Edgar Filing: AXIS CAPITAL HOLDINGS LTD

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

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

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-31721

AXIS CAPITAL HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

BERMUDA

(State or other jurisdiction of incorporation or organization)

98-0395986

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

92 Pitts Bay Road, Pembroke, Bermuda HM 08

(Address of principal executive offices and zip code)

(441) 496-2600

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of July 26, 2010 there were 119,982,422 Common Shares, $0.0125 par value per share, of the registrant outstanding.

AXIS CAPITAL HOLDINGS LIMITED

INDEX TO FORM 10-Q


		Page
	PART I

	Financial Information	3

Item 1.	Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69

Item 4.	Controls and Procedures	69

	PART II

	Other Information	70

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 6.	Exhibits	72

	Signatures	73

PART I

FINANCIAL INFORMATION

Cautionary Statement Regarding Forward-looking Statements

This quarterly report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report 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 Condition and Results of Operations’ included in our Annual Report on Form 10-K for the year ended December 31, 2009.

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

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS


		Page

Consolidated Balance Sheets as at June 30, 2010 (Unaudited) and December 31, 2009		5

Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009 (Unaudited)		6

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2010 and 2009 (Unaudited)		7

Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2010 and 2009 (Unaudited)		8

Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (Unaudited)		9

Notes to the Consolidated Financial Statements (Unaudited)		10

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009


	2010			2009
	(in thousands)
Assets
Investments:
Fixed maturities, available for sale, at fair value (Amortized cost 2010: $9,880,475; 2009: $9,628,287)	$	10,064,335		$	9,718,355
Equity securities, available for sale, at fair value (Cost 2010: $218,303; 2009: $195,011)		201,173			204,375
Other investments, at fair value		547,873			570,276
Short-term investments, at amortized cost		131,104			129,098

Total investments		10,944,485			10,622,104
Cash and cash equivalents		1,092,616			788,614
Restricted cash and cash equivalents		104,927			75,440
Accrued interest receivable		94,686			89,559
Insurance and reinsurance premium balances receivable		1,722,586			1,292,877
Reinsurance recoverable on unpaid and paid losses		1,545,080			1,424,172
Deferred acquisition costs		419,191			302,320
Prepaid reinsurance premiums		271,700			301,885
Securities lending collateral		107,167			129,814
Net receivable for investments sold		—			12,740
Goodwill and intangible assets		90,473			91,505
Other assets		165,369			175,494

Total assets	$	16,558,280		$	15,306,524


Liabilities
Reserve for losses and loss expenses	$	6,718,776		$	6,564,133
Unearned premiums		2,781,101			2,209,397
Insurance and reinsurance balances payable		199,463			173,156
Securities lending payable		108,167			132,815
Senior notes		993,843			499,476
Other liabilities		181,959			227,303
Net payable for investments purchased		79,669			—

Total liabilities		11,062,978			9,806,280


*Commitments and Contingencies*

Shareholders’ equity
Preferred shares - Series A and B		500,000			500,000
Common shares (2010: 154,549; 2009: 152,465 shares issued and 2010: 120,254; 2009: 132,140 shares outstanding)		1,930			1,903
Additional paid-in capital		2,038,158			2,014,815
Accumulated other comprehensive income		221,856			85,633
Retained earnings		3,824,111			3,569,411
Treasury shares, at cost (2010: 34,295; 2009: 20,325 shares)		(1,090,753	)		(671,518	)

Total shareholders’ equity		5,495,302			5,500,244

Total liabilities and shareholders’ equity	$	16,558,280		$	15,306,524

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009


	Three months ended						Six months ended
	2010			2009			2010			2009
	(in thousands, except for per share amounts)
Revenues
Net premiums earned	$	735,027		$	706,770		$	1,431,219		$	1,372,129
Net investment income		82,584			112,220			187,203			211,512
Other insurance related income (loss)		217			(14,261	)		843			(23,656	)
Net realized investment gains (losses):
Other-than-temporary impairment losses		(7,533	)		(22,896	)		(14,490	)		(52,796	)
Portion of impairment losses transferred to other comprehensive income		107			1,443			1,556			1,443
Other realized investment gains (losses)		32,045			(2,225	)		53,729			(12,922	)

Total net realized investment gains (losses)		24,619			(23,678	)		40,795			(64,275	)

