,956 

ABS

   1,126      2,384      8,615 

States, municipalities, and political subdivisions

   19      1,280      394 
                    
    9,429      317,080      71,097 

Equities

   8,503      20,355      6,656 
                    

Total OTTI recognized in earnings

  $ 17,932     $ 337,435     $ 77,753 
                    
                    

As disclosed in Note 2 (a)2(a), on April 1, 2009, we adopted a new accounting standard which amended the previous OTTI recognition model for fixed maturities. Accordingly, for securities that we intended to sell at the end of each reporting period we recognized the entire unrealized loss in earnings. For the remaining impaired fixed maturities, from April 1, 2009, we have recorded only the estimated credit losses in earnings rather than the entire difference between the fair value and the amortized cost of fixed maturities. Because the new accounting standard does not allow for retrospective application, the OTTI amounts reported in the above table for the year ended December 31, 2009,2010, are not measured on the same basis as prior period amounts and accordingly these amounts are not comparable. Furthermore, theThe adoption of this new accounting standard on April 1, 2009, resulted in $38 million net OTTI recognizedafter-tax increase to retained earnings with a corresponding decrease to AOCI, resulting in earnings for the first quarter of 2009 includes $26 million of OTTI charges calculated based on the former OTTI recognition model.

In 2009, we incurred OTTI charges of $317 million (2008: $71 million) relating to fixed maturities. These charges primarily relate to an impairment charge of $263 million recorded on our portfolio of MTNs within our corporate debt holdings as well as $20 million dueno change to our intent to sell certain securities during the year ($3 million of corporate debt, $6 million of residential MBS and $11 million of commercial MBS). Inshareholders’ equity.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008 our OTTI charges included $40 million of write-downs on a number of financial institutions, including $32 million related to Lehman Brothers, following its bankruptcy and sale in September, 2008. The balance of the OTTI charges on corporate debt was spread across the portfolio on securities that are unlikely to recover. The OTTI charges on our ABS and MBS portfolio in 2008 were primarily the result of the credit crisis and the higher risk of defaults on certain identified securities.

5.INVESTMENTS (CONTINUED)

Fixed Maturities

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

 

Year ended December 31, 2009

Beginning balance at April 1, 2009

$-

Additions for:

Credit losses remaining in retained earnings related to adoption of accounting standard (see Note 2)

45,347

Credit loss impairment recognized on securities not previously impaired

267,770

Change in credit loss estimates on previously impaired securities

1,102

Passage of time on previously recorded credit losses

820

Reductions for:

Intent to sell securities previously impaired

(70,540

Securities sold/redeemed during the period (realized)

(82,109

Ending balance at December 31, 2009

$  162,390

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

5.Investments (Continued)

The credit losses remaining in retained earnings upon adoption of the new accounting standard were $45 million, comprising $33 million of corporate debt securities, $7 million of ABS, $4 million of residential MBS and $1 million of commercial MBS. Corporate debts included $20 million of credit losses related to the bankruptcy of Lehman Brothers.

 

Year ended December 31,

  2010  2009 
     

Balance at beginning of period

  $162,390  $-      

Credit losses remaining in retained earnings related to adoption of accounting standard

   -        45,347 

Credit impairments recognized on securities not previously impaired

   1,355   267,770 

Additional credit impairments recognized on securities previously impaired

   1,826   1,922 

Intent to sell of securities previously impaired

   (829  (70,540

Securities sold/redeemed/matured

    (107,244  (82,109
          

Balance at end of period

  $57,498  $ 162,390 
          
          

Credit losses are calculated based on the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to the impairment.

The following provides a summary of the credit loss activities by asset class during 2010 and 2009, as well as the significant inputs and the methodology used to estimate thethese credit losses for which a portion of the OTTI was recognized in AOCI were as follows:losses.

Corporate Debt:

Our projected cash flows forDuring 2010, we sold some previously impaired corporate debt securities, are primarily driven by our assumptions regardingresulting in a decrease in credit loss impairments of $9 million (2009: $21 million) in the probabilityabove credit loss table. Additionally, certain previously impaired MTNs matured with realized gains of default and$29 million in 2010, resulting in a reduction of $85 million in the timing and amount of recoveries associated with defaults. Our default and recovery rate assumptions are based onremaining estimated credit rating, credit analysis, industry analyst reports and forecasts, Moody’s historical default data and any other data relevant tolosses in the recoverability ofabove table. At December 31, 2010 all the security. Additionally, our projected cash flows forremaining MTNs include significant inputs such as future credit spreads and use of leverage over the expected duration of each MTN.were in an unrealized gain position.

During the third quarter of 2009, we recognized $263 million of estimated credit losses on MTNs, which are included in the MTNs as there was considerable uncertainty regarding full recoverability.above credit loss table. In response to the credit crisis, the MTNsMTN managers reduced their leverage levels which in turn lowered the credit duration of the MTNs. As credit markets recovered and credit spreads tightened in 2009, price appreciation was not as pronounced as the depreciation during 2008 due to the lower credit duration of the MTNs. The tightening of credit spreads was more significant and much quicker than anticipated which has hindered the ability of the MTN managers to reinvest the underlying cash flows at wider credit spreads. Consequently, we revised the significant inputs in our projected cash flows for the MTNs (see below), resulting in a significant credit impairment charge in the third quarter of 2009.

To estimate credit losses for corporate debt securities excluding MTNs, our projected cash flows are primarily driven by our assumptions regarding the probability of default and the severity associated with those defaults. Our default and loss severity rates are based on updated cash flow projections, we concluded that we will not fully recover par on these MTNscredit rating, credit analysis, industry analyst reports and therefore we have recordedforecasts, Moody’s historical default data and any other data relevant to the recoverability of the security. At December 31, 2010, the weighted average default rate and loss severity rate were 35% and 100% (2009: 34% and 100%), respectively, for determining the credit losses on these securities.

During 2009, we soldour impaired corporate debt securities, that were previously impaired, resulting in a decrease in credit loss impairments of $21 million, in the above table. Further, in the fourth quarter of 2009, we made the decision to redeem certain MTNs, of which some redemptions occurred prior to and after December 31, 2009. Accordingly the related credit loss amounts are reported in the above table as ‘Securities sold/redeemed during the period (realized)’ and ‘Intent to sell securities previously impaired’, respectively.

excluding MTNs.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

5.Investments (Continued)INVESTMENTS (CONTINUED)

 

For MTNs, our projected cash flows also include significant inputs such as future credit spreads and the use of leverage over the expected duration of each of the medium-term notes. At December 31, 2009, we used the following significant inputs:

Default rates

3% - 5%

Loss severity rates

45% - 70%

Collateral spreads

5.2% - 6.7%

Leveraged duration

6.5 - 8.5 years

Residential MBS and CommercialAgency MBS:

We utilized modelsdo not record credit impairments on agency MBS in an unrealized loss position as they represent AAA rated holdings backed by either the explicit or implicit guarantee of the U.S. government. We believe the risk of loss in this asset class is remote and linked to determinethe overall credit-worthiness of the U.S. government. At December 31, 2010, the fair value of our agency MBS was $2.6 billion (2009: $1.6 billion), which included $21 million (2009: $4 million) of gross unrealized losses.

Non-agency CMBS:

Our investments in CMBS are diversified and rated highly with approximately 84% (2009: 89%) rated AA or better by S&P, with a weighted average estimated subordination percentage of 27% at December 31, 2010 (2009: 27%). Based on discounted cash flows, the current level of subordination is sufficient to cover the estimated creditloan losses for structured debt securities. To projecton the underlying collateral of the CMBS.

Non-agency RMBS:

For non-agency RMBS, our expected cash flows to be collected, we utilizedincorporated underlying data from widely accepted third-party data sources as well asalong with certain internal assumptions and judgments regarding the future performance of the security. These assumptions included the following: default, delinquency, loss severity and prepayment rates. During 2010, we have recorded additional credit losses of $1 million on non-agency RMBS. The assumptions used to calculate the credit losses in 2010 have not changed significantly since December 31, 2009. At December 31, 2010, the fair value of our non-agency RMBS was $244 million (2009: $223 million), consisting primarily of $174 million (2009: $136 million) of Prime and $52 million (2009: $70 million) of Alt-A MBS. At December 31, 2010, we had gross unrealized losses of $12 million on these securities.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

5.INVESTMENTS (CONTINUED)

During 2009, we recorded credit losses of $14 million on non-agency RMBS. At December 31, 2009, our non-agency RMBS had gross unrealized losses of $35 million, consisting of $13 million of Prime, $16 million of Alt-A and $6 million of Subprime MBS. We used the following significant assumptions: expected defaults, delinquencies, recoveries, foreclosure costs,weighted average inputs to estimate the credit losses for potentially impaired Prime and prepayments. Alt-A MBS in an unrealized loss position at December 31, 2009:

 

Vintage

    Fair Value     Default Rate     Delinquency Rate     Loss Severity Rate     Prepayment Rate 
                      

Prime:

                     

Pre-2004

    $29,429      1.1% - 1.2%       2.3% - 5.1%       10.5% - 15.3%       19.1% - 26.5%  

2004

     10,515      2.4%       5.4%       26.5%       16.7%  

2005

     30,282      1.7%       4.0%       25.4%       14.5%  

2006

     16,892      13.6%       30.6%       44.9%       8.1%  

2007

     21,411      4.2%       10.5%       40.5%       11.7%  
                         
     $ 108,529      4.0%       9.4%       28.6%       14.7%  
                         

Alt-A:

                     

Pre-2004

    $5,386      1.4% - 2.4%       2.8% - 8.4%       38.9% - 40.5%       11.3% - 12.1%  

2004

     20,502      5.0%       13.7%       31.3%       12.4%  

2005

     36,954      4.6%       13.5%       33.3%       5.8%  

2006

     2,075      20.9%       51.6%       49.7%       11.3%  

2007

     3,458      23.3%       55.7%       54.9%       10.7%  
                         
     $68,375      5.9%       16.2%       34.8%       8.7%  
                         
                                    

These assumptionsinputs require significant management judgment and vary for each structured security based on the underlying property type, vintage, loan to collateral value ratio, geographic concentration, and current level of subordination. ForWe also corroborate our credit loss estimate with the independent investment manager’s credit loss estimate for each structured debt security with a significant unrealized loss position we have also corroborated our principal loss estimate with the independent investment manager’s principal loss estimate.

During 2009, based on expected cash flows to be collected, we have recorded credit losses of $14 million on residential MBS.position.

ABS:

The majority of the unrealized losses on ABS at December 31, 2010, and 2009, were related to CLO debt tranched securities. We utilizedused the same internal model as for CLO equity tranched securities (see Note 6 – Fair Value Measurements) to project estimated cash flows to be collected on the various CLO debt tranched securities. Thefollowing significant inputs used into estimate the model include default and recovery rates and collateral spreads. credit loss for these securities:

 

At December 31,

  2010  2009
      

Default rate

  3.8%  4.4%

 

Loss severity rate

  65.0%  50.0%

 

Collateral spreads

  2.9% - 3.7%  2.6% - 3.4%
       

Our assumptions on default and recoveryloss severity rates are established based on an assessment of actual experience to date for each CLO debt tranche and review of recent credit rating agencies’ default and recoveryloss severity forecasts. Based on projected cash flows at December 31, 2009,2010, we do not anticipate credit losses on the CLO debt tranched securities.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

5.INVESTMENTS (CONTINUED)

Equities

InThe OTTI losses on equities in 2010 and 2009 we recorded an OTTI charge of $20 million (2008: $7 million) on equitiesare primarily due to the severity and duration of their unrealized loss positions, for which we concluded the forecasted recovery period was uncertain. The recognition of such losses does not necessarily indicate that sales will occur or that sales are imminent or planned. At December 31, 2010, the fair value of our equities was $349 million (2009: $204 million), which included $5 million (2009: $8 million) of gross unrealized losses.

 

e)Securities Lending

We participate in a securities lending program whereby 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. We maintain control over the securities loaned, retain the earnings and cash flows associated with the loaned securities and 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 fair value of the loaned securities and is monitored and maintained by the lending agent. At December 31, 2009, we had $130 million (2008: $406 million) in securities on loan. As a response to credit crisis in late 2008, we decided to wind down the lending program in an orderly manner to further reduce our counterparty credit risk. For certain securities, we may hold these until they mature in 2010. We consider our securities lending activities to be non-cash investing and financing activities.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

5.Investments (Continued)

f)Restricted Investments

To support our insurance and reinsurance operations we provide collateral (fixed maturities and short-term investments) in various forms. We primarily utilize trust arrangements for U.S. insurance obligations, and to a lesser extent issue letters of credit, for reinsurance business. The new letter of credit facility is secured with fixed maturity investments (see Note 10(b)). We are also required to maintain assetssecurities 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. We also utilize trust accounts in certain large transactions to provide collateral to ceding companies, rather than providing letters of credit. The assets in trust consist primarily of highly rated fixed maturity securities and a foreign bond mutual fund.authorities. The fair value of our restricted assets components areinvestments was as follows:

 

   
At December 31,  2009  2008 
  

Assets used for collateral in Trust for inter-company agreements

  $  1,592,014  $  1,455,634     

Deposits with U.S. regulatory authorities

   72,081   49,789  

Assets used for collateral in Trust for third party agreements

   173,547   149,623  
          

Total restricted investments

  $1,837,642  $1,655,046  
          
          

 

At December 31,

  2010     2009 
        

Collateral in Trust for inter-company agreements

  $1,785,961     $1,592,014 

Collateral for secured letter of credit facility

   405,037      -      

Collateral in Trust for third party agreements

   217,905      173,547 

Securities on deposit with regulatory authorities

   87,657      72,081 
             

Total restricted investments

  $ 2,496,560     $ 1,837,642 
             
             

 

6.Fair Value MeasurementsFAIR VALUE MEASUREMENTS

Fair Value Hierarchy

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

 

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.

 

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

 

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

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

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

6.Fair Value Measurements (Continued)FAIR VALUE MEASUREMENTS (CONTINUED)

 

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

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

Fixed Maturities

Our U.S. Treasury securities are classified within Level 1 asAt each valuation date, we use the market approach valuation technique to estimate the fair values are based on unadjusted market prices. For the remainingvalue of our fixed maturities substantially all are classified within Level 2.

The valuations for fixed maturity securities are generallyportfolio, when possible. This market approach includes, but is not limited to, prices obtained from third party pricing services for identical or comparable securities or throughand the use of “pricing matrix models” using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services areis sourced from multiple vendors, and we maintain a vendor hierarchy by asset type based on historical pricing experience and vendor expertise.

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

U.S. government and agency

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

Non-U.S. government

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

Corporate debt

Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our corporate debt securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain unbindingnon-binding quotes from broker-dealers orbroker-

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

6.FAIR VALUE MEASUREMENTS (CONTINUED)

dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3 and consisted of private corporate debt securities at December 31, 2010.

MBS

Our portfolio of RMBS and CMBS are originated by both agencies and non-agencies. The fair values of these securities are determined through the use an internalof a pricing model (including Option Adjusted Spread) which uses prepayment speeds and spreads to determine the appropriate average life of the MBS. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the significant inputs used to price MBS are observable market inputs, the fair values of the MBS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 33.

ABS

ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, credit card receivables, and consisted primarily of CLO debt tranched securities private corporateoriginated by a variety of financial institutions. Similarly to MBS, the fair values of ABS are priced through the use of a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers or use a discounted cash flow model to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. At December 31, 2010, the use of a discounted cash flow model was limited to our investment in CLO debt tranched securities and certain residential MBS at December 31, 2009.included the following significant inputs: default and loss severity rates, collateral spreads, and risk free yield curves (see Note 5(d) for quantitative inputs). As most of these inputs are unobservable, these securities are classified within Level 3.