Total revenues		842,447			781,051			1,660,060			1,495,710

Expenses
Net losses and loss expenses		403,370			378,252			871,632			766,251
Acquisition costs		124,176			103,309			240,825			205,285
General and administrative expenses		106,062			86,949			205,831			173,506
Foreign exchange losses (gains)		(27,229	)		24,184			(35,376	)		23,795
Interest expense and financing costs		15,697			7,971			24,385			15,892

Total expenses		622,076			600,665			1,307,297			1,184,729


Income before income taxes		220,371			180,386			352,763			310,981
Income tax expense		6,300			12,006			17,661			17,703

Net income		214,071			168,380			335,102			293,278

Preferred share dividends		9,219			9,219			18,438			18,438

Net income available to common shareholders	$	204,852		$	159,161		$	316,664		$	274,840


Weighted average common shares and common share equivalents:
Basic		121,766			137,849			124,961			137,586

Diluted		135,665			149,861			138,899			149,448


Earnings per common share:
Basic	$	1.68		$	1.15		$	2.53		$	2.00

Diluted	$	1.51		$	1.06		$	2.28		$	1.84


Cash dividends declared per common share	$	0.21		$	0.20		$	0.42		$	0.40

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009


	Three months ended						Six months ended
	2010			2009			2010			2009
	(in thousands)
Net income	$	214,071		$	168,380		$	335,102		$	293,278
Other comprehensive income, net of tax:
Available for sale investments:
Unrealized gains arising during the period		75,000			254,295			169,589			155,046
Portion of other-than-temporary impairment losses recognized in other comprehensive income		(107	)		(1,443	)		(1,556	)		(1,443	)
Adjustment for re-classification of realized investment (gains) losses and net impairment losses recognized in net income		(17,384	)		23,103			(30,218	)		64,636
Foreign currency translation adjustment		(1,108	)		1,300			(1,592	)		(1,667	)

Comprehensive income	$	270,472		$	445,635		$	471,325		$	509,850

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2010 AND 2009


	2010			2009
	(in thousands)
Preferred shares - Series A and B
Balance at beginning and end of period	$	500,000		$	500,000


Common shares (par value)
Balance at beginning of period		1,903			1,878
Shares issued		27			22

Balance at end of period		1,930			1,900


Additional paid-in capital
Balance at beginning of period		2,014,815			1,962,779
Shares issued		1,430			13
Stock options exercised		2,641			920
Share-based compensation expense		19,272			25,791

Balance at end of period		2,038,158			1,989,503


Accumulated other comprehensive income (loss)
Unrealized appreciation (depreciation) on available for sale investments, net of tax:
Balance at beginning of period		87,438			(702,548	)
Cumulative effect of change in accounting principle (see Note 3(d))		—			(38,334	)
Unrealized gains arising during the period, net of reclassification adjustment		139,371			219,682
Portion of other-than-temporary impairment losses		(1,556	)		(1,443	)

Balance at end of period		225,253			(522,643	)

Cumulative foreign currency translation adjustments, net of tax:
Balance at beginning of period		803			—
Foreign currency translation adjustment		(1,592	)		(1,667	)

Balance at end of period		(789	)		(1,667	)

Supplemental Executive Retirement Plans (SERPs):
Balance at beginning of period		(2,608	)		(3,951	)
Net actuarial gain (loss)		—			—

Balance at end of period		(2,608	)		(3,951	)

Balance at end of period		221,856			(528,261	)


Retained earnings
Balance at beginning of period		3,569,411			3,198,492
Cumulative effect of change in accounting principle, net of tax (see Note 3(d))		—			38,334
Net income		335,102			293,278
Series A and B preferred share dividends		(18,438	)		(18,438	)
Common share dividends		(61,964	)		(64,155	)

Balance at end of period		3,824,111			3,447,511


Treasury shares, at cost
Balance at beginning of period		(671,518	)		(495,609	)
Shares repurchased for treasury		(419,235	)		(5,925	)

Balance at end of period		(1,090,753	)		(501,534	)


Total shareholders’ equity	$	5,495,302		$	4,909,119

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2010 AND 2009


	2010			2009
	(in thousands)
Cash flows from operating activities:
Net income	$	335,102		$	293,278
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment (gains) losses		(40,795	)		64,275
Loss on insurance derivative contract		—			25,000
Net realized and unrealized gains of other investments		(14,280	)		(26,110	)
Amortization of fixed maturities		24,232			5,319
Other amortization and depreciation		6,175			6,684
Share-based compensation expense		19,272			25,791
Changes in:
Accrued interest receivable		(5,127	)		(8,129	)
Reinsurance recoverable balances		(120,908	)		(65,210	)
Deferred acquisition costs		(116,871	)		(101,753	)
Prepaid reinsurance premiums		30,185			(17,441	)
Reserve for loss and loss expenses		154,643			317,111
Unearned premiums		571,704			508,624
Insurance and reinsurance balances, net		(403,402	)		(545,665	)
Other items		98,312			(30,332	)

Net cash provided by operating activities		538,242			451,442


Cash flows from investing activities:
Purchases of:
Fixed maturities		(5,436,355	)		(5,251,298	)
Equity securities		(55,537	)		(24,689	)
Other investments		(20,000	)		(91,800	)
Proceeds from the sale of:
Fixed maturities		4,788,803			3,871,643
Equity securities		27,772			44,967
Other investments		56,682			60,420
Proceeds from redemption of fixed maturities		482,894			497,681
Net (purchases) sales of short-term investments		(1,819	)		102,660
Purchase of other assets		(4,994	)		(39,660	)
Change in restricted cash and cash equivalents		(29,487	)		6,272

Net cash used in investing activities		(192,041	)		(823,804	)


Cash flows from financing activities:
Net proceeds from issuance of senior notes		494,870			—
Repurchase of shares		(419,235	)		(5,925	)
Dividends paid - common shares		(57,439	)		(59,562	)
Dividends paid - preferred shares		(18,438	)		(18,438	)
Proceeds from issuance of common shares		4,098			955

Net cash (used in) provided by financing activities		3,856			(82,970	)


Effect of exchange rate changes on foreign currency cash		(46,055	)		21,794

Increase (decrease) in cash and cash equivalents		304,002			(433,538	)
Cash and cash equivalents - beginning of period		788,614			1,697,581

Cash and cash equivalents - end of period	$	1,092,616		$	1,264,043

See accompanying notes to Consolidated Financial Statements.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

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

The consolidated balance sheet at June 30, 2010 and the consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for the periods ended June 30, 2010 and 2009 have not been audited. The balance sheet at December 31, 2009 is derived from our audited financial statements.

These statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated.

The following information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009. Tabular dollars and share amounts are in thousands, except per share amounts.

Significant Accounting Policies

There have been no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2009.

Adoption of New Accounting Standards

Fair Value Measurement and Disclosures

Effective January 1, 2010, we adopted new guidance issued by the FASB requiring additional disclosures about transfers into and out of Levels 1 and 2 of the fair value hierarchy and separate disclosures about purchases, sales, issuance, and settlements relating to Level 3 measurements. As these new requirements related solely to disclosures, the adoption did not impact our results of operations, financial condition or liquidity. The additional disclosures have been provided in Note 4 – Fair Value Measurements.

Consolidations

Effective January 1, 2010, we adopted amended FASB guidance related to the consolidation of variable interest entities (“VIEs”). This new guidance modifies the approach for determining the primary beneficiary of a VIE by eliminating the initial quantitative assessment and requiring ongoing qualitative reassessments. The adoption of this guidance did not impact our results of operations or financial condition.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)

Recently Issued Accounting Standards Not Yet Adopted

Embedded Credit Derivatives

In March 2010, the FASB issued new guidance clarifying the 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 are not subject to potential bifurcation and separate accounting. However, other embedded credit-derivative features are required to be analyzed to determine whether they must be accounted for separately. Additional guidance on whether embedded credit-derivative features in financial instruments issued by structures such as collateralized debt obligations (“CDOs”) and synthetic CDOs are subject to bifurcation and separate accounting. To simplify compliance with this new guidance, an entity may make a one-time election to apply the fair value option to any investment in a beneficial interest in securitized financial assets, regardless of whether such investments contain embedded derivative features. This new guidance is effective as of July 1, 2010, with early adoption being permitted at April 1, 2010. We do not anticipate the adoption of this guidance will significantly impact our results of operations, financial condition or liquidity.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

In July 2010, the FASB issued new guidance 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 changes in the allowance for credit losses during the reporting period. Financing receivables are defined to include instruments such as certain trade receivables, notes receivable and lease receivables, in addition to instruments more traditionally associated with an allowance for credit losses, such as consumer and commercial lending agreements. The new disclosure requirements related to information at the end of a reporting period will become effective at October 1, 2010, while requirements related to activity that occurred during a reporting period will become effective at January 1, 2011. We are presently evaluating the disclosure impact of the adoption of this guidance.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2.	SEGMENT INFORMATION

Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Reinsurance and therefore we have determined that we have 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.