Municipals

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

Equity Securities

Equity securities include U.S. and foreign common stocks as well as a foreign bond mutual fund. For common stocks we classified these within Level 1 as their fair values are based on quoted market prices in active markets. Our investment in the foreign bond mutual fund has daily liquidity, with redemption based on the net asset value of the fund. Accordingly, we have classified this investment as levelLevel 2.

Other Investments

The short-duration high yield fund is classified within Level 2 as itsAs a practical expedient, we estimate fair value is estimated using the net asset value reported by Bloomberg and it has daily liquidity.

Thevalues for hedge and credit funds are classified within Level 3 as we estimate their respective fair values using net asset values as advised by external fund managers or third party administrators. Refer toAs our investment in hedge and credit funds have redemption restrictions (see Note 5 (b) for further details on this asset class.

details), we have classified these investments as Level 3.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

6.Fair Value Measurements (Continued)FAIR VALUE MEASUREMENTS (CONTINUED)

 

TheAt December 31, 2010, and 2009, the CLO – equity tranched securities (“CLO – Equities”) arewere classified within Level 3 as we estimateestimated the fair value for these securities based onusing an internalincome approach valuation modeltechnique (internal cash flow model) due to the lack of observable, relevant tradetrades in the secondary markets. The model includes the following significant unobservable inputs: default and recovery rates and collateral spreads. During the year ended December 31, 2009, the change in fair value for the CLO equities was primarily due to lower recoveries on actual defaults and change to our recovery rate assumption. We have revised our projected default and recovery rates in 2009 based on our assessment of actual experience on the underlying collateral for our CLO – Equities as well as a review of recent credit rating agencies’ forecasted default and recovery rates for U.S. corporate speculative-grade securities. The following table presents the weighted averagea range of each significant inputinputs used in our valuation model.

 

   
At December 31,  2009  2008 
  

Default rates:

     

- for next twelve months

  4.6%  7.6%     

- thereafter until maturity of securities

  4.4%  4.4%  

Recovery rate until maturity of securities

  50.0%  60.0%  

Collateral spreads until maturity of securities

  3.3%  2.8%  
        

 

At December 31,

  2010   2009 
      

Default rates

   3.8% - 5.0%     4.4% - 6.0%  

 

Loss severity rate

   65.0%    50.0% 

 

Collateral spreads

   2.4% - 4.2%     2.6% to 4.4%  

 

Estimated maturity dates

   1.5 - 10.5 years     2.5 - 11.5 years  
           

The changes made to the above significant inputs in 2010 did not impact significantly the fair value of the CLO—Equities at December 31, 2010.

Derivative Instruments

a) Forward Contracts and Options

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

b) Insurance Derivative Contract

AXIS CAPITAL HOLDINGS LIMITED

InNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

6.FAIR VALUE MEASUREMENTS (CONTINUED)

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

    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   

Significant
Other Observable
Inputs

(Level 2)

   

Significant
Unobservable
Inputs

(Level 3)

   Total Fair
Value
 
          

At December 31, 2010

         

Assets

         

Fixed maturities

         

U.S. government and agency

  $588,281   $271,839   $-        $860,120 

Non-U.S. government

   -         772,798    -         772,798 

Corporate debt

   -         4,161,358    1,550    4,162,908 

Agency MBS

   -         2,593,582    -         2,593,582 

Non-Agency CMBS

   -         474,785    -         474,785 

Non-Agency RMBS

   -         224,524    19,678    244,202 

ABS

   -         618,665    43,178    661,843 

Municipals

   -         712,659    -         712,659 
                     
    588,281    9,830,210    64,406    10,482,897 

Equity securities

   271,451    77,803    -         349,254 

Other investments

   -         -         519,296    519,296 

Other assets (see Note 9)

   -         6,641    -         6,641 
                     

Total

  $859,732   $9,914,654   $583,702   $11,358,088 
                     

Liabilities

         

Other liabilities (see Note 9)

  $-        $14,986   $-        $14,986 
                     

At December 31, 2009

         

Assets

         

Fixed maturities

         

U.S. government and agency

  $1,207,033   $649,626   $-        $1,856,659 

Non-U.S. government

   -         696,814    -         696,814 

Corporate debt

   -         3,562,636    18,130    3,580,766 

Agency MBS

   -         1,566,259    -         1,566,259 

Non-Agency CMBS

   -         650,802    2,409    653,211 

Non-Agency RMBS

   -         216,343    6,639    222,982 

ABS

   -         399,554    43,585    443,139 

Municipals

   -         698,525    -         698,525 
                     
    1,207,033    8,440,559    70,763    9,718,355 

Equity securities

   142,716    61,659    -         204,375 

Other investments

   -         50,088    520,188    570,276 

Other assets (see Note 9)

   -         9,968    -         9,968 
                     

Total

  $ 1,349,749   $ 8,562,274   $ 590,951   $ 10,502,974 
                     

Liabilities

         

Other liabilities (see Note 9)

  $-        $-        $-        $-      
                     
                     

During 2010 and 2009, we entered into a cancellation agreement for our insurance derivative contract with longevity risk exposure for a total cash consideration of $200 million; accordingly, there ishad no outstanding balance at December 31, 2009.

transfers between Levels 1 and 2.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

6.Fair Value Measurements (Continued)

In 2008, the fair value for this indemnity contract was based on an internal valuation model, which included the following significant unobservable inputs:

The timing of the receipt of death benefits as well as the amount of premiums to be paid to maintain the policies in force, both of which are directly correlated to life expectancy assumptions for a portfolio of 188 lives;

The proceeds of selling the unmatured life settlement contracts in 2017; and

The risk margin that a market participant would require for providing this indemnity.

The estimated indemnity payment, net of our contractual premium for providing the indemnity, was discounted using the risk free yield curve, adjusted for counterparties’ credit risk.

The tables below present the financial instruments measured at fair value on a recurring basis.

At December 31, 2009  

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

  

Significant
Other Observable
Inputs

(Level 2)

  

Significant
Unobservable
Inputs

(Level 3)

  Total Fair
Value
 

Assets

         

Fixed maturities

         

U.S. government and agency

  $1,207,033  $649,626  $-  $1,856,659     

Non-U.S. government

   -   696,814   -   696,814  

Corporate debt

   -   3,562,636   18,130   3,580,766  

Residential MBS

   -   1,773,002   6,639   1,779,641  

Commercial MBS

   -   660,402   2,409   662,811  

ABS

   -   399,554   43,585   443,139  

Municipals

   -   698,525   -   698,525  
                  
    1,207,033   8,440,559   70,763   9,718,355  

Equity securities

   142,716   61,659   -   204,375  

Other investments

   -   50,088   520,188   570,276  

Other assets (see Note 9)

   -   9,968   -   9,968  
                  

Total

  $  1,349,749  $  8,562,274  $  590,951  $  10,502,974  
                  

Liabilities

         

Other liabilities (see Note 9)

  $-  $-  $-  $-  
                  
                  

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

6.Fair Value Measurements (Continued)

At December 31, 2008  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  

Significant
Other Observable
Inputs

(Level 2)

  

Significant
Unobservable
Inputs

(Level 3)

  Total Fair
Value
 

Assets

         

Fixed maturities

         

U.S. government and agency

  $647,139  $540,194  $-  $1,187,333     

Non-U.S. government

   -   279,225   -   279,225  

Corporate debt

   -   2,061,317   -   2,061,317  

Residential MBS

   -   2,711,998   -   2,711,998  

Commercial MBS

   -   763,098   -   763,098  

ABS

   -   381,006   -   381,006  

Municipals

   -   366,677   -   366,677  
                  
    647,139   7,103,515   -   7,750,654  

Equity securities

   107,283   -   -   107,283  

Other investments

   -   41,540   450,542   492,082  

Other assets (see Note 9)

   -   5,005   -   5,005  
                  

Total

  $  754,422  $  7,150,060  $  450,542  $  8,355,024  
                  

Liabilities

         

Other liabilities (see Note 9)

  $-  $29,044  $62,597  $91,641  
                  
                  

During 2009 and 2008, we had no transfers between Levels 1 and 2.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

6.Fair Value Measurements (Continued)FAIR VALUE MEASUREMENTS (CONTINUED)

 

Level 3 financial instruments

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

 

 Fixed Maturities           Fixed Maturities          
Year ended
December 31, 2009
 Corporate
debt
 Residential
MBS
 Commercial
MBS
 ABS Municipals Total Other
Investments
 Total
Assets
 Other
Liabilities(1)
 
  Corporate
Debt
 Non-Agency
CMBS
 Non-Agency
RMBS
 ABS Municipals Total Other
Investments
 Total
Assets
 Other
Liabilities
 
          

Year ended December 31, 2010

          

Balance at beginning of period

 $-   $-   $-   $-   $-   $-   $450,542   $450,542   $62,597      $ 18,130  $ 2,409  $ 6,639  $ 43,585  $-       $ 70,763  $ 520,188  $ 590,951  $-      

Total net realized and unrealized gains included in net income(1)

  -    -    -    -    -    -    96,860    96,860    -    -        -        -        -        -        -        60,969   60,969   -      

Total net realized and unrealized losses included in net income(1)

  (1,457  -    -    (373  -    (1,830  (23,365  (25,195  132,595    (1,550  (119  (581  (1,134  -        (3,384  -        (3,384  -      

Change in net unrealized gains included in other comprehensive income

  2,112    7,319    115    8,049    -    17,595    -    17,595    -    2,201   1,273   1,825   3,361   -        8,660   -        8,660   -      

Change in net unrealized losses included in other comprehensive income

  (1,202  (1,032  (91  (1,689  (9  (4,023  -    (4,023  -    (34  (238  (27  (71  -        (370  -        (370  -      

Purchases / premiums

  -    1,760    -    5,900    -    7,660    111,800    119,460    4,808  

Purchases

  -        3,474   20,230   4,000   -        27,704   65,000   92,704   -      

Sales

  -    -    -    -    -    -    (102,686  (102,686  -    (12  (206  (211  (2,004  -        (2,433  (99,822  (102,255  -      

Settlements / distributions

  (287  (10,733  (73  (3,467  -    (14,560  (12,963  (27,523    (200,000  -        (694  (1,832  (369  -        (2,895  (27,039  (29,934  -      

Transfers into Level 3

  19,479    69,895    11,669    73,733    4,447    179,223    -    179,223    -    -        -        781   -        -        781   -        781   -      

Transfers out of Level 3

  (515    (60,570    (9,211    (38,568    (4,438    (113,302  -      (113,302  -    (17,185  (5,899  (7,146  (4,190  -        (34,420  -        (34,420  -      
                                                      

Balance at end of period

 $  18,130   $6,639   $2,409   $43,585   $-   $70,763   $520,188   $590,951   $-   $1,550  $-       $19,678  $43,178  $-       $64,406  $519,296  $583,702  $-      
                                                      

Level 3 gains / losses included in earnings attributable to the change in unrealized gains / losses relating to those assets and liabilities held at the reporting date

 $(1,457 $-   $-   $-   $-   $(1,457 $72,947   $71,490   $-  

Level 3 gains / losses included in earnings attributable to the change in unrealized gains /losses relating to those assets held at the reporting date

 $(1,550 $-       $-       $-       $-       $(1,550 $60,969  $59,419  $-      
                           

Year ended December 31, 2009

          

Balance at beginning of period

 $-       $-       $-       $-       $-       $-       $450,542  $450,542  $62,597 

Total net realized and unrealized gains included in net income(1)

  -        -        -        -        -        -        96,860   96,860   -      

Total net realized and unrealized losses included in net income(1)

  (1,457  -        -        (373  -        (1,830  (23,365  (25,195  132,595 

Change in net unrealized gains
included in other comprehensive income

  2,112   115   7,319   8,049   -        17,595   -        17,595   -      

Change in net unrealized losses
included in other comprehensive income

  (1,202  (91  (1,032  (1,689  (9  (4,023  -        (4,023  -      

Purchases

  -        -        1,760   5,900   -        7,660   111,800   119,460   4,808 

Sales

  -        -        -        -        -        -        (102,686  (102,686  -      

Settlements / distributions

  (287  (73  (10,733  (3,467  -        (14,560  (12,963  (27,523  (200,000

Transfers into Level 3

  19,479   11,669   69,895   73,733   4,447   179,223   -        179,223   -      

Transfers out of Level 3

  (515  (9,211  (60,570  (38,568   (4,438  (113,302  -        (113,302  -      
                           

Balance at end of period

 $18,130  $2,409  $6,639  $43,585  $-       $70,763  $520,188  $590,951  $-      
                           

Level 3 gains / losses included inearnings attributable to the changein unrealized gains /losses relatingto those assets held at thereporting date

 $(1,457 $-       $-       $-       $-       $(1,457 $72,947  $71,490  $-      
                                                      
                                      
(1)Realized gains and losses on fixed maturities are included in net realized investment gains (losses). Realized gains and (losses) on other investments are included in net investment income. Losses on other liabilities are included in other insurance related (loss) income.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

6.Fair Value Measurements (Continued)FAIR VALUE MEASUREMENTS (CONTINUED)

 

   
Year ended December 31, 2008  Other
Investments
  Other
Liabilities
 
  

Balance at beginning of period

  $592,593   $16,346     

Total net realized and unrealized gains included in net income(1)

   -    -  

Total net realized and unrealized losses included in net income(1)

   (216,872  41,444  

Change in net unrealized gains included in other comprehensive income

   -    -  

Change in net unrealized losses included in other comprehensive income

   -    -  

Purchases / premiums

   141,000    4,807  

Sales

   (37,716  

Settlements / distributions

   (28,463  -  

Transfers into Level 3

   -    -  

Transfers out of Level 3

   -    -  
          

Balance at end of period

  $450,542   $62,597  
          

Level 3 gains / losses included in earnings attributable to the change in unrealized gains / losses relating to those assets and liabilities held at the reporting date

  $  (199,456 $  41,444  
          
          
(1)Realized gains and (losses) on other investments are included in net investment income. Losses on other liabilities are included in other insurance related income (loss).

DuringFollowing the adoption of the new Fair Value Measurements and Disclosures guidance on January 1, 2010, transfers into and out of Level 3 reflect the fair value of the securities at the end of the reporting period. This transition was applied prospectively and accordingly the transfers into and out of Level 3 from Level 2 for the year ended December 31, 2009, certain fixed maturities2010, are not comparable with aprior periods as transfers into Level 3 were previously recorded at the fair value of $179 million were transferredthe security at the beginning of the reporting period.

Transfers into Level 3 from Level 2. 2

The reclassifications were primarily relatedtransfers to residential MBS, private corporate debt securities and debt tranches of CLOs (included in ABS). The majority of the transfers into Level 3 occurred during the first half of the yearfrom Level 2 made in 2009 and 2010 were due to a reduction in the volume of recently executed transactions and market quotations for these securities, or a lack of available broker quotes such that unobservable inputs had to be utilized forfrom pricing vendors and broker-dealers. None of the valuation of these securities. The transfers into Level 3 were not as a result of changes in valuation methodology that we made.

As the financial markets recovered mostly during the second half of 2009, the volume of market transactions also increased for our Level 3 securities such that significant observable market inputs were used for the valuation of these securities at December 31, 2009. As a result, certain fixed maturities with a fair value of $113 million were transferredTransfers out of Level 3 into Level 2

During the year ended December 31, 2010, the transfer relating to Level 2.

Transferscorporate debt was in relation to one issuer as a result of entering into the Level 3 balance reflect thean agreement to take delivery of a new corporate debt security, which its fair value of the securities at the beginning of the period and themeasurement was based on observable market inputs. The remaining transfers out of Level 3 reflectinto Level 2 made in 2009 and 2010 were primarily due to the fair value at the endavailability of observable market inputs and multiple quotes from pricing vendors and broker-dealers as a result of the period.return of liquidity in the credit markets.