The following tables summarize the underwriting results of our operating segments for the periods indicated and the carrying values of goodwill and intangible assets at June 30, 2010 and 2009:


	2010									2009
Three months ended June 30,	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written	$	612,893		$	326,980		$	939,873		$	526,764		$	387,877		$	914,641
Net premiums written		466,880			322,058			788,938			313,136			387,877			701,013
Net premiums earned		301,652			433,375			735,027			298,975			407,795			706,770
Other insurance related income (loss)		217			-			217			(14,956	)		695			(14,261	)
Net losses and loss expenses		(155,494	)		(247,876	)		(403,370	)		(187,211	)		(191,041	)		(378,252	)
Acquisition costs		(40,567	)		(83,609	)		(124,176	)		(28,306	)		(75,003	)		(103,309	)
General and administrative expenses		(64,045	)		(22,817	)		(86,862	)		(52,893	)		(17,525	)		(70,418	)

Underwriting income	$	41,763		$	79,073			120,836		$	15,609		$	124,921			140,530

Corporate expenses								(19,200	)								(16,531	)
Net investment income								82,584									112,220
Net realized investment gains (losses)								24,619									(23,678	)
Foreign exchange (losses) gains								27,229									(24,184	)
Interest expense and financing costs								(15,697	)								(7,971	)

Income before income taxes							$	220,371								$	180,386


Net loss and loss expense ratio		51.6%			57.2%			54.9%			62.6%			46.8%			53.5%
Acquisition cost ratio		13.4%			19.3%			16.9%			9.5%			18.4%			14.6%
General and administrative expense ratio		21.2%			5.3%			14.4%			17.7%			4.3%			12.3%

Combined ratio		86.2%			81.8%			86.2%			89.8%			69.5%			80.4%


Goodwill and intangible assets	$	90,473		$	-		$	90,473		$	95,058		$	-		$	95,058

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2.	SEGMENT INFORMATION (CONTINUED)


	2010									2009
Six months ended June 30,	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total
Gross premiums written	$	985,822		$	1,379,252		$	2,365,074		$	890,922		$	1,347,214		$	2,238,136
Net premiums written		673,692			1,358,881			2,032,573			525,151			1,338,163			1,863,314
Net premiums earned		557,933			873,286			1,431,219			574,598			797,531			1,372,129
Other insurance related income (loss)		843			-			843			(24,761	)		1,105			(23,656	)
Net losses and loss expenses		(286,197	)		(585,435	)		(871,632	)		(339,915	)		(426,336	)		(766,251	)
Acquisition costs		(71,708	)		(169,117	)		(240,825	)		(54,509	)		(150,776	)		(205,285	)
General and administrative expenses		(125,655	)		(44,668	)		(170,323	)		(103,374	)		(35,796	)		(139,170	)

Underwriting income	$	75,216		$	74,066			149,282		$	52,039		$	185,728			237,767

Corporate expenses								(35,508	)								(34,336	)
Net investment income								187,203									211,512
Net realized investment gains (losses)								40,795									(64,275	)
Foreign exchange (losses) gains								35,376									(23,795	)
Interest expense and financing costs								(24,385	)								(15,892	)

Income before income taxes							$	352,763								$	310,981


Net loss and loss expense ratio		51.3%			67.0%			60.9%			59.2%			53.5%			55.8%
Acquisition cost ratio		12.9%			19.4%			16.8%			9.4%			18.9%			15.0%
General and administrative expense ratio		22.5%			5.1%			14.4%			18.0%			4.5%			12.6%

Combined ratio		86.7%			91.5%			92.1%			86.6%			76.9%			83.4%


Goodwill and intangible assets	$	90,473		$	-		$	90,473		$	95,058		$	-		$	95,058

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	INVESTMENTS

a)	Fixed Maturities and Equities

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


	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-credit OTTI in AOCI⁽³⁾
At June 30, 2010
Fixed maturities
U.S. government and agency	$	1,394,728	$	33,738	$	(36	)	$	1,428,430	$	-
Non-U.S. government		784,486		5,742		(35,460	)		754,768		-
Corporate debt		3,971,256		154,373		(63,651	)		4,061,978		(491	)
Agency MBS⁽¹⁾		1,641,101		64,380		(377	)		1,705,104		-
Non-Agency CMBS		583,506		29,004		(3,009	)		609,501		(264	)
Non-Agency RMBS		234,834		2,218		(16,079	)		220,973		(10,199	)
ABS⁽²⁾		661,375		8,791		(15,229	)		654,937		(4,098	)
Municipals		609,189		21,874		(2,419	)		628,644		(389	)

Total fixed maturities	$	9,880,475	$	320,120	$	(136,260	)	$	10,064,335	$	(15,441	)


Equity securities	$	218,303	$	9,058	$	(26,188	)	$	201,173


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		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)	Agency mortgage-backed securities (MBS) include agency residential MBS (RMBS) and agency commercial MBS (CMBS).

(2)	Asset-backed securities (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) and collaterlized debt obligations (CDOs).

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

In the normal course of investing activities, we make passive investments in 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 3(b)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly we are not the primary beneficiary for any of these VIEs. Our maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	INVESTMENTS (CONTINUED)

Gross Unrealized Loss

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:


At June 30, 2010	12 months or greater					Less than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Fixed maturities
U.S. government and agency	$	2,081	$	(8	)	$	23,286	$	(28	)	$	25,367	$	(36	)
Non-U.S. government		-		-			421,555		(35,460	)		421,555		(35,460	)
Corporate debt		37,293		(5,532	)		797,596		(58,119	)		834,889		(63,651	)
Agency MBS		2,219		(132	)		94,323		(245	)		96,542		(377	)
Non-Agency CMBS		38,122		(2,912	)		15,449		(97	)		53,571		(3,009	)
Non-Agency RMBS		114,434		(15,771	)		27,085		(308	)		141,519		(16,079	)
ABS		44,535		(15,014	)		74,218		(215	)		118,753		(15,229	)
Municipals		19,687		(1,802	)		40,967		(617	)		60,654		(2,419	)

Total fixed maturities	$	258,371	$	(41,171	)	$	1,494,479	$	(95,089	)	$	1,752,850	$	(136,260	)


Equity securities	$	12,370	$	(6,059	)	$	131,912	$	(20,129	)	$	144,282	$	(26,188	)


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 June 30, 2010, 583 fixed maturities (2009: 832) were in an unrealized loss position of $136 million (2009: $134 million) of which $17 million (2009: $20 million) of this balance was related to securities below investment grade or not rated.

At June 30, 2010, 183 (2009: 312) securities have been in continuous unrealized loss position for 12 months or greater and have a fair value of $258 million (2009: $705 million). These securities were primarily corporate debt, non-agency CMBS, non-agency RMBS, and ABS with a weighted average S&P credit rating of BBB+, AA-, BBB+, and BB-, respectively. We concluded that these securities as well as the remaining securities in an unrealized loss position are temporarily depressed and are expected to recover in value as the securities approach maturity or as market spreads return to more normalized levels. Further, at June 30, 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.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	INVESTMENTS (CONTINUED)

Equity Securities

At June 30, 2010, 138 securities (2009: 95) were in an unrealized loss position and 44 of these securities (2009: 56) have been in a continuous unrealized loss position for 12 months or greater. 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, we concluded that the above equities in an unrealized loss position were temporarily impaired at June 30, 2010 and December 31, 2009.

b)	Other Investments

The table below shows our portfolio of other investments reported at fair value:


	June 30, 2010			December 31, 2009

Hedge funds	$	110,968	20.3%	$	94,630	16.6%
Funds of hedge funds		225,456	41.1%		256,877	45.0%

Total hedge funds		336,424	61.4%		351,507	61.6%

Distressed securities		22,989	4.2%		22,957	4.0%
Long/short credit		78,108	14.2%		84,392	14.8%

Total credit funds		101,097	18.4%		107,349	18.8%

CLO - equity tranched securities		58,566	10.7%		61,332	10.8%
Short duration high yield fund		51,786	9.5%		50,088	8.8%

Total other investments	$	547,873	100.0%	$	570,276	100.0%

The major categories and related investment strategies for our investments in hedge and credit funds are as follows:


Hedge Fund Type		Investment Strategy
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 funds		Seek to achieve attractive risk-adjusted returns by investing in a large pool of hedge funds across a diversified range of hedge fund strategies.