Fair Values of Financial Instruments

The carrying amount of financial assets and liabilities presented on the Consolidated Balance Sheets as at December 31, 2009,2010, and December 31, 2008, are equal to2009 approximated their fair valuevalues with the exception of senior notes. SeniorAt December 31, 2010, the senior notes are recorded at amortized cost with a carrying value of $499$994 million (2008:(2009: $499 million) and a fair value of $1,018 million (2009: $510 million (2008: $415 million) at December 31, 2009.

.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

7.Reserve for Losses and Loss ExpensesRESERVE FOR LOSSES AND LOSS EXPENSES

Our reserve for losses and loss expenses comprise the following:

 

  
As of December 31,  2009  2008   2010     2009 
        

Reserve for reported losses and loss expenses

  $1,895,297  $2,055,027       $2,097,484     $1,895,297 

Reserve for losses incurred but not reported

   4,668,836   4,189,756     4,934,891      4,668,836 
                 

Reserve for losses and loss expenses

  $  6,564,133  $  6,244,783    $ 7,032,375     $ 6,564,133 
                 
                

The following table representsshows a reconciliation of our beginning and ending netgross unpaid losses and loss expense reserves:expenses for the periods indicated:

 

    
At and year ended December 31,  2009  2008  2007 
  

Gross reserve for losses and loss expenses, beginning of period

  $6,244,783   $5,587,311   $5,015,113     

Less reinsurance recoverable on unpaid losses, beginning of period

     (1,314,551    (1,297,539    (1,310,904
              

Net reserve for losses and loss expenses, beginning of period

   4,930,232    4,289,772    3,704,209  
              
  

Net incurred losses related to:

     

Current year

   1,847,044    2,089,053    1,707,237  

Prior years

   (423,172  (376,287  (336,977
              
    1,423,872    1,712,766    1,370,260  
              

Net paid losses related to:

     

Current year

   (271,011  (323,244  (177,019

Prior years

   (982,036  (615,717  (636,266
              
    (1,253,047  (938,961  (813,285
              

Foreign exchange losses (gains)

   82,018    (133,345  28,588  
              

Net reserve for losses and loss expenses, end of period

   5,183,075    4,930,232    4,289,772  

Reinsurance recoverable on unpaid losses, end of period

   1,381,058    1,314,551    1,297,539  
              

Gross reserve for losses and loss expenses, end of period

  $6,564,133   $6,244,783   $5,587,311  
              
              

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

7.Reserve for Losses and Loss Expenses (Continued)

 

Year ended December 31,

  2010  2009  2008 
      

Gross reserve for losses and loss expenses, beginning of period

  $6,564,133  $6,244,783  $5,587,311 

Less reinsurance recoverable on unpaid losses, beginning of period

   (1,381,058  (1,314,551   (1,297,539
              

Net reserve for losses and loss expenses, beginning of period

   5,183,075   4,930,232   4,289,772 
              

Net incurred losses related to:

     

Current year

   1,990,187   1,847,044   2,089,053 

Prior years

   (313,055  (423,172  (376,287
              
    1,677,132   1,423,872   1,712,766 
              

Net paid losses related to:

     

Current year

   (300,293  (271,011  (323,244

Prior years

    (1,042,890  (982,036  (615,717
              
    (1,343,183   (1,253,047  (938,961
              

Foreign exchange and other

   (25,282  82,018   (133,345
              

Net reserve for losses and loss expenses, end of period

   5,491,742   5,183,075   4,930,232 

Reinsurance recoverable on unpaid losses, end of period

   1,540,633   1,381,058   1,314,551 
              

Gross reserve for losses and loss expenses, end of period

  $7,032,375  $6,564,133  $6,244,783 
              
              

We write business with loss experience generally characterized as low frequency and high severity in nature, which results in volatility in our financial results. Net loss and loss expenses incurred include net favorable prior period reserve development of $313 million, $423 million $376 million and $337$376 million for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively. Prior period reserve development wasarises from changes to loss estimates recognized in the current year that relate to losses incurred in previous calendar years.

In 2010, we recognized net favorable resultloss and loss expenses of several underlying reserve developments on prior accident years, identified during$256 million in relation to the February 2010 Chilean and September 2010 New Zealand earthquakes. Our estimates for these events were derived from ground-up assessments of our quarterly reserving process. individual contracts and treaties in the affected regions and are consistent with our market share in the regions. As part of our estimation process, we also considered current industry insured loss estimates, market share analyses, catastrophe modeling analyses and the information available to date from clients, brokers and loss adjusters. Industry-wide insured loss estimates and our own loss estimates for these events are subject to change, as additional actual loss data becomes available. Actual losses in relation to these events may ultimately differ materially from current loss estimates.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

7.RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)

The following table provides a break down of prior periodsummarizes net favorable reserve development by segment:

 

    

 

Insurance

     Reinsurance     Total 
  Insurance  Reinsurance  Total            
 

2010

  $ 118,336     $ 194,719     $ 313,055 

2009

  $  210,861  $  212,311  $  423,172        210,861      212,311      423,172 

2008

  $202,339  $173,948  $376,287     202,339      173,948      376,287 

2007

  $214,018  $122,959  $336,977  
                        

Overall, a significant portion of the net favorable prior period reserve development in each of the last three years has primarily beenwas generated from the property, marine, terrorism and aviation lines of our insurance segment and the property catastrophe and cropcatastrophe lines of our reinsurance segment. These lines of business, the majority of which have short tail exposures, contributed 63%58%, 65% and 86% and 95% toof the total net favorable reserve development in 2010, 2009 2008 and 2007,2008, respectively. The favorable development on these lines of business primarily reflects the recognition of better than expected loss emergence, rather than explicit changes toin our actuarial assumptions.

Approximately 37% and 34% of the net favorable reserve development in 2010 and 2009, respectively, was generated from professional lines insurance and reinsurance business. This favorable development was driven by theincreased incorporation of more of our own historical claims experience into theour ultimate expected loss ratios for accident years 20062007 and prior, with less weighting being given to the initial expected loss ratios, which wereinformation derived from industry benchmarks. WeDuring 2008, we concluded that a reasonable level of credible loss data had developed for the 2005 and prior accident year professional lines business and we began to give weight to our own loss experience for professional lines business in 2008, on those earlier accident years which had developed a reasonable level of credible data.years. However, last year, the impact of this change during 2008 was largely offsetnotably muted by adverse development on the 2007 accident year 2007insurance business, emanatingdriven by losses arising from exposure to the sub-prime creditglobal financial crisis.

The continued economic downturn and credit crisis also had some impactDuring 2010, we recognized net favorable prior period reserve development of $38 million on our prior year loss reserves during 2009. Specifically, we strengthened our loss reserves for accident year 2008 trade credit and bond reinsurance business, by $40 million andprimarily on the 2009 accident year 2008 professional lines insurance business by $44 million to reflect claims emergence that was worse than we had anticipated.

Credit and political risk business contributed 8% and 17% of the total net favorable reserve development in 2009 and 2008, respectively. In 2009, the favorable development was generated from credit related classes, largely from accident year 2007, and, to a lesser extent, the 2007 and 2008 accident years, 2006 and 2005, and was driven by thein recognition of lowerbetter than expected loss activity.experience. In contrast, we recognized $18 million net adverse prior period reserve development on this business during 2009 to reflect updated information from our cedants.

We recognized $18 million of net adverse prior period reserve development on our credit and political risk insurance business during 2010, as we worked towards finalizing settlements for certain loss events and reductions in recovery estimates for the latest available information. During 2009 and 2008, respectively, we recognized $35 million and $65 million of net favorable development on this business, primarily in relation to credit-related classes. Better than expected loss emergence contributed to the favorable development was primarily generated from credit related classes, partially in recognitionboth years. In addition, the adoption of lower than expected loss activity and also due to adopting a more accelerated loss development profile and development on these lines. We also recognized favorable2004 and prior period reserve development from ouraccident year traditional political risk book from accident years 2004 and prior.

business contributed to the favorable development in 2008.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

8.ReinsuranceREINSURANCE

We purchase treaty and facultative reinsurance to reduce exposure to a large loss or a series of largesignificant losses. Facultative reinsurance provides coverage for all or a portion of the insurance provided bylosses incurred for a single policy and we separately negotiated each policy reinsured is individually negotiated.facultative contract. Treaty reinsurance provides coverage for a specified type or category of risks. TheOur treaty reinsurance agreements are writtenprovide this coverage on either an excess of loss or a proportional basis. Excess of loss covers provide a contractually set amount of covercoverage after an excess pointa specified loss amount has been reached. This excess pointspecified loss amount can be based on the size of an industry loss or on a fixed monetaryCompany-specific incurred loss amount. These covers can be purchased on a package policy basis, which provide coverus with coverage for a number of lines of business within one contract. ProportionalIn contrast, proportional covers provide a proportional amountus with a specified percentage of coverage from the first dollar of loss. All of these reinsurance covers provide for recoveryus the right to recover of a portion of specified losses and loss expenses from reinsurers. However, to the extent that our reinsurers do not meet their obligations under these agreements due to solvency issues, contractual disputes or other reasons, we remain liable. Under our reinsurance security policy, we predominantly cede our business to reinsurers rated A- or better by S&P and/or A.M. 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:

 

  
Year ended December 31,  2009  2008  2007     2010     2009     2008 
              

Treaty:

                    

Quota Share

  $394,729  $345,144  $280,375         $ 299,310     $ 394,729     $ 345,144 

Excess of Loss

   321,580   328,212   380,287       247,712      321,580      328,212 

Facultative

   54,557   50,152   65,671       55,974      54,557      50,152 
                            

Total

  $  770,866  $  723,508  $  726,333      $602,996     $770,866     $723,508 
                            
                          

Gross and net premiums written and earned were as follows:

 

  
Year ended December 31, 2009 2008 2007  2010   2009   2008 
 Premiums
written
 Premiums
earned
 Premiums
written
 Premiums
earned
 Premiums
written
 Premiums
earned
  Premiums
written
   Premiums
earned
   Premiums
written
   Premiums
earned
   Premiums
written
   Premiums
earned
 
             

Gross

 $3,587,295   $3,540,298   $3,390,388   $3,374,076   $3,590,090   $3,459,816      $ 3,750,536   $ 3,632,177   $ 3,587,295   $ 3,540,298   $ 3,390,388   $ 3,374,076 

Ceded

  (770,866  (748,534  (723,508  (686,895  (726,333  (725,406  (602,996   (684,767   (770,866   (748,534   (723,508   (686,895
                                         

Net

 $  2,816,429   $  2,791,764   $  2,666,880   $  2,687,181   $  2,863,757   $  2,734,410   $3,147,540   $2,947,410   $2,816,429   $2,791,764   $2,666,880   $2,687,181 
                                         
                               

Gross and net incurred losses and loss expenses were as follows:

 

Year ended December 31,

    2010     2009     2008 
              

Gross losses and loss expenses

    $ 2,102,509     $ 1,742,656     $ 2,086,236 

Reinsurance recoveries

     (425,377     (318,784     (373,470
                      

Net incurred losses and loss expenses

    $1,677,132     $1,423,872     $1,712,766 
                      
                      

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

8.REINSURANCE (CONTINUED)

Reinsurance recoverable and the provision for unrecoverable reinsurance by segment were as follows:

    

 

Insurance

  Reinsurance  Total 
      

At December 31, 2010

     

Gross reinsurance recoverable on unpaid and paid losses and loss expenses

  $1,547,463  $ 47,204  $1,594,667 

Provision for unrecoverable reinsurance

   (16,737  (383  (17,120
              

Net reinsurance recoverable

  $1,530,726  $46,821  $ 1,577,547 
              

% of gross reinsurance recoverable with reinsurers rated A- or better(1)

   97.8%    100.0%    97.9%  
  

At December 31, 2009

     

Gross reinsurance recoverable on unpaid and paid losses and loss expenses

  $ 1,403,948  $43,181  $1,447,129 

Provision for unrecoverable reinsurance

   (17,691  (5,266  (22,957
              

Net reinsurance recoverable

  $1,386,257  $37,915  $1,424,172 
              
      

% of gross reinsurance recoverable with reinsurers rated A- or better(1)

   97.8%    97.7%    97.8%  
              
(1)Ratings as assigned by A.M. Best.

At December 31, 2010, 5.7% (2009: 6.4%) of the total reinsurance recoverable balance was collateralized.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

8.Reinsurance (Continued)

Gross and net incurred losses and loss expenses were as follows:

    
Year ended December 31,  2009  2008  2007 
  

Gross losses and loss expenses

  $1,742,656   $2,086,236   $1,733,499     

Reinsurance recoveries

   (318,784  (373,470  (363,239
              

Net incurred losses and loss expenses

  $  1,423,872   $  1,712,766   $  1,370,260  
              
              

Reinsurance recoverable and the provision for unrecoverable reinsurance by segment were as follows:

    
At December 31, 2009  Insurance  Reinsurance  Total 
  

Gross reinsurance recoverable on unpaid and paid losses and loss expenses

  $1,403,948   $43,181   $1,447,129     

Provision for unrecoverable reinsurance

   (17,691  (5,266  (22,957
              

Net reinsurance recoverable

  $  1,386,257   $  37,915   $  1,424,172  
              

% of gross reinsurance recoverable with Reinsurers rated A- or better*

   97.8%    97.7%    97.8%  
              

    
At December 31, 2008  Insurance  Reinsurance  Total 
  

Gross reinsurance recoverable on unpaid and paid losses and loss expenses

  $  1,364,042   $35,021   $1,399,063     

Provision for unrecoverable reinsurance

   (13,623  (6,810  (20,433
              

Net reinsurance recoverable

  $  1,350,419   $  28,211   $  1,378,630  
              

% of gross reinsurance recoverable with Reinsurers rated A- or better*

   97.1%    97.1%    97.1%  
              
*Ratings as assigned by S&P and/or A.M. Best.

At December 31, 2009, 6.4% (2008: 6.2%) of the total reinsurance recoverable balance was collateralized.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

 

9.Derivative InstrumentsDERIVATIVE INSTRUMENTS

The following table summarizes information on the location and amounts of derivative fair values on the consolidated balance sheetsheets at December 31, 2010 and 2009:

 

      Asset Derivatives Liability Derivatives  December 31, 2010 December 31, 2009 
Notional
Amount
  Balance Sheet
Location
  Fair
value
 

Balance Sheet

Location

  Fair
Value
  Derivative
Notional
Amount
 Asset
Derivative
Fair
Value(1)
 Derivative
Notional
Amount
 Liability
Derivative
Fair
Value(1)
 Derivative
Notional
Amount
 Asset
Derivative
Fair
Value(1)
 Derivative
Notional
Amount
 Liability
Derivative
Fair
Value(1)
 
         

Derivatives designated as

hedging instruments

Derivatives designated as

hedging instruments

  

  

Derivatives designated as hedging instruments

  

       
 

Foreign exchange contracts

  $  659,617  Other assets  $  9,557   Other liabilities  $  -     
             

Derivatives not designated as

hedging instruments

  

  

Relating to investment portfolio:

          

Foreign exchange contracts

  $21,436  Other assets  $411   Other liabilities  $-  
             

Total derivatives

      $9,968     $-  
             
             

The following table summarizes information on the location and amounts of derivative fair values on the consolidated balance sheet at December 31, 2008:

   

      Asset Derivatives Liability Derivatives 
Notional
Amount
  Balance Sheet
Location
  Fair
value
 

Balance Sheet

Location

  Fair
Value
 

Derivatives designated as

hedging instruments

  

  

 

Foreign exchange contracts

  $469,515  Other assets  $-   Other liabilities  $25,843      $-       $-       $ 612,845  $ 13,748   $ 659,617  $ 9,557   $ -       $ -      
                                     
 

Derivatives not designated as

hedging instruments

Derivatives not designated as

hedging instruments

  

  

Derivatives not designated as hedging instruments

  

       

Relating to investment portfolio:

Relating to investment portfolio:

                 

Foreign exchange contracts

  $27,293    $262     $-   $98,467  $2,182   $46,819  $746   $21,436  $411   $-       $-      
                         

Relating to underwriting portfolio:

Relating to underwriting portfolio:

                 

Longevity risk derivative

  $  400,000     -      62,597  

Currency collar options

          

Put options – Long

  $83,832     4,841      -  

Call options – Short

  $41,916     (98    -  

Foreign exchange contracts

  $41,916     -      3,156   $ (89,239 $4,459   $21,325  $492   $-       $-       $-       $-      

Catastrophe-related risk

  $50,000     -      45  
             
    Other assets  $  5,005   Other liabilities  $  65,798                          
              

Total derivatives

      $5,005     $91,641   $9,228  $ 6,641   $680,989  $14,986   $681,053  $9,968   $-       $-      
                                     
                              
(1)Asset and liability derivatives are classified within other assets and other liabilities on the consolidated balance sheets.