In aggregate, 94% 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 the six months ended June 30, 2010 and 2009, no gates were imposed on our redemption requests. At June 30, 2010, the only redemptions receivable relate to a December 31, 2009 redemption whereby $2 million is being held back until the completion of the fund’s annual audit.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	INVESTMENTS (CONTINUED)

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 June 30, 2010, the fair value of our hedge funds held in side-pockets was $4 million (2009: $4 million).


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.

At June 30, 2010, we had $45 million of a long/short credit fund that we do not have the ability to liquidate at our own discretion as the fund is beyond its investment period and is currently distributing capital to its investors. Of the remaining credit fund holdings, 32% of the carrying value has annual or semi-annual liquidity and 68% has quarterly liquidity, subject to prior written redemption notice varying from 65 to 95 days. At June 30, 2010 and December 31, 2009, none of our credit funds had established side-pockets.

At June 30, 2010, we have no unfunded commitments relating to our investments in hedge and credit funds.

c)	Net Investment Income

Net investment income was derived from the following sources:


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Fixed maturities	$	86,772		$	100,901		$	177,890		$	192,598
Other investments		(1,985	)		11,868			14,280			18,738
Cash and cash equivalents		989			2,032			2,724			4,888
Equities		1,332			1,392			1,920			1,763
Short-term investments		207			177			427			443

Gross investment income		87,315			116,370			197,241			218,430
Investment expenses		(4,731	)		(4,150	)		(10,038	)		(6,918	)

Net investment income	$	82,584		$	112,220		$	187,203		$	211,512

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	INVESTMENTS (CONTINUED)

d)	Net Realized Investment Gains (Losses)

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


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Gross realized gains	$	58,997		$	23,502		$	118,960		$	84,582
Gross realized losses		(34,240	)		(23,350	)		(75,578	)		(98,607	)
Net OTTI recognized in earnings		(7,426	)		(21,453	)		(12,934	)		(51,353	)

Net realized gains (losses) on fixed maturities and equities		17,331			(21,301	)		30,448			(65,378	)

Change in fair value of investment derivatives⁽¹⁾		2,988			(391	)		2,830			1,009

Fair value hedges:⁽¹⁾
Derivative instruments		57,296			(26,713	)		92,223			(6,648	)
Hedged investments		(52,996	)		24,727			(84,706	)		6,742

Net realized investment gains (losses)	$	24,619		$	(23,678	)	$	40,795		$	(64,275	)

(1)	Refer to Note 6 – Derivative Instruments

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


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Fixed maturities:
Corporate debt	$	-	$	1,604	$	1,650	$	13,026
Agency MBS		-		344		-		344
Non-Agency CMBS		325		10,843		325		10,843
Non-Agency RMBS		2,879		2,622		3,943		7,602
ABS		-		-		1,126		9,983
Municipals		19		-		19		-

		3,223		15,413		7,063		41,798
Equities		4,203		6,040		5,871		9,555

Total OTTI recognized in earnings	$	7,426	$	21,453	$	12,934	$	51,353

On April 1, 2009, we adopted a new accounting standard which amended the previous OTTI recognition model for fixed maturities. For securities in an unrealized loss position that we intend to sell at the end of the reporting period, we recognized the entire unrealized loss position as a credit loss in earnings. For the remaining impaired fixed maturities, we have recorded only the estimated credit losses in earnings rather than the entire unrealized loss position. Because the new accounting standard does not allow for retrospective application, the OTTI amounts reported in the above table for the six months ended June 30, 2010, are not measured on the same basis as prior period amounts and accordingly these amounts are not comparable. The adoption of this new accounting standard on April 1, 2009 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 shareholders’ equity.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	INVESTMENTS (CONTINUED)

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:


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Balance at beginning of period	$	157,842		$	-		$	162,390		$	-
Additions for:
Credit losses remaining in retained earnings related to adoption of accounting standard		-			45,347			-			45,347
Credit impairments recognized on securities not previously impaired		844			2,513			1,188			2,513
Additional credit impairments recognized on securities previously impaired		191			187			777			187
Increases due to changes in the timing of cash flows		-			-			25			-
Reductions for:
Decreases due to changes in the timing of cash flows		(460	)		-			-			-
Securities previously impaired due to subsequent intent to sell		(65	)		-			(65	)		-
Securities sold/redeemed during the period		(11,389	)		(10,818	)		(17,352	)		(10,818	)