ForThe following table provides the fair value hierarchy level, refer to Note 6 – Fair Value Measurements.total unrealized and realized gains (losses) on derivatives recorded in earnings:

   

Location of Gain (Loss) Recognized

in Income on Derivative

 Amount of Gain (Loss)
Recognized in Income on
Derivative
 
    2010  2009  2008 
      

Derivatives in fair value hedging relationships

    

Foreign exchange contracts

 Net realized investment gains (losses) $ 35,886  $(13,655 $7,248 
              
  

Derivatives not designated as hedging instruments

    

Relating to investment portfolio:

     

Foreign exchange contracts

 Net realized investment gains (losses) $(3,641 $(1,032 $6,650 

Mortgage Derivatives

 Net realized investment gains (losses)  -        -        (274
  

Relating to underwriting portfolio:

     

Longevity risk derivative

 Other insurance related income (loss)  -        (132,595  (41,444

Currency collar options:

     

Put options - Long

 Foreign exchange gains (losses)  -        2,331   3,873 

Call options - Short

 Foreign exchange gains (losses)  -        97   2,407 

Foreign exchange contracts

 Foreign exchange gains (losses)  9,596   (10,429  (397

Catastrophe-related risk

 Other insurance related income (loss)  -        45   (475
              

Total

  $5,955  $ (141,583 $ (29,660
              
               

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

9.Derivative Instruments (Continued)DERIVATIVE INSTRUMENTS (CONTINUED)

 

The following table provides the total unrealized and realized gains (losses) recorded in earnings for the years ended December 31, 2009, 2008 and 2007.

   Location of Gain (Loss) Recognized in
Income on Derivative
 Amount of Gain (Loss) Recognized in
Income on Derivative
 
      2009  2008  2007 
 

Derivatives in fair value

hedging relationships

  

  

  

Foreign exchange contracts

 Net realized investment gains (losses) $(13,655 $7,248   $-     
              

Derivatives not designated as

hedging instruments

    

Relating to investment portfolio:

     

Foreign exchange contracts

 Net realized investment gains (losses) $(1,032 $6,650   $(82

Mortgage derivatives

 Net investment income  -    (274    1,383  
  

Relating to underwriting portfolio:

     

Longevity risk derivative

 Other insurance related income (loss)    (132,595    (41,444  -  

Currency collar options:

     

Put options - Long

 Foreign exchange gains (losses)  2,331    3,873    -  

Call options - Short Foreign exchange gains (losses)

 Foreign exchange gains (losses)  97    2,407    -  

Foreign exchange contracts

 Foreign exchange gains (losses)  (10,429  (397  -  

Catastrophe-related risk

 Other insurance related income (loss)  45    (475  430  
              

Total

  $(141,583 $(29,660 $1,731  
              
               

Derivative Instruments Designated as a Fair Value Hedge

The hedging relationship foreign currency contracts were entered into to mitigate the foreign currency exposure of two available for sale (“AFS”) fixed maturity portfolios denominated in Euros. The hedges were designated and qualified as a fair value hedge. The net impact of the hedges is recognized in net realized investment losses.gains (losses).

The following table provides the net earnings impact of the fair value hedges for the years ended December 31, 2009, 2008 and 2007:hedges:

 

    
    2009   2008   2007 
  

Foreign exchange contracts

  $(13,655  $7,248    $          -  

Hedged investment portfolio

   16,565     (8,108   -  
                

Hedge ineffectiveness recognized in earnings

  $2,910    $(860  $-  
                
                

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

9.Derivative Instruments (Continued)

 

Year ended December 31,

  2010   2009   2008 
        

Foreign exchange contracts

  $ 35,886   $ (13,655  $ 7,248 

Hedged investment portfolio

   (30,063   16,565    (8,108
                

Hedge ineffectiveness recognized in earnings

  $5,823   $2,910   $(860
                
                

Derivative Instruments not Designated as Hedging Instruments

a) Relating to Investment Portfolio

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

Mortgage derivatives are commonly referred as to-be-announced mortgage-backed securities and are accounted for as derivatives. As part of our investment strategy, we may from time to time invest in mortgage derivatives.

b) Relating to Underwriting Portfolio

Longevity Risk

In September 2007, we issued a policy which indemnifiesindemnified a third party in the event of a non-payment of a $400 million asset-backed note (“Note”).note. This security had a 10 year term with the full principal amount due at maturity and was collateralized by a portfolio of life settlement contracts and cash held by a special purpose entity. We concluded that the indemnity contract was a derivative instrument and accordingly we recorded it at its fair value. This contract was cancelled and settled during the fourth quarter of 2009, resulting in a loss of $133 million for the full year (2008: $41 million).2009.

Foreign Currency Risk

Our insurance and reinsurance subsidiaries and branches operate in various foreign countries and consequently our underwriting portfolio is exposed to significant foreign currency risk. We manage 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. When necessary, we may also use derivatives to economically hedge un-matched foreign currency exposures, specifically forward contracts and currency options.

Catastrophe-Related Risk

During 2006, we entered into a $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. We utilized half of the Facility to enter into a $50 million catastrophe-related total return swap transaction to assume losses from qualifying earthquake events. As a result of this swap, the Facility was collateralized by a lien over a portfolio of the Company’s investment grade securities. During 2009, we earned payments on the swap, net of the Facility fee, which are included in other insurance related income. The catastrophe-related total return swap expired with no loss and the Facility terminated in 2009.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

10.Debt and Financing ArrangementsDEBT AND FINANCING ARRANGEMENTS

 

a)Senior Notes

On November 15, 2004, weAXIS Capital issued $500 million aggregate principal amount of 5.75% senior unsecured debt (“(the “5.75% Senior Notes”) at an issue price of 99.785%, generating net proceeds of $496 million. TheInterest on the 5.75% Senior Notes bear interest at a rate of 5.75%,is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2005. Unless previously redeemed, the 5.75% Senior Notes will mature on December 1, 2014.

On March 23, 2010, AXIS Specialty Finance LLC (“AXIS Specialty Finance”), a 100% owned finance subsidiary, issued $500 million aggregate principal amount of 5.875% senior unsecured debt (the “5.875% Senior Notes” and, together with the 5.75% Senior notes, the “Senior Notes”) at an issue price of 99.624%. The net proceeds of the issuance, after consideration of the offering discount and underwriting expenses and commissions, totaled approximately $495 million. Interest on the 5.875% Senior Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2010. Unless previously redeemed, the 5.875% Senior Notes will mature on June 1, 2020. The 5.875% Senior Notes are ranked as unsecured senior obligations of AXIS Specialty Finance. AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance under the 5.875% Senior Notes. AXIS Capital’s obligations under this guarantee are unsecured and senior and rank equally with all other senior obligations of AXIS Capital.

We mayhave the option to redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.price, which is equal to the greater of the aggregate principal amount or the sum of the present values of the remaining scheduled payments of principal and interest. The Senior Notes indenture containsrelated indentures contain various covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. We were in compliance with all the covenants contained in the Senior Notes indentureindentures at December 31, 20092010 and 2008.2009.

Interest expense onrecognized in relation to our Senior Notes includes interest payable, amortization of the offering discountdiscounts and amortization of debt offering expenses. The offering discountdiscounts and debt offering expenses are amortized over the period of time during which the Senior Notes are outstanding. WeDuring 2010, we incurred interest expense for the Senior Notes of $52 million (2009 and 2008: $29 million in each of the last three years.million).

 

b)Credit Facilities

At December 31, 2009, we had aOur syndicated $1.5 billion credit facility agreement(the “Expired Facility”) was terminated on August 24, 2010. Letters of credit outstanding under the Expired Facility at the time of termination remain valid until their expiry. As a condition of the execution of the new Syndicated Credit Facility (discussed below), we agreed to provide collateral to secure our remaining letter of credit obligations under the Expired Facility.

On May 14, 2010, certain of AXIS Capital’s operating subsidiaries entered into a secured $750 million letter of credit facility (the “LOC Facility”) with Citibank Europe plc (“Citibank”) pursuant to a syndicateMaster Reimbursement Agreement and other ancillary documents (together, the “Facility Documents”). The LOC Facility may be terminated by Citibank on December 31, 2013 upon thirty days prior notice. Under the terms of lenders. The credit agreement is an unsecured five-year facility that allows us to issuethe LOC Facility, letters of credit up to the fulla maximum aggregate amount of the facility and to borrow up to $500$750 million are available for general corporate purposes, with total usage not to exceed $1.5 billion. The credit facility will expireissuance 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 requires that 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%behalf 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 maximum debt to total capitalization ratio 0.35:1.0.

We were in compliance with all covenants at December 31, 2009 and 2008. At December 31, 2009, we hadoperating subsidiaries. These letters of credit outstandingwill principally be used to support the reinsurance obligations of $453 million (2008: $567 million). There was no debt outstandingthe operating subsidiaries. The LOC Facility is subject to certain covenants, including the requirement to maintain sufficient collateral, as defined in the Facility Documents, to cover all of the obligations under the credit facility at December 31, 2009 and 2008.

11.Commitments and Contingencies

a)Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrationsLOC Facility. Such obligations include contingent reimbursement obligations for outstanding letters of credit risk consist principallyand fees payable to Citibank. In the event of investmentsdefault, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and reinsurance recoverable balances.

the termination of the availability of the LOC Facility to any or all of the operating subsidiaries party to the Facility Documents.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

11.10.Commitments and Contingencies (Continued)DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

 

On August 24, 2010, AXIS Capital and certain of its operating subsidiaries entered into a three-year revolving $500 million credit facility (the “Syndicated Credit Facility”) with a syndication of lenders pursuant to a Credit Agreement and other ancillary documents (together, the “Facility Documents”). Subject to certain conditions and at the request of AXIS Capital, the aggregate commitment under the Syndicated Credit Facility may be increased by up to $250 million. Under the terms of the Syndicated Credit Facility, loans are available for general corporate purposes and letters of credit may be issued in the ordinary course of business, with total usage not to exceed the aggregate amount of the Syndicated Credit Facility. Interest on loans issued under the Syndicated Credit Facility is payable based on underlying market rates at the time of loan issuance. While loans under the Syndicated Credit Facility are unsecured, we have the option to issue letters of credit on a secured basis in order to reduce associated fees. The letters of credit will principally be used to support the reinsurance obligations of the operating subsidiaries. Under the Syndicated Credit Facility, AXIS Capital guarantees the obligations of the operating subsidiaries and AXIS Specialty Finance guarantees the obligations of AXIS Capital and the operating subsidiaries. The Syndicated Credit Facility is subject to certain covenants, including limitations on fundamental changes, the incurrence of additional indebtedness and liens, certain transactions with affiliates and investments, as defined in the Syndicated Facility Documents. The Syndicated Credit Facility also requires compliance with certain financial covenants, including a maximum debt to capital ratio and a minimum consolidated net worth requirement. In addition, each of AXIS Capital’s material insurance/reinsurance subsidiaries party to the Syndicated Credit Facility must maintain a minimum A.M. Best Company, Inc. financial strength rating. In the event of default, including a breach of these covenants, the lenders may exercise certain remedies including the termination of the Syndicated Credit Facility, the declaration of all principal and interest amounts related to Syndicated Credit Facility loans to be immediately due and the requirement that all outstanding letters of credit be collateralized.

At December 31, 2010, we had $41 million, $315 million and nil letters of credit outstanding under the Expired Facility, the LOC Facility and the Syndicated Credit Facility, respectively. There was no debt outstanding under the Syndicated Credit Facility. We were in compliance with all LOC Facility and Syndicated Credit Facility covenants at December 31, 2010.

11.COMMITMENTS AND CONTINGENCIES

a)Concentrations of Credit Risk

Credit Risk Aggregation

We monitor and control the aggregation of credit risk on a consolidated basis by assigning limits on maximum credit exposures in certain categories including, but not limited to, single obligors and groups, industry sector, country and region. Such limits are based on a variety of factors, including the prevailing economic environment and the nature of the underlying credit exposures. The credit risk reporting process is supported by an exposure database, which contains relevant information on counterparties and credit risk; we also license third party databases to provide credit risk assessments.

We also manage the aggregation of credit risk by minimizing overlaps in underwriting, financing and investing activities.

The assets that potentially subject us to concentrations of credit risk consist principally of investments, reinsurance recoverable and insurance and reinsurance premiums receivable balances, as described below:

Investments

Our investment portfolio is managed by external investment managers in accordance with our investment guidelines. Specific provisions limit the allowable holdings of a single issue and issuers. Specifically, we manage our credit exposure by limiting the purchase of fixed maturities to investment grade securities. In addition, excluding U.S. government and agency securities, we limit our concentration of credit risk to any single corporate issuer to 2% or less of our fixed

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

11.COMMITMENTS AND CONTINGENCIES (CONTINUED)

maturities portfolio for securities rated A- or above and 1% or less of our fixed maturities portfolio for securities rated between BBB and BBB+.below A-. At December 31, 2009,2010, we were in compliance with these limits.

Concentration of credit risk withReinsurance Recoverable Balances

With respect to our reinsurance recoverable balances, is limited duewe are exposed to the numberrisk of a reinsurer failing to meet its obligations under coverage we have purchased. To mitigate this risk, all reinsurance coverage we purchase is subject to requirements established by our Reinsurance Security Committee. This Committee maintains a list of approved reinsurers, usedperforms credit risk assessments for potential new reinsurers, regularly monitors approved reinsurers with consideration for events which may have a material impact on our reinsurance programs. At December 31, 2009, our top tentheir creditworthiness, recommends counterparty tolerance levels for different types of ceded business and monitors concentrations of credit risk. The assessment of each reinsurer considers a range of attributes, including a review of financial strength, industry position and other qualitative factors. Generally, the Committee requires that reinsurers who do not meet specified requirements provide collateral.

Our reinsurers with the three largest balances accounted for 73% (2008: 71%)13%, 11% and 11%, respectively, of our total reinsurance recoverable on unpaid and paid losses balance net of collateral. Of the balanceat December 31, 2010 (2009: 13%, 12% and 13%, respectively). Amounts related to the top tenour reinsurers 43% (2008: 57%) related to reinsurers rated A+ or better, with the remainder ratedten largest balances comprised 70% of December 31, 2010 balance (2009: 70%) and had a weighted average A.M. Best rating of A by A.M. Best. Our top three (2008: three) reinsurers accounted for 40% (2008: 38%)(2009: A).

Premiums Receivable Balances

The diversity of our client base limits the credit risk associated with our premiums receivable. In addition, for insurance contracts we have contractual rights to cancel coverage for non-payment of premiums and for reinsurance recoverablecontracts we have contractual rights to offset premiums receivable with corresponding payments for losses and loss expenses. These contractual rights contribute to the mitigation of credit risk, as does our monitoring of aged receivable balances. In light of these mitigating factors, and considering that a significant portion of our premiums receivable are not currently due based on unpaidthe terms of the underlying contracts, we do not utilize specific credit quality indicators to monitor our premiums receivable balance. At December 31, 2010, we recorded an allowance for estimated uncollectible premiums receivable of $3 million (2009: $2 million). The corresponding bad debts expense charges for 2010, 2009 and paid losses balance net of collateral.2008 were insignificant.

 

b)Brokers

We produce our business through brokers and direct relationships with insurance companies. During 2009,2010, three brokers accounted for 64% (2008:62% (2009: 62%; 2008: 58%; 2007: 55%) of our total gross premiums written. Aon Corporation accounted for 25% (2009: 26% (2008:; 2008: 23%, 2007: 21%), Marsh, Inc. (including its subsidiary Guy Carpenter and Company) accounted for 24% (2009: 23% (2008: 23%, 2007:; 2008: 23%), and Willis Group Holdings Ltd. for 15% (2008:13% (2009: 13%; 2008: 12%, 2007: 11%). No other broker and no one insured or reinsured accounted for more than 10% of our gross premiums written in any of the last three years.

 

c)Lease Commitments

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. During 2009,2010, total rent expense with respect to these operating leases was $19 million (2009: $17 million (2008:million; 2008: $15 million: 2007: $12 million).

Future minimum lease payments under our leases are expected to be as follows:

  

2010

  $  14,670     

2011

   16,089  

2012

   15,252  

2013

   14,630  

2014

   13,782  

Later years

   30,162  
      

Total minimum future lease commitments

  $  104,585  
      
      

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

11.Commitments and Contingencies (Continued)COMMITMENTS AND CONTINGENCIES (CONTINUED)

Future minimum lease payments under our leases are expected to be as follows:

      

2011

  $18,909 

2012

   20,444 

2013

   19,953 

2014

   18,491 

2015

   13,346 

Later years

   30,687 
      

Total minimum future lease commitments

  $ 121,830 
      
      

 

d)Reinsurance Purchase Commitment

During 2009,2010, we purchased reinsurance coverage for our insurance lines of business. The minimum reinsurance premiums are contractually due on a quarterly basis in advance. Accordingly at December 31, 2009,2010, we have an outstanding reinsurance purchase commitment of $50$51 million.

 

e)Legal Proceedings

Except as noted below, we are not a party to any material legal proceedings. From time to time, we are subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against us in the ordinary course of insurance or reinsurance operations. In our opinion, the eventual outcome of these legal proceedings is not expected to have a material adverse effect on our financial condition, or results of operations.operations or cash flows.

In 2005, a putative class action lawsuit was filed against our U.S. insurance subsidiaries. In re Insurance Brokerage Antitrust Litigation was filed on August 15, 2005 in the United States District Court for the District of New Jersey and includes as defendants numerous insurance brokers and insurance companies. The lawsuit alleges antitrust and Racketeer Influenced and Corrupt Organizations Act (“RICO”) violations in connection with the payment of contingent commissions and manipulation of insurance bids and seeks damages in an unspecified amount. On October 3, 2006, the District Court granted, in part, motions to dismiss filed by the defendants, and ordered plaintiffs to file supplemental pleadings setting forth sufficient facts to allege their antitrust and RICO claims. After plaintiffs filed their supplemental pleadings, defendants renewed their motions to dismiss. On April 15, 2007, the District Court dismissed without prejudice plaintiffs’ complaint, as amended, and granted 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, and a hearing was held in April 2009. On August 16, 2010, the Third Circuit Court of Appeals affirmed the District Court’s dismissal of the antitrust and RICO claims arising from the contingent commission arrangements and remanded the case to the District Court with respect to the manipulation of insurance bids allegations. We believe that the lawsuit is completely without merit and we continue to vigorously defend the filed action.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

11.COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

f)Dividends for Common Shares and Preferred Shares

On December 10, 2009 the9, 2010, our Board of Directors declared a dividend of $0.21$0.23 per common share to shareholders of record at the close of business on December 31, 20092010 and payable on January 15, 2010. Additionally, the18, 2011. The Board of Directors also declared a dividend of $0.453125 per Series A 7.25% Preferred shareShare and a dividend of $1.875 per Series B 7.5% Preferred share.Share. The Series A Preferred shareShare dividend is payable on January 15, 2010,18, 2011, to shareholders of record at the close of business on December 31, 20092010 and the Series B Preferred shareShare dividend is payable on March 1, 20102011, to shareholders of record at the close of business on February 12, 2010.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 200715, 2011.

 

12.Earnings per Common ShareEARNINGS PER COMMON SHARE

The following table provides a comparison of basic and diluted earnings per common share:

 

  
At and year ended December 31,  2009  2008  2007   2010     2009     2008 
            

Basic earnings per common share

                  

Net income available to common shareholders

  $  461,011  $  350,501  $  1,055,243       $  819,848     $  461,011     $  350,501 
                          

Weighted average common shares outstanding

   137,279   140,322   147,524     121,728      137,279      140,322 
                          

Basic earnings per common share

  $3.36  $2.50  $7.15    $6.74     $3.36     $2.50 
                          

Diluted earnings per common share

                  

Net income available to common shareholders

  $461,011  $350,501  $1,055,243    $819,848     $461,011     $350,501 
                          

Weighted average common shares outstanding

   137,279   140,322   147,524  

Share equivalents:

       

Weighted average common shares outstanding - basic

   121,728      137,279      140,322 

Warrants

   10,616   12,023   13,055     12,106      10,616      12,023 

Restricted stock

   1,744   1,674   1,551  

Options

   711   1,301   2,385  

Restricted stock units

   21   -   -  

Stock compensation plans

   2,365      2,476      2,975 
                          

Weighted average common shares outstanding—diluted

   150,371   155,320   164,515  

Weighted average common shares outstanding - diluted

   136,199      150,371      155,320 
                          

Diluted earnings per common share

  $3.07  $2.26  $6.41    $6.02     $3.07     $2.26 
                          
                        

For the year ended December 31, 2009,2010, there were 756,365 (2008: 843,904) restricted186,792 (2009: 1,915,574) shares 1,118,209 (2008: nil) options and 41,000 (2008: nil) restrictedfor stock units,compensation plans which would have resulted in the issuance of common shares that were excluded in the computation of diluted earnings per share because the effect would be anti-dilutive.

13.Shareholders’ Equity

a)Common Shares

Our authorized share capital is 800,000,000 common shares, par value of $0.0125 per share. At December 31, 2009, 132,139,701 (2008: 136,211,956) common shares were outstanding, which excludes restricted shares under our stock compensation plans (see Note 15 – Stock Compensation Plans).

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

13.Shareholders’ Equity (Continued)SHAREHOLDERS’ EQUITY

a)Common Shares

At December 31, 2010, and 2009, our authorized share capital was 800,000,000 common shares, par value of $0.0125 per share.

The following table presents our common shares issued and outstanding, excluding restricted shares under our stock compensation plans (see Note 15 – Stock Compensation Plans):

 

Year ended December 31,

  2010   2009   2008 
        

Shares issued, balance at beginning of period

   152,465    150,455    147,986 

Shares issued

   2,447    2,010    2,469 
                

Total shares issued at end of period

   154,912    152,465    150,455 
                

Treasury shares, balance at beginning of period

   (20,325   (14,243   (5,466

Shares repurchased

   (22,194   (6,082   (8,777
                

Total treasury shares at end of period

   (42,519   (20,325   (14,243
                

Total shares outstanding

   112,393    132,140    136,212 
                
                

 

b)Series A and B Preferred Shares

On October 5, 2005, we issued $250 million of 7.25% series A Preferred shares, par value $0.0125 per share, with a liquidation preference of $25.00 per share. 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 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 shares will 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 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 20092010 and 2008,2009, the total dividends declared on series A Preferred share was $1.8125 per share.

On November 23, 2005, we issued $250 million of 7.50% series B Preferred shares with a liquidation preference of $100.00 per share. 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 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 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 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 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 20092010 and 2008,2009, the total dividends declared on series B Preferred share was $7.50 per share.

The holders of the series A and B Preferred shares will have no voting rights except as described below. Whenever dividends payable on the series A and B Preferred shares have not been declared by the board of directors and paid for an

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

13.SHAREHOLDERS’ EQUITY (CONTINUED)

aggregate amount equivalent to six full quarterly dividends (whether or not consecutive) on all of the series A and B Preferred shares or any class or series of parity stock then outstanding, the holders of the series A and B 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 our board of directors. We will use our best efforts to effectuate the election or appointment of these two directors. Whenever dividends on the series A and B 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 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 of Directors will terminate.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

13.Shareholders’ Equity (Continued)

 

c)Share Warrants

In connection with our formation, 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, 2009, 19,762,574 common shares (2008: 19,710,390) would be issued pursuant to the warrants, if all2010, 19,787,712 (2009: 19,762,574) warrants were exercisedoutstanding and exercisable at an average price of $12.36 (2008: $12.40). All warrants were exercisable$12.31 (2009: $12.36) and will expire on November 20, 2001. 2011. These warrants include a “cashless exercise” provision which allows the warrant holder to surrender the warrants with a notice of cashless exercise and receive a number of common shares based on the market value of AXIS Capital’s common shares. The cashless exercise provision will result in a lower number of common shares being issued than the numbers of warrants exercised.

At December 31, 2009,2010, we accrued $70$85 million (2008: $56(2009: $70 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 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 million has been included in additional paid-in capital. This value was calculated using the Black-Scholes option-pricing model. The three significant assumptions used were: risk-free interest rate of 5.1%; expected life of seven years; and a dividend yield of nil.

 

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. OnOur Board of Directors authorized the following share repurchase plans:

on December 6, 2007, our Board of Directors approved a share repurchase plan with the authorization to repurchase up to $400 million of our common shares until December 31, 2009;

on December 10, 2009, our Board of Directors authorized to extend the above repurchase plan until December 31, 2011, and approved a new share repurchase plan to repurchase up to $500 million of our common shares until December 31, 2011; and

on September 24, 2010, our Board of Directors approved a new share repurchase plan with the authorization to repurchase up to an additional $400$750 million of our common shares until December 31, 2009. On December 10, 2009, our Board of Directors authorized to extend this repurchase plan until2012.

At December 31, 2011. Further, our Board2010, we had $593 million of Directors approved a newcapacity remaining under the share repurchase plan with the authorization to repurchase up to an additional $500 million of our common shares toplans. Share repurchases may be effected from time to time in the open market or private negotiated transactions. This new share repurchase plan will expiretransactions, depending on December 31, 2011.

market conditions.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

13.Shareholders’ Equity (Continued)SHAREHOLDERS’ EQUITY (CONTINUED)

 

During 2009 and 2008, we made theThe following table presents our share repurchases, which wereare held in treasury.treasury:

 

  
Year ended December 31,  2009  2008     2010     2009     2008 
              

In the open market:

                  

Total shares

   5,851   8,574       18,750      5,851      8,574 

Total cost

  $  169,620  $  283,279         $ 590,694     $ 169,620     $ 283,279 
                         

Average price per share(2)

  $28.99  $33.04      $31.50     $28.99     $33.04 
                         

From employees:(1)

                  

Total shares

   231   203       381      231      203 

Total cost

  $6,289  $7,724      $11,062     $6,289     $7,724 
                         

Average price per share(2)

  $27.23  $37.96      $29.04     $27.23     $37.96 
                         

From founding shareholder:(3)

             

Total shares

     3,063      -           -      

Total cost

    $107,827      -           -      
                  

Average price per share(2)

    $35.21      -           -      
                  

Total

                  

Total shares

   6,082   8,777       22,194      6,082      8,777 

Total cost

  $175,909  $291,003      $709,583     $175,909     $291,003 
                         

Average price per share(2)

  $28.92  $33.15      $31.97     $28.92     $33.15 
                         
                       
(1)To satisfy withholding tax liabilities upon the vesting of restricted stock awards and the exercise of stock options. Share repurchases from employees are excluded from the authorized share repurchase plans noted above.
(2)Calculated using whole figures.
(3)On November 29, 2010, we privately negotiated with Trident II, L.P. and affiliated entities to repurchase 3,062,824 of our common shares.

Subsequent to December

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 through February 5, 2010, we repurchased a further 4,399,414 common shares at an average price of $28.38 per share, for a total cost of $125 million. At February 5, we have approximately $417 million of remaining authorization for common share repurchases under the 2007 and 2009 plans, which will expire on December 31, 2011.AND 2008

During 2007, under the 2006 repurchase plan, we repurchased 2,786,611 common shares for cancellation for a total cost of $103 million. The total share repurchases made in 2007, including those held in treasury, include 5,263,445 shares repurchased from Trident II, L.P and affiliated entities, for a total purchase price of $201 million.

 

14.Benefit PlansBENEFIT PLANS

We provide retirement benefits to eligible employees through various plans sponsored by us.

 

(i)a)Defined Contribution Plans

We have several defined contribution plans that are self directed. Generally, mutual funds are made available pursuant to which employees and we contribute a percentage of the employee’s gross salary into the plan each month. During 2009,2010, our total contribution expenses were $15 million (2009: $13 million (2008: $10 million and 2007:2008: $10 million).

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

 

14.Benefit Plans (Continued)

(ii)b)Supplemental Executive Retirement Plans (“SERPs”)

We have SERPs for our two senior executives: Chairman, Mr. Butt, and President and Chief Executive Officer (CEO), Mr. Charman. The SERP for Mr. Butt requires us to make annual payments to him upon retirement, or beginning January 1, 2010, even if he has not retired, for a period of ten years. The SERP for Mr. Charman requires us to make annual payments to him starting January 1, 2009, even if he has not retired, for a period of 20twenty years.

If either the CEO or Chairman dies, is disabled or a change of control of the Company occurs, the remaining benefits under their respective SERP are payable by the Company in a lump sum. At December 31, 2009,2010, the total lump sum contingently payable to our CEO and Chairman was $22$21 million and $4$3 million, respectively. During 2009,2010, pension expense was negligible (2008:(2009: negligible and 2008: $3 million) and total benefits paid was $1 million (2009: $1 million and 2007: $2 million)2008: $nil) for the two SERPs. At December 31, 2009,2010, the accrued SERPs obligations were $16 million (2009: $17 million (2008:and 2008: $16 million and 2007: $14 million).

The weighted-average assumptions used to determine our net periodic pension cost and benefit obligations were as follows:

 

    
Year ended December 31,  2009  2008  2007
  

Discount rate on plan obligations

  6.00%  6.00%  6.00%

Expected return on plan assets

  5.75%  5.75%  5.75%

Rate of increase in future pensions(1)

  3.00%  3.00%  3.00%
          

 

Year ended December 31,

  2010    2009    2008
            

Discount rate on plan obligations(1)

  5.25%    6.00%    6.00%

Expected return on plan assets(2)

  5.75%    5.75%    5.75%

Rate of increase on future pensions(3)

  3.00%    3.00%    3.00%
              
(1)

Based on the average return for a hypothetical portfolio of high quality corporate bonds (rated AA or better) over the SERP payment period.

(2)Considered the historical returns of equity and fixed maturity markets in conjunction with current economic and financial market conditions.
(3)The rate is fixed at 3% for the duration of the SERPs.

At December 31, 2009,2010, the fair value of the SERPs assets was $18 million (2008: $16(2009: $18 million). SERP assets increased in 2009 primarily due to $3 million in improved fund valuations due to the strong recovery in the financial markets, partially offset by $1 million of benefits paid. Our investment strategy is to maintain a conservative and diversified asset allocation strategy to yield a 5.75% annualized return over the life of the SERPs. At December 31, 2009,2010, the plan wasSERPs were over-funded by $2 million (2009: $1 million.million) and accordingly we do not anticipate making any contributions to these SERPs in 2011, assuming normal market conditions.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

 

15.Stock Compensation PlansSHARE-BASED COMPENSATION

In May 2007, our shareholders approved the AXIS Capital Holdings Limited 2007 Long-Term Equity Compensation Plan (“2007 Plan”). The 2007 Plan provides for, among other things, the grant of restricted stock awards and units, non-qualified and incentive stock options, and other equity-based awards to our employees and directors. The maximum number of our common shares that may be delivered under our 2007 Plan is 5,000,000. As a result of the adoption of 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 administered by the Compensation Committee of our Board of Directors.