Balance at end of period	$	146,963		$	37,229		$	146,963		$	37,229

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 significant inputs and the methodology used to estimate the credit losses for which a portion of the OTTI was recognized in AOCI were as follows:

Corporate Debt:

Our projected cash flows for corporate debt securities, excluding medium-term notes (“MTNs”), 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 credit rating, credit analysis, industry analyst reports and forecasts, Moody’s historical default data and any other data relevant to the recoverability of the security. At December 31, 2009, the weighted average default rate and loss severity rate were 34% and 100%, respectively, for determining the credit losses on our impaired corporate debt securities. For the three and six months ended June 30, 2010, we have not impaired any corporate debt securities except for securities we intended to sell. Additionally, we have sold some previously impaired corporate debt, resulting in a decrease in credit loss impairments of $8 million and $8 million, respectively, in the above credit loss table.

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 June 30, 2010, we have not modified our significant inputs since December 31, 2009, which were as follows:


Default rates, per annum		3% - 5%
Loss severity rates, per annum		45% - 70%
Collateral spreads, per annum		5.2% - 6.7%
Leveraged duration		6.5 - 8.5 years

Agency MBS:

For agency MBS in an unrealized loss position, we do not impair these securities 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 very remote and linked to the overall credit-worthiness of the U.S. government. At June 30, 2010, the fair value of our agency MBS was $1.7 billion (2009: $1.6 billion), which included $0.4 million (2009: $4.4 million) of gross unrealized losses.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	INVESTMENTS (CONTINUED)

Non-agency CMBS:

Our investment in commercial MBS are diversified and rated highly with approximately 78% (2009: 79%) rated AAA by S&P, with a weighted average estimated subordination percentage of 28% at June 30, 2010 (2009: 27%). Based on discounted cash flows, the current level of subordination is sufficient to cover the estimated loan losses on the underlying collateral of the CMBS.

Non-agency RMBS:

For non-agency RMBS, we project expected cash flows to be collected by incorporating underlying data from widely accepted third-party data sources along with certain internal assumptions and judgments regarding the future performance of the security. At June 30, 2010, the fair value of our non-agency RMBS was $221 million (2009: $223 million), consisting primarily of $151 million (2009: $136 million) of Prime and $55 million (2009: $70 million) of Alt-A MBS.

We used the following weighted average significant inputs to estimate the credit loss for potentially impaired Prime and Alt-A MBS in an unrealized loss position at June 30, 2010:


Vintage	Fair Value		Default Rate		Delinquency Rate		Loss Severity Rate		Prepayment Rate
Prime:
Pre-2004	$	10,915	1.2% - 2.0	%	3.7% - 4.9	%	1.8% - 21.7	%	0.5% - 34.1	%
2004		17,364	1.5%		3.7%		18.2%		27.2%
2005		17,287	1.6%		4.1%		19.8%		14.2%
2006		19,263	8.5%		22.2%		42.3%		31.3%
2007		14,460	4.0%		9.7%		27.0%		33.0%

	$	79,289	3.7%		9.5%		25.1%		21.1%

Alt-A:
Pre-2004	$	6,674	1.3% - 4.3	%	4.3% - 7.7	%	37.7% - 41.0	%	10.0% - 12.5	%
2004		18,882	4.4%		14.4%		31.9%		12.3%
2005		21,403	6.5%		18.2%		44.8%		8.5%
2006		—	—		—		—		—
2007		2,676	10.8%		35.8%		0.0%		7.9%

	$	49,635	5.4%		16.0%		36.8%		10.3%

We used the following weighted average significant inputs to estimate the credit loss for potentially impaired Prime and 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%

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	INVESTMENTS (CONTINUED)

These significant inputs 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 credit loss estimate with the independent investment manager’s credit loss estimate for each structured debt security with a significant unrealized loss position.

For the three and six months ended June 30, 2010, based on expected cash flows to be collected, we have recorded additional credit losses of $2 million and $4 million, respectively, on non-agency RMBS.

ABS:

The majority of the unrealized losses on ABS at June 30, 2010 were related to CLO debt tranched securities. We used the following weighted average significant inputs to estimate the credit loss for these securities at June 30, 2010:


	June 30, 2010	December 31, 2009
Default rate, per annum	4.4%	4.4%
Loss severity rate, per annum	50.0%	50.0%
Collateral spreads, per annum	3.3%	3.1%

Our assumptions on default and loss 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 loss severity forecasts. Based on projected cash flows at June 30, 2010, we do not anticipate credit losses on the CLO debt tranched securities.