In May 2009, our shareholders approved an amendment to the 2007 Plan, resulting in an increase in the total number of common shares authorized for issuance by 4,000,000 for a total of 9,000,000 common shares.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

15.Stock Compensation Plans (Continued)

We have issued stock options, restricted stocks, restricted stock units, and phantom stock units to our employees and non-management directors but none of these awards were subject to performance and market conditions. At December 31, 2009, 5,067,5002010, 3,871,527 equity-based awards remain available for grant under the 2007 Plan. Subsequent to December 31, 2009,2010 and up to February 8, 2011 we granted 23,328a total of 1,749,610 stock awards under the 2007 plan as follows:

1,521,500 restricted stocks/units with a grant date fair value of $36.56 to our employees;

100,000 restricted stocks with a grant date fair value of $35.88 to our Chairman in connection with an amendment to his employment agreement;

100,000 restricted stocks with a grant date fair value of $35.29 to our Chief Financial Officer in connection with his employment agreement; and

28,110 unrestricted common sharesstocks with a grant date fair value of $35.29 to our non-management directors on January 15, 2010, at a fair value of $28.42 per share. We also granted 1,364,450directors.

The above restricted shares and unitsstocks are subject to our employees on February 8, 2010, at a fair value of $28.69 per share. These awards carry a vesting period of four years with 25% of the award to be vested annually.on an annual basis.

 

(i)a)Stock options

We have granted stock options under the 2003 Plans. The stock options generally become exercisable over a three-year annual vesting period and expire ten years from the date of grant. We have determined the fair value of each stock option grant at the date of grant. WeSince 2006 we have not issuedgranted stock options in 2007, 2008, and 2009.options.

The following is a summary of stock options outstanding and exercisable at December 31, 2009,2010 and related activity for the year ended:

 

    Number
of Stock
Options
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value(1)
(‘000s)
 
  Number
of Stock
Options
 Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value(1)
(‘000s)
                  

Outstanding - beginning of year

  3,068   $  21.20          2,776     $21.56          

Granted

  -    -          -           -               

Exercised

  (219  14.96          (427     17.71          

Expired

  (73  26.53          (31     22.34          
                                

Outstanding - end of year

  2,776   $  21.56  3.54 years  $  20,098          2,318     $22.26      2.65     $31,572  
                                     
                                 
(1)The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price onat December 31, 2009,2010 and the exercisable price, multiplied by the number of in-the-money-options) that would have been received by the stock option holdersholder had all stock option holders exercised their stock options on December 31, 2009.2010.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

15.SHARE-BASED COMPENSATION (CONTINUED)

The total intrinsic value of stock options exercised during 20092010 was $3$4 million (2008: $35(2009: $3 million) and we received proceeds of $8 million (2009: $3 million (2008: $24 million). For exercised stock options, we issued new shares from the authorized share capital pool rather than from our treasury pool. At December 31, 20082009 and 2007,2008, there was no remaining unrecognized compensation cost related to stock options and accordingly we incurred no related compensation costs during 2009December 31, 2010 and 2008.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 20072009.

 

15.Stock Compensation Plans (Continued)

(ii)b)Restricted stock

We have granted restricted stock under both our 2003 Plans and the 2007 Plan. The nature and general terms of these plans are materially consistent. 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. Prior to 2009, the vesting of restricted stock or restricted stock units (“RSUs”) awards were generally subject to a three year cliff vesting periodprovision after the date of grant or upon the employee’s retirement eligibility, death, permanent disability or a qualifying change in control of the Company, if earlier. The restricted stock and RSUs granted in 2009 areand 2010 were subject to a vesting period of four years with 25% of the award to be vested annually and has the same accelerated vesting provisions as noted above, excluding the vesting on the employee’s retirement eligibility. Prior to 2008, restricted stock and phantom stock units granted to our non-management directors generally vested 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. Starting in 2008, under the 2007 Plan, we granted common stock and phantom stock units with no vesting restriction to our non-management directors.

We have determined the fair value of all stock and unit grants using the closing price of our common 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 unvestednonvested restricted stock (including restricted stock units) for the year ended December 31, 2009:2010:

 

    Number of
Restricted
Stock
     

Weighted Average
Grant Date

Fair Value

 
  Number of
Shares
 Weighted Average
Grant Date Fair
Value
        

Nonvested restricted stock - beginning of year

  5,163   $34.66        4,555     $33.03 

Granted

  1,282    26.39     1,497      28.91 

Vested

  (1,722  32.83     (1,928     32.31 

Forfeited

  (168  34.45     (242     31.97 
                 

Nonvested restricted stock - end of year

  4,555   $  33.03     3,882     $ 31.95 
                 
               

During 2009,2010, we granted 1,281,5001,496,550 restricted shares (2008: 2,747,630; 2007: 1,596,400)(2009: 1,281,500; 2008: 2,747,630) to our employees and non-management directors with a weighted average grant-date fair value per share of $26.39 (2008: $37.23; 2007: $33.02)$28.91 (2009: $26.39; 2008: $37.23). The total 2008 granted restricted shares included 1,000,000 shares with a grant date fair value of $35.17 per share to our CEO in connection with an amendment to his employment agreement. The grant made to our CEO has the following vesting schedule: 500,000 shares on January 31, 2009; 166,666 shares on January 1, 2010; 166,667 shares on January 1, 2012; and 166,667 shares on January 1, 2013. We have elected the straight-line recognition method for awards subject to graded vesting based on a service condition.

During 2010, we incurred an expense of $37 million (2009: $48 million; 2008: $67 million) in respect of restricted stock, and recorded tax benefits thereon of $6 million (2009: $6 million; 2008: $7 million). The total fair value of shares vested

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

15.Stock Compensation Plans (Continued)SHARE-BASED COMPENSATION (CONTINUED)

 

During 2009, we incurred $48during 2010 was $56 million (2008: $67(2009: $57 million; 2007: $34 million) in respect of restricted stock, and recorded tax benefits thereon of $6 million (2008: $7 million; 2007: $6 million). The total fair value of shares vested during 2009 was $57 million (2008:2008: $24 million; 2007: $13 million). At December 31, 2009,2010, we had 4,555 (2008: 5,163)3,882 (2009: 4,555) nonvested restricted stocks outstanding including 167 RSUs, with $63$61 million (2008: $84(2010: $63 million) of unrecognized compensation cost. These are expected to be recognized over the weighted average period of 2.42.6 years (2008:(2009: 2.4 years).

During 2009,2010, realized additional tax benefits for certain vested restricted stocks and exercised stock options was negligible (2008: $1 million; 2007:(2009: negligible; 2008: $1 million). These excess tax benefits are included in our cash flows from financing activities in the Consolidated Statements of Cash Flows.

Our non-management directors may also elect to receive their meeting and other fees in common shares or phantom stock units rather than cash, based on the fair value of our common shares at the time of the grant. At December 31, 2009,2010, we had 67,461 (2008: 62,091)35,699 (2009: 67,461) phantom stock units outstanding and we have issued a cumulative total of 97,900 (2008: 72,189)161,411 (2009: 97,900) common shares in lieu of fees.fees, including the conversion of phantom stock units into common shares.

 

16.Related Party TransactionsRELATED 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 us or has been a board member during any period covered by the financial statements.

The collateral manager of four of our CLOs is Blackstone Debt Advisors L.P., who is entitled to management fees payable by the collateralized obligations in the ordinary course of business. We also have investments in three hedge funds and a credit fund that are managed by Blackstone Alternative Asset Management, LP, who is entitled to management fees in the ordinary course of business. During 2009,2010, total management fees to the Blackstone Group were $2 million (2009: $1 million (2008:million; 2008: $2 million; 2007: $4 million).

 

17.Income TaxesINCOME TAXES

Under current Bermuda law, we are not required to pay any taxes in Bermuda on income or capital gains. We have received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, we will be exempt from taxation in Bermuda until March 2016. Our Bermuda subsidiary has a branch operation in Singapore, which is subject to the relevant taxes in that jurisdiction. The branch is not under examination in this tax jurisdiction, but remains subject to examination for tax years 2008 and 2009.through 2010.

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 Regulations. Should the U.S. subsidiaries pay a dividend outside the U.S. group, withholding taxes will apply. Our U.S. subsidiaries are not under examination but remain subject to examination in the U.S. for tax years 2006-2009.2007-2010. One of our U.S. subsidiaries has a branch operation in Canada, which is subject to the relevant taxes in that jurisdiction. The branch is not under examination in this tax jurisdiction, but remains subject to examination for tax years 2008 and 2009.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

17.Income Taxes (Continued)

through 2010.

We also have operating subsidiaries and branch operations in Ireland, the United Kingdom, Switzerland and Australia which are subject to the relevant taxes in those jurisdictions. Our various European insurance operating subsidiaries andsubsidiary with branch operations in Ireland, the United Kingdom, Switzerland, and Australia are not under examination in any of these tax jurisdictions, but generally remain subject to examination for tax years 2005-2009.2006-2010. Our European reinsurance operating subsidiary with a branch in Switzerland was audited by the Irish and Swiss taxing authorities through 2007 with no significant audit adjustments.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

17.INCOME TAXES (CONTINUED)

The following table provides an analysis of our income tax expense and net tax assets:

 

    
Year ended December 31,  2009  2008  2007 
  

Current income tax expense (benefit)

      

United States

  $  32,182   $  15,330  $  38,090     

Europe

   7,020    3,302   15,398  

Other

   408    -   -  

Deferred income tax expense (benefit)

      

United States

   2,252    1,091   (11,966

Europe

   113    386   (31
              

Total income tax expense

  $41,975   $20,109  $41,491  
              

Net current tax (liabilities) receivables

  $(7,322 $15,308  $3,640  

Net deferred tax assets

   72,362    85,585   79,725  
              

Net tax assets

  $65,040   $100,893  $83,365  
              
              

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

17.Income Taxes (Continued)

 

Year ended December 31,

  2010   2009   2008 

Current income tax expense

       
        

United States

  $ 26,633   $ 32,182   $ 15,330 

Europe

   12,173    7,020    3,302 

Other

   120    408    -      

Deferred income tax expense (benefit)

       

United States

   121    2,252    1,091 

Europe

   (173   113    386 

Other

   (194   -         -      
                

Total income tax expense

  $38,680   $41,975   $20,109 
                

Net current tax (liabilities) receivables

  $(8,525  $(7,322  $15,308 

Net deferred tax assets

   72,606    72,362    85,585 
                

Net tax assets

  $64,081   $65,040   $ 100,893 
                
                

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. The significant components of our deferred tax assets and liabilities were as follows:

 

   
At December 31,  2009  2008 
  

Deferred tax assets:

    

Discounting of loss reserves

  $    58,537   $    57,717     

Unearned premiums

   27,075    23,874  

Capital loss carryforwards

   21,657    25,549  

Net unrealized losses and impairments

   15,651    36,258  

Accruals not currently deductible

   17,026    14,382  

Other deferred tax assets

   11,114    3,323  
          

Deferred tax assets before valuation allowance

   151,060    161,103  
  

Valuation allowance

   (31,702  (52,280
          

Deferred tax assets net of valuation allowance

   119,358    108,823  
          

Deferred tax liabilities:

    

Deferred acquisition costs

   (21,649  (16,750

Net unrealized gains on investments

   (9,896  -  

Amortization of intangible assets and goodwill

   (4,322  (3,364

Deferred ceding commissions

   (3,762  -  

Other deferred tax liabilities

   (7,367  (3,124
          

Deferred tax liabilities

   (46,996  (23,238
          

Net deferred tax assets

  $72,362   $85,585  
          
          

The net deferred assets of $72 million at December 31, 2009 (2008: $86 million) include a $32 million (2008: $52 million) valuation allowance. A valuation allowance of $29 million (2008: $52 million) has been established against certain U.S. deferred tax assets attributable to realized and unrealized capital losses, capital loss carryforwards and impairments on investments. During the year ended December 31, 2009, an increase of $6 million (2008: $30 million) of the valuation allowance was recorded in the Consolidated Statements of Operations and a decrease of $27 million (2008: $22 million increase) recorded as a component of other comprehensive income in shareholders’ equity. At December 31, 2009 a total of $3 million of deferred tax assets (2008: $5 million of deferred tax liabilities) were included in accumulated other comprehensive income.

 

At December 31,

  2010   2009 
      

Deferred tax assets:

     

Discounting of loss reserves

  $ 61,997   $ 58,537 

Unearned premiums

   30,623    27,075 

Capital loss carryforwards

   17,763    21,657 

Accruals not currently deductible

   16,282    17,026 

Operating loss carryforwards

   8,671    2,957 

Net unrealized losses and impairments

   5,140    15,651 

Other deferred tax assets

   5,541    8,157 
           

Deferred tax assets before valuation allowance

   146,017    151,060 

Valuation allowance

   (18,180   (31,702
           

Deferred tax assets net of valuation allowance

   127,837    119,358 
           

Deferred tax liabilities:

     

Deferred acquisition costs

   (25,495    (21,649

Net unrealized gains on investments

   (14,538   (9,896

Amortization of intangible assets and goodwill

   (5,477   (4,322

Deferred ceding commissions

   (3,202   (3,762

Other deferred tax liabilities

   (6,519   (7,367
           

Deferred tax liabilities

    (55,231   (46,996
           

Net deferred tax assets

  $72,606   $72,362 
           
           

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

17.Income Taxes (Continued)INCOME TAXES (CONTINUED)

 

At December 31, 2010 and 2009, the valuation allowance consisted of capital items in the U.S., including net unrealized capital losses, capital loss carryforwards, and impairments, as well as operating loss carryforwards in other jurisdictions. The movement in the valuation allowance is allocated first to income tax expense and the remainder to AOCI using the intraperiod tax allocation method.

The following table provides an analysis of the movement in our valuation allowance:

 

At December 31,

  2010     2009 
        

Income tax expense:

       

Valuation allowance - beginning of year

  $ 36,231     $ 30,019 

Operating loss carryforwards

   5,714      2,957 

Capital loss carryforwards and impairments

    (14,406     3,255 
             

Valuation allowance - ending of year

   27,539      36,231 
             

Accumulated other comprehensive income:

       

Valuation allowance - beginning of year

   (4,529     22,261 

Net unrealized (gains) losses on investments

   (4,830      (26,790
             

Valuation allowance - ending of period

   (9,359     (4,529
             

Total valuation allowance - end of year

  $18,180     $31,702 
             
             

Relevant to making the valuation allowance determination, we considered that the U.S. consolidated group has no capital loss carryback ability, limiteduncertain ability to generate U.S. capital gains during the carryforward period, or other strategies to generate U.S. capital gains sufficient to utilize the deferred tax assets relating the U.S. investment portfolio. We did take into account net unrealized capital gains of $38 million at December 31, 2010 (2009: $24 millionmillion) in computing the valuation allowance based on the assumption that the company would dispose of these securities to avoid expiration of the U.S. capital loss carryforwards. In addition, we established a valuation allowance against a $3 million deferred tax asset attributable to an Australian tax loss carryforward of $10 million. Tax losses in Australia may be carried forward indefinitely. However, we believe it is necessary to establish a valuation allowance against the deferred tax assets due to insufficient positive evidence regarding the utilization of these losses. The entity giving rise to the loss carryforward is not expected to generate future taxable income as the entity is a holding company with no significant ongoing operations.

Although realization is not assured, management believes it is more likely than not that the tax benefit of the remainingrecorded net deferred tax assets will be realized. Other than the $37 million of deferred tax assets relating to capital items notedprovided for in the above table (i.e. capital loss carryforwards, net unrealized losses and impairments),valuation allowance, the remaining $114 million of gross deferred tax assets relate to ordinary income items. Substantially all of these deferred tax assets relate to our U.S. operations. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including historical results, operating loss carryback potential and scheduled reversals of deferred tax liabilities. Our U.S. operations have produced significant taxable income in prior periods and have deferred tax liabilities that will reverse in future periods such that we believe sufficient ordinary taxable income is available to utilize all remaining deferred tax assets. There were no unrecognized tax benefits at December 31, 20092010 and 2008.2009.

Capital loss carryforwards at December 31, 20092010 by expiration date are as follows: $2 million expire in 2010, $4 million expire in 2011, $50$20 million expire in 2013, and $6$30 million expire in 2014.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 2008 AND 20072008

 

17.Income Taxes (Continued)INCOME TAXES (CONTINUED)

 

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,  2009 2008 2007   2010   2009   2008 
        

Income before income taxes

  $  539,861   $  407,485   $  1,133,509       $ 895,403   $ 539,861   $ 407,485 
                      

Reconciliation of effective tax rate

     

(% of income before income taxes)

     

Reconciliation of effective tax rate (% of income before income taxes)

       

Expected tax rate

   0.0%    0.0%    0.0%     0.0%     0.0%     0.0%  

Foreign taxes at local expected rates

            

United States

   6.8%    (2.2%  3.0%     5.1%     6.8%     (2.2%

Europe

   1.0%    1.2%    1.1%     1.3%     1.0%     1.2%  

Other

   (0.6%  0.0%    0.0%     (0.2%   (0.6%   0.0%  

Valuation allowance

   1.2%    7.4%    (0.1%   (1.0%   1.2%     7.4%  

Net tax exempt income

   (0.9%  (1.6%  (0.6%   (0.6%   (0.9%   (1.6%

Other

   0.3%    0.1%    0.3%     (0.3%   0.3%     0.1%  
                      

Actual tax rate

   7.8%    4.9%    3.7%     4.3%     7.8%     4.9%  
                      
                  

 

18.Statutory Financial InformationSTATUTORY FINANCIAL INFORMATION

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.

The unaudited statutory capital and surplus, for our principal operating subsidiaries at December 31, 20092010 and 20082009 was as follows:

 

    Bermuda  Ireland  United States 
At December 31,  2009  2008  2009  2008  2009  2008 
  

Required statutory capital and surplus

  $  1,732,667  $  1,413,794  $  188,011  $  201,512  $  285,966  $  248,285     

Actual statutory capital and surplus

  $4,122,604  $3,474,970  $798,706  $714,861  $  1,039,646  $933,851  
                          

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

18.Statutory Financial Information (Continued)

    Bermuda   Ireland   United States 
At December 31,  2010   2009   2010   2009   2010   2009 
              

Required statutory capital and surplus

  $ 1,719,284    $ 1,732,667   $ 212,767    $ 188,011   $ 317,588    $ 285,966 

Actual statutory capital and surplus

  $ 4,206,359    $ 4,122,604   $ 814,032    $ 798,706   $ 1,141,176    $ 1,039,646 
                               

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 dividend that may be paid by our U.S. insurance subsidiaries is restricted by the regulatory requirements of the domiciliary states. Generally, the maximum dividend that may be paid by each of our U.S. insurance subsidiaries is limited to unassigned surplus (statutory equivalent of retained earnings) and cannot exceedmay also be limited to statutory net income, net investment income or 10% of total statutory capital and surplus. At December 31, 2009,2010, the maximum dividend that our U.S. insurance operations could pay without regulatory approval was approximately $78$101 million.

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 and/or distributions for amounts greater than 25% of the 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 and/or distribution in excess of this amount would not cause the company to fail to meet its

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010, 2009 AND 2008

18.STATUTORY FINANCIAL INFORMATION (CONTINUED)

relevant margins is required. At December 31, 2009,2010, the maximum dividenddividend/distribution AXIS Specialty Bermuda could pay, without a signed affidavit, having met minimum levels of statutory capital and surplus requirements, was approximately $1 billion.

Our Irish subsidiaries, AXIS Specialty Europe and AXIS Re Ltd., are required to maintain minimum levels of statutory and capital surplus. At December 31, 2009 our subsidiaries were in compliance with these requirements. Our Irish subsidiaries may declare dividends out of retained earnings subject to meeting their solvency and capital requirements. At December 31, 20092010, the maximum dividend our Irish subsidiaries could pay out of retained earnings, subject to regulatory approval, was $77approximately $80 million.

Total statutory net income of our operating subsidiaries was $921 million, $685 million, $408 million $1,137 million for 2010, 2009, 2008 and 2007,2008, 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 acquisition costs, certain net deferred tax assets, goodwill and intangible assets, unrealized appreciation on debt securities or certain unauthorized reinsurance recoverables.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007

 

19.Condensed Quarterly Financial Data – UnauditedUNAUDITED CONDENSED QUARTERLY FINANCIAL DATA

The following tables summarizeis an unaudited summary of our quarterly financial data:results:

 

    2009 
  Quarters ended 
  Mar 31  Jun 30  Sep 30  Dec 31 
  

Total revenues

  $  714,659  $  781,051  $  451,710   $  867,557     

Net income available to common shareholders

   115,679   159,161   (95,892  282,063  

Comprehensive income

   64,215   445,635   516,561    301,941  

Earnings per common share – basic

  $0.84  $1.15  $(0.70 $2.07  

Earnings per common share – diluted

  $0.78  $1.06  $(0.70 $1.87  
                  

 

Quarters ended

    Mar 31   Jun 30   Sep 30   Dec 31 
            

2010 

           

Net premiums earned

    $ 696,192   $ 735,027   $ 758,873   $ 757,318 

Net investment income

     104,619    82,584    111,800    107,889 

Net realized investment gains

     16,176    24,619    76,531    77,772 

Underwriting income

     28,446    120,836    127,376    132,546 

Net income available to common shareholders

     111,812    204,852    238,842    264,343 

Earnings per common share - basic

    $0.87   $1.68   $1.99   $2.26 

Earnings per common share - diluted

    $0.79   $1.51   $1.78   $1.99 
  

2009 

           

Net premiums earned

    $665,359   $706,770   $706,025   $713,610 

Net investment income

     99,292    112,220    134,788    118,178 

Net realized investment gains (losses)

     (40,597   (23,678    (253,365   6,056 

Underwriting income

     97,237    140,530    71,351    215,517 

Net income available to common shareholders

     115,679    159,161    (95,892   282,063 

Earnings (loss) per common share - basic

    $0.84   $1.15   $(0.70  $2.07 

Earnings (loss) per common share - diluted

    $0.78   $1.06   $(0.70  $1.87 
                       

 

    2008 
  Quarters ended 
  Mar 31  Jun 30  Sep 30  Dec 31 
  

Total revenues

  $  781,972  $  811,589  $  637,668   $  579,255     

Net income available to common shareholders

   237,722   231,267   (249,346  130,858  

Comprehensive income

   224,169   89,869   (585,104  (70,725

Earnings per common share – basic

  $1.66  $1.62  $(1.79 $0.96  

Earnings per common share – diluted

  $1.48  $1.47  $(1.79 $0.88  
                  
20.SUBSEQUENT EVENTS

During January 2011, severe flooding occurred in and around Brisbane, Australia. In addition, Tropical Cyclone Yasi made landfall in northern Queensland, Australia on February 3, 2011. We have exposure to these Australian events, primarily through our reinsurance segment, and are currently assessing our potential claims. At February 18, 2011, the available information is insufficient to arrive at reasonable estimates for our net exposure.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

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 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, 2009.2010. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2009,2010, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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 our internal control over financial reporting as of December 31, 2009.2010. 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, 2009,2010, 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.

Our independent registered public accounting firm has issued an audit report on our assessment of our internal control over financial reporting as of December 31, 2009.2010. 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, 2009.2010. Based upon that evaluation there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20092010 that have materially affected, or are reasonably likely to materially affect, 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 the internal control over financial reporting of AXIS Capital Holdings Limited and subsidiaries (the “Company”) as of December 31, 2009,2010, 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, included in the accompanying Management’s Annual Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on 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, 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 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2010, 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, 20092010 of the Company and our report dated February 22, 201018, 2011 expressed an unqualified opinion on those financial statements and financial statement schedules and included an explanatory paragraph regarding the Company’s adoption, on April 1, 2009 of FSP FAS 115-2,Recognition and Presentation of Other-Than-Temporary Impairments(Codified in FASB ASC Topic 320, Investments – Investments—Debt and Equity Securities).

/s/ Deloitte & Touche

Hamilton, Bermuda

February 18, 2011

ITEM 9B.
/s/ Deloitte & ToucheOTHER INFORMATION

Hamilton, Bermuda

February 22, 2010

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference from athe sections captioned “Proposal No. 1—Election of Directors”, “Corporate Governance”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Executive Officers” in the 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, 20092010 pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 11.EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from athe sections captioned “Executive Compensation”, “Compensation Discussion and Analysis”, “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in the 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, 20092010 pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference from athe sections captioned “Principal Shareholders” and “Equity Compensation Plan Information” in the 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, 20092010 pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference from athe sections captioned “Certain Relationships and Related Transactions”, and “Corporate Governance” in the 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, 20092010 pursuant to Regulation 14A.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference from athe section captioned “Principal Accountant Fees and Services” in the 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, 20092010 pursuant to Regulation 14A.

PART IV

 

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

(a)Financial Statements, Financial Statement Schedules and Exhibits.

 

1.Financial Statements

Included in Part II—See Item 8 of this report.

 

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

 

Exhibit

Number*Number

  

Description of Document

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. 333-103620) filed on April 16, 2003).
3.2  Amended and Restated Bye-laws of AXIS Capital Holdings Limited (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed on May 15, 2009).
4.1  Specimen Common Share Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 3) (No. 333-103620) filed on June 10, 2003).
4.2  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 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 on Form 8-K filed on November 15, 2004).
4.5Senior Indenture among AXIS Specialty Finance LLC, AXIS Capital Holdings Limited and The Bank of New York Mellon Trust Company, N.A., as trustee, dated as of March 23, 2010 (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q filed on April 27, 2010).
4.6  Certificate of Designations setting 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 on Form 8-K filed on October 4, 2005).

Exhibit

Number*

Description of Document

  4.64.7  Certificate of Designations setting 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 on Form 8-K filed on November 23, 2005).

Exhibit

Number

Description of Document

10.1 Amended and Restated Shareholders Agreement dated December 31, 2002, among 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    *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    *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    *10.4 Amendment No. 2 to Employment Agreement between John R. Charman and AXIS Specialty Limited dated February 19, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 19, 2008).
10.5    *10.5 Amendment No. 3 to Employment Agreement between John R. Charman and AXIS Specialty Limited dated May 20, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 20, 2008).
10.6    *10.6Amendment No. 4 to Employment Agreement between John R. Charman and AXIS Specialty Limited dated December 31, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 4, 2011).
    *10.7 Amended and Restated Supplemental Executive Retirement Agreement by and between AXIS Specialty Limited and John R. Charman dated May 8, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 5, 2008).
10.7    *10.8 Amended and Restated 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).
10.8    *10.9 Amendment No. 1 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).
10.9    *10.10 Amendment No. 2 to Amended and Restated Service Agreement by and between AXIS Specialty Limited and Michael A. Butt dated September 19, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 23, 2008).
10.10    *10.11 Amendment No. 3 to Amended and Restated Service Agreement by and between Michael A. Butt and AXIS Specialty Limited dated May 6, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s QuarterlyCurrent Report on Form 10-Q8-K filed on May 7, 2009).
10.11    *10.12Amendment No. 4 to Amended and Restated Service Agreement by and between Michael A. Butt and AXIS Specialty Limited dated December 31, 2010 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 4, 2011).
    *10.13 Amended and Restated Supplemental Executive Retirement Agreement by and between AXIS Specialty Limited and Michael A. Butt dated May 8, 2008 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 5, 2008).

Exhibit

Number*Number

  

Description of Document

10.12
*10.14  Amendment No. 1 to Amended and Restated Supplemental Executive Retirement Agreement by and between AXIS Specialty Limited and Michael A. Butt dated September 19, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 23, 2008).
10.13*10.15Employment Agreement by and between AXIS Specialty U.S. Services, Inc. and Albert Benchimol dated November 1, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 2, 2010).
*10.16  Employment Agreement between Dennis B. Reding and AXIS Specialty U.S. Services, Inc. dated as of January 1, 2004 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on May 5, 2004).
10.14Amendment to Employment Agreement between Dennis B. Reding and AXIS Specialty U.S. Services, Inc. dated December 31, 2008 (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on February 25, 2009).
10.15Employment Agreement between William A. Fischer and AXIS Specialty Limited dated as of January 1, 2004 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 5, 2004).
10.16Amendment to Employment Agreement between William A. Fischer and AXIS Specialty Limited dated December 16, 2008 (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K filed on February 25, 2009).
10.17Employment Agreement between John Gressier and AXIS Specialty Limited dated as of July 5, 20072010 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 6, 2007)January 4, 2011).
10.18*10.17  Employment Agreement between William A. Fischer and AXIS Specialty Limited dated September 8, 2006 between AXIS Capital Holdings Limited and David B. Greenfieldas of December 31, 2010 (incorporated by reference to Exhibit 10.310.4 to the Company’s Current Report on Form 8-K filed on September 14, 2006)January 4, 2011).
10.19*10.18  Amendment to Employment Agreement between David B. GreenfieldJohn Gressier and AXIS Capital HoldingsSpecialty Limited dated as of December 26, 200831, 2010 (incorporated by reference to Exhibit 10.1810.5 to the Company’s AnnualCurrent Report on Form 10-K8-K filed on February 25, 2009)January 4, 2011).
*10.19Separation Agreement dated August 23, 2010 by and among AXIS Capital Holdings Limited, AXIS Specialty U.S. Services, Inc. and David B. Greenfield (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 26, 2010).
*10.20  2003 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-103620) filed on May 17, 2003).
*10.21  AXIS Capital Holdings Limited 2007 Long-Term Equity Compensation Plan, as amended and restated (incorporated by reference to Exhibit 10.2 to the Company’s QuarterlyCurrent Report on Form 10-Q8-K filed on May 7, 2009).
*10.22  Form of Employee Restricted Stock Agreement (incorporated by reference to Exhibit 10.2310.1 to the Company’s AnnualCurrent Report on Form 10-K8-K filed on February 25, 2009)September 28, 2010).
*10.23  Form of Employee Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2410.2 to the Company’s AnnualCurrent Report on Form 10-K8-K filed on February 25, 2009)September 28, 2010).
*10.24  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).

Exhibit

Number*

Description of Document

*10.25  2003 Directors Deferred Compensation Plan, as amended and restated (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on April 28, 2009).
*10.26  20102011 Directors Annual Compensation Program (incorporated by reference to Exhibit 10.110.5 to the Company’s Quarterly Report on Form 10-Q filed on November 3, 2009)2, 2010).
*10.27  AXIS Specialty U.S. Services, Inc. Supplemental Retirement Plan (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed on February 26, 2008).
*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).

Exhibit

Number

Description of Document

10.29    *10.29 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).
10.30 CreditMaster Reimbursement Agreement, dated August 25, 2005as of May 14, 2010, by and among AXIS Capital Holdings Limited, AXIS Specialty Limited, AXIS Re Limited, AXIS Specialty Europe Limited, JP Morgan Chase Bank NA, as administrative agentAXIS Insurance Company, AXIS Surplus Insurance Company, AXIS Specialty Insurance Company, AXIS Reinsurance Company 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).
10.31Amendment 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 AgentCitibank Europe plc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 28, 2007)May 19, 2010).
†12.1      10.31Credit Agreement, dated as of August 24, 2010, by and among AXIS Capital Holdings Limited, certain subsidiaries of AXIS Capital Holdings Limited party thereto, Bank of America, N.A., as Administrative Agent and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 25, 2010).
    †12.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
†21.1    †21.1 Subsidiaries of the registrant.
†23.1    †23.1 Consent of Deloitte & Touche.
†24.1    †24.1 Power of Attorney (included as part of signature pages hereto).
†31.1    †31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†31.2    †31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†32.1    †32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†32.2    †32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101The following financial information from AXIS Capital Holdings Limited’s Annual Report on Form 10-K for the year ended December 31, 2010 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2010 and 2009; (ii) Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2010, 2009 and 2008; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text.

 

*Exhibits 10.2 through 10.29 represent a management contract, compensatory plan or arrangement in which directors and/or executive officers are eligible to participate.
Filed herewith.
**As provided in Rule 406T of Regulation S-T, this information is “furnished” herewith and not “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 unless AXIS Capital Holdings Limited specifically incorporates it by reference.

 

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 22, 2010.18, 2011.

 

AXIS CAPITAL HOLDINGS LIMITED

By: 

/s/    JOHN 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,Albert Benchimol, 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 22, 2010.18, 2011.

 

Signature

  

Title

/s/S/ JOHN R. CHARMAN

John R. Charman

  Chief Executive Officer, President and Director
(Principal Executive Officer)

/s/  DAVIDS/ ALBERT B. GBREENFIELD        ENCHIMOL

David B. GreenfieldAlbert Benchimol

  Chief Financial Officer
(Principal Financial Officer)

/s/S/ GORDON MCFADDEN

Gordon McFadden

  Controller
(Principal Accounting Officer)

/s/S/ GEOFFREY BELL

Geoffrey Bell

  Director

/s/S/ MICHAEL A. BUTT

Michael A. Butt

  Director

/s/S/ CHARLES A. DAVIS

Charles A. Davis

  Director

/S/ ROBERT L. FRIEDMAN

Robert L. Friedman

Director

/S/ DONALD J. GREENE

Donald J. Greene

Director

Signature

  

Title

/s/  ROBERTS/ CHRISTOPHER L. FV. GRIEDMAN        REETHAM

Robert L. FriedmanChristopher V. Greetham

  Director

/s/  DONALDS/ MAURICE J. GA. KREENE        EANE

Donald J. GreeneMaurice A. Keane

  Director

/s/  CHRISTOPHERS V. GREETHAM        

Christopher V. Greetham

Director

/s/  MAURICE A. KEANE        

Maurice A. Keane

Director

/s/ SIR ANDREW LARGE

Sir Andrew Large

  Director

/s/S/ CHERYL-ANN LISTER

Cheryl-Ann Lister

  Director

/s/S/ THOMAS C. RAMEY

Thomas C. Ramey

Director

/S/ HENRY B. SMITH

Henry B. Smith

  Director

/s/  THOMASS/ WILHELM C. RZAMEY        ELLER

Thomas C. RameyWilhelm Zeller

  Director

/s/  FRANK J. TASCO        

Frank J. Tasco

 Director

/s/  WILHELM ZELLER        

Wilhelm Zeller

Director

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, 20092010, and 2008,2009, and for each of the three years in the period ended December 31, 2009,2010, and the Company’s internal control over financial reporting as of December 31, 2009,2010, and have issued our reports thereon dated February 22, 2010;18, 2011; 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.

As discussed in Note 2 to the consolidated financial statements, on April 1, 2009 the Company adopted FSP FAS 115-2,Recognition and Presentation of Other-Than-Temporary Impairments(Codified in FASB ASC Topic 320, Investments – Investments—Debt and Equity Securities).

/s/ Deloitte & Touche

/s/ Deloitte & Touche

Hamilton, Bermuda

February 18, 2011

Hamilton, Bermuda

February 22, 2010

SCHEDULE II

AXIS CAPITAL HOLDINGS LIMITED

CONDENSED BALANCE SHEETS – PARENT COMPANY

DECEMBER 31, 20092010 AND 20082009

 

   2009  2008 
   (in thousands) 

Assets

   

Investments in subsidiaries on equity basis

  $6,258,813   $5,351,120  

Cash and cash equivalents

   29,618    15,693  

Other assets

   2,001    2,396  
         

Total assets

  $6,290,432   $5,369,209  
         

Liabilities

   

Intercompany payable

  $191,878   $338,931  

Senior notes

   499,476    499,368  

Dividends payable

   80,494    65,052  

Other liabilities

   18,340    4,817  
         

Total liabilities

   790,188    908,168  
         

Shareholders’ equity

   

Preferred shares - Series A and B

   500,000    500,000  

Common shares (2009: 132,140; 2008: 136,212 shares issued and outstanding)

   1,903    1,878  

Additional paid-in capital

   2,014,815    1,962,779  

Accumulated other comprehensive income (loss)

   85,633    (706,499

Retained earnings

   3,569,411    3,198,492  

Treasury shares, at cost(2009: 20,325; 2008: 14,243 shares)

   (671,518  (495,609
         

Total shareholders’ equity

   5,500,244    4,461,041  
         

Total liabilities and shareholders’ equity

  $  6,290,432   $  5,369,209  
         

   2010  2009 
   (in thousands) 

Assets

   

Investments in subsidiaries on equity basis

  $6,505,431  $6,258,813 

Cash and cash equivalents

   8,496   29,618 

Other assets

   3,716   2,001 
         

Total assets

  $6,517,643  $6,290,432 
         

Liabilities

   

Intercompany payable

  $295,422  $191,878 

Senior notes

   499,583   499,476 

Dividends payable

   93,843   80,494 

Other liabilities

   3,825   18,340 
         

Total liabilities

   892,673   790,188 
         

Shareholders’ equity

   

Preferred shares - Series A and B

   500,000   500,000 

Common shares(2010: 154,912; 2009: 152,465 shares issued and 2010: 112,393; 2009: 132,140 shares outstanding)

   1,934   1,903 

Additional paid-in capital

   2,059,708   2,014,815 

Accumulated other comprehensive income

   176,821   85,633 

Retained earnings

   4,267,608   3,569,411 

Treasury shares, at cost(2010: 42,519; 2009: 20,325 shares)

   (1,381,101  (671,518
         

Total shareholders’ equity

   5,624,970   5,500,244 
         

Total liabilities and shareholders’ equity

  $ 6,517,643  $ 6,290,432 
         

 

(1)On November 15, 2004, AXIS Capital issued $500 million aggregate principal amount of 5.75% senior unsecured debt (“Senior Notes”) at an issue price of 99.785%, generating net proceeds of $496 million. Interest of the 5.75% Senior Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2005. Unless previously redeemed, the 5.75% Senior Notes will mature on December 1, 2014.
(2)AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance, an indirect wholly-owned subsidiary, related to the issuance of $500 million aggregate principal amount of 5.875% senior unsecured notes. AXIS Capital’s obligations under this guarantee are unsecured and senior and rank equally with all other senior obligations of AXIS Capital.

SCHEDULE II (Continued)

AXIS CAPITAL HOLDINGS LIMITED

CONDENSED STATEMENTS OF OPERATIONS – PARENT COMPANY

YEARS ENDED DECEMBER 31, 2010, 2009 2008 AND 20072008

 

  2009 2008 2007   2010 2009 2008 
  (in thousands, except for per share amounts)   (in thousands) 

Revenues

        

Net investment income

  $27   $297   $660    $74  $27  $297 
                    

Total revenues

   27    297    660     74   27   297 
          
          

Expenses

        

General and administrative expenses

   42,114    42,342    30,444     33,785   42,114   42,342 

Interest expense and financing costs

   29,201    29,201    29,210     29,201   29,201   29,201 
                    

Total expenses

   71,315    71,543    59,654     62,986   71,315   71,543 
                    

Loss before equity in net earnings of subsidiaries

   (71,288  (71,246  (58,994   (62,912  (71,288  (71,246

Equity in net earnings of subsidiaries

   569,174    458,622    1,151,012     919,635   569,174   458,622 
                    

Net income

   497,886    387,376    1,092,018     856,723   497,886   387,376 

Preferred share dividends

   36,875    36,875    36,775     36,875   36,875   36,875 
                    

Net income available to common shareholders

  $461,011   $350,501   $1,055,243    $  819,848  $  461,011  $  350,501 
                    

SCHEDULE II (Continued)

AXIS CAPITAL HOLDINGS LIMITED

CONDENSED STATEMENTSTATEMENTS OF CASH FLOWS – PARENT COMPANY

YEARS ENDED DECEMBER 31, 2010, 2009 2008 AND 20072008

 

  2009 2008 2007   2010 2009 2008 
  (in thousands)   (in thousands) 

Cash flows from operating activities:

      

Net income

  $497,886   $387,376   $1,092,018    $856,723  $497,886  $387,376 

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

        

Equity in net earnings of subsidiaries

   (569,174  (458,622  (1,151,012   (919,635  (569,174  (458,622

Intercompany payable

   (147,053  65,240    (85,833   103,544   (147,053  65,240 

Dividends received from subsidiaries

   530,000    430,000    565,000     697,500   530,000   430,000 

Other items

   24,190    15,417    26,501     87,277   24,190   15,417 
                    

Net cash provided by operating activities

   335,849    439,411    446,674     825,409   335,849   439,411 
                    

Cash flows from investing activities:

        

Investment in subsidiaries

   -    (25,000  (100   -        -        (25,000
                    

Net cash used in investing activities

   -    (25,000  (100   -        -        (25,000
          
          

Cash flows from financing activities:

        

Repurchase of shares

   (175,909  (291,003  (308,110   (709,583  (175,909  (291,003

Dividends paid - common shares

   (112,984  (106,368  (111,226   (108,302  (112,984  (106,368

Dividends paid - preferred shares

   (36,875  (36,875  (36,775   (36,875  (36,875  (36,875

Proceeds from issuance of common shares

   3,844    26,117    8,898     8,229   3,844   26,117 
                    

Net cash used in financing activities

   (321,924  (408,129  (447,213    (846,531   (321,924   (408,129
                    

Increase (decrease) in cash and cash equivalents

   13,925    6,282    (639   (21,122  13,925   6,282 

Cash and cash equivalents - beginning of period

   15,693    9,411    10,050     29,618   15,693   9,411 
                    

Cash and cash equivalents - end of period

  $29,618   $15,693   $9,411    $8,496  $29,618  $15,693 
                    

Supplemental disclosures of cash flow information:

        
          

Interest paid

  $28,750   $28,750   $28,750    $28,750  $28,750  $28,750 
                    

SCHEDULE III

AXIS CAPITAL HOLDINGS LIMITED

SUPPLEMENTARY INSURANCE INFORMATION

At and year ended December 31, 2010

(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(2)
  Net
Premiums
Written
 

Insurance

 $ 119,323  $ 3,512,002  $ 1,359,668  $ 1,206,493  $-       $569,869  $ 152,223  $ 276,435   $ 1,332,220 

Reinsurance

  239,977   3,520,373   974,008   1,740,917   -        1,107,263   336,489   98,001    1,815,320 

Corporate

  -        -        -        -        406,892    -        -        75,449    -      
                                    

Total

 $359,300  $7,032,375  $2,333,676  $2,947,410  $ 406,892   $ 1,677,132  $488,712  $449,885   $3,147,540 
                                    

At and year ended December 31, 2009

 

(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(2)
 Net
Premiums
Written
 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(2)
 Net
Premiums
Written
 

Insurance

 $87,818 $3,502,680 $1,293,529 $1,157,966 $- $612,694 $113,187 $216,954 $1,025,061 $87,818  $3,502,680  $1,293,529  $1,157,966  $-       $612,694  $113,187  $216,954   $1,025,061 

Reinsurance

  214,502  3,061,453  915,868  1,633,798  -  811,178  307,308  76,127  1,791,368  214,502   3,061,453   915,868   1,633,798   -        811,178   307,308   76,127    1,791,368 

Corporate

  -  -  -  -  464,478  -  -  77,076  -  -        -        -        -        464,478    -        -        77,076    -      
                                             

Total

 $302,320 $6,564,133 $2,209,397 $2,791,764 $464,478 $1,423,872 $420,495 $370,157 $2,816,429 $ 302,320  $ 6,564,133  $ 2,209,397  $ 2,791,764  $ 464,478   $ 1,423,872  $ 420,495  $ 370,157   $ 2,816,429 
                                             

At and year ended December 31, 2008

 

(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(2)
 Net
Premiums
Written

Insurance

 $95,758 $3,547,071 $1,419,075 $1,183,143 $- $659,668 $102,475 $193,881 $1,133,843

Reinsurance

  177,338  2,697,712  743,326  1,504,038  -  1,053,098  264,034  68,690  1,533,037

Corporate

  -  -  -  -  247,237  -  -  73,187  -
                           

Total

 $273,096 $6,244,783 $2,162,401 $2,687,181 $247,237 $1,712,766 $366,509 $335,758 $2,666,880
                           

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(2)
 Net
Premiums
Written
 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(2)
 Net
Premiums
Written
 

Insurance

 $114,015 $3,333,743 $1,434,079 $1,208,440 $- $534,264 $126,423 $175,810 $1,326,647 $95,758  $3,547,071  $1,419,075  $1,183,143  $-       $659,668  $102,475  $193,881   $1,133,843 

Reinsurance

  162,786  2,253,568  712,008  1,525,970  -  835,996  258,074  69,721  1,537,110  177,338   2,697,712   743,326   1,504,038   -        1,053,098   264,034   68,690    1,533,037 

Corporate

  -  -  -  -  482,873  -  -  58,300  -  -        -        -        -        247,237    -        -        73,187    -      
                                             

Total

 $276,801 $5,587,311 $2,146,087 $2,734,410 $482,873 $1,370,260 $384,497 $303,831 $2,863,757 $ 273,096  $ 6,244,783  $ 2,162,401  $ 2,687,181  $ 247,237   $ 1,712,766  $ 366,509  $ 335,758   $ 2,666,880 
                                             

 

(1)As we evaluate the underwriting results of each of our reportable segments separately from the results of our investment portfolio, we do not allocate net investment income to our reportable segments.
(2)General and administrative expenses incurred by our reportable segments are allocated directly. Certain corporate overhead is allocated to our reportable segments based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Other corporate expenses do not relate to underwriting operations and, therefore, are not allocated to our reportable segments.

SCHEDULE IV

AXIS CAPITAL HOLDINGS LIMITED

SUPPLEMENTARY REINSURANCE INFORMATION

YEARS ENDED DECEMBER 31, 2010, 2009 2008 AND 20072008

 

(in thousands)

  DIRECT
GROSS
PREMIUM
  CEDED TO
OTHER
COMPANIES
  ASSUMED
FROM OTHER
COMPANIES
  NET AMOUNT  PERCENTAGE OF
AMOUNT
ASSUMED
TO NET
     DIRECT
GROSS
PREMIUM
     CEDED TO
OTHER
COMPANIES
     ASSUMED
FROM OTHER
COMPANIES
     NET
AMOUNT
     PERCENTAGE
OF AMOUNT
ASSUMED TO NET
 

2010

    $ 1,619,880     $ 602,996     $ 2,130,656     $ 3,147,540      67.7%  

2009

  $  1,516,031  $  770,866  $  2,071,264  $  2,816,429  73.5     1,516,031      770,866      2,071,264      2,816,429      73.5%  

2008

   1,580,397   723,508   1,809,990   2,666,880  67.9     1,580,397      723,508      1,809,990      2,666,880      67.9%  

2007

   1,691,931   726,333   1,898,159   2,863,757  66.3

 

199188