4.	FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

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

•

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

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

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.	FAIR VALUE MEASUREMENTS (CONTINUED)

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

Fixed Maturities

At each valuation date, we use various valuation techniques to estimate the fair value of our fixed maturities portfolio. These techniques include, but are not limited to, prices obtained from third party pricing services for identical or comparable securities and the use of “pricing matrix models” using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services are 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 techniques 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, 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 unbinding quotes from broker-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 primarily of private corporate debt securities at June 30, 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 of a pricing model (including Option Adjusted Spread) which uses prepayment speeds and spreads to determine the appropriate average life of the MBS. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the significant inputs used to price MBS are observable market inputs, the fair values of the MBS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain unbinding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3 and consist primarily of certain non-agency RMBS and CMBS at June 30, 2010.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.	FAIR VALUE MEASUREMENTS (CONTINUED)

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 CLO debt tranched securities originated by a variety of financial institutions. Similarly to MBS, the fair values of ABS are priced through the use of a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain unbinding 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 June 30, 2010, the use of a discounted cash flow model was limited to our investment in CLO debt tranched securities and included the following significant inputs: default and loss severity rates, collateral spreads, and risk free yield curves (see Note 3(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 Level 2.

Other Investments

The short-duration high yield fund is classified within Level 2 as its fair value is estimated using the net asset value reported by Bloomberg and it has daily liquidity.

The 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 to Note 3 for further details on this asset class.

The CLO – equity tranched securities (“CLO – Equities”) are classified within Level 3 as we estimate the fair value for these securities based on an discounted cash flow model due to the lack of observable, relevant trade in the secondary markets. At June 30, 2010, our discounted cash flow model included the following significant unobservable inputs.


Default rates:
- for 2010		4.6%
- thereafter per annum		4.4%
Loss severity rate per annum		50.0%
Collateral spreads per annum		2.5% - 4.1%

Derivative Instruments

Our foreign currency forward contracts and options are customized to our hedging strategies and trade in the over-the-counter derivative market. We 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.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.	FAIR VALUE MEASUREMENTS (CONTINUED)

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


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
At June 30, 2010
Assets
Fixed maturities
U.S. government and agency	$	872,696	$	555,734	$	-	$	1,428,430
Non-U.S. government		-		754,768		-		754,768
Corporate debt		-		4,058,878		3,100		4,061,978
Agency MBS		-		1,705,104		-		1,705,104
Non-Agency CMBS		-		605,901		3,600		609,501
Non-Agency RMBS		-		218,000		2,973		220,973
ABS		-		608,121		46,816		654,937
Municipals		-		628,644		-		628,644

		872,696		9,135,150		56,489		10,064,335
Equity securities		148,430		52,743		-		201,173
Other investments		-		51,786		496,087		547,873
Other assets (see Note 6)		-		7,633		-		7,633

Total	$	1,021,126	$	9,247,312	$	552,576	$	10,821,014


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 6)		-		9,968		-		9,968

Total	$	1,349,749	$	8,562,274	$	590,951	$	10,502,974

During 2010 and 2009, we had no transfers between Levels 1 and 2.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.	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
	Corporate Debt			Non-Agency CMBS			Non-Agency RMBS			ABS			Total			Other Investments			Total Assets
Three months ended June 30, 2010
Balance at beginning of period	$	18,169		$	3,447		$	3,420		$	47,663		$	72,699		$	487,466		$	560,165
Total net realized and unrealized gains included in net income⁽¹⁾		-			-			-			-			-			6,988			6,988
Total net realized and unrealized losses included in net income⁽¹⁾		-			(119	)		(581	)		(1,134	)		(1,834	)		(9,542	)		(11,376	)
Change in net unrealized gains included in other comprehensive income		2,128			1,061			872			2,300			6,361			-			6,361
Change in net unrealized losses included in other comprehensive income		-			-			-			-			-			-			-
Purchases		-			-			-			-			-			20,000			20,000
Sales		(12	)		(207	)		(211	)		(2,004	)		(2,434	)		(1,810	)		(4,244	)
Settlements / distributions		-			(582	)		(132	)		(9	)		(723	)		(7,015	)		(7,738	)
Transfers into Level 3		-			-			-			-			-			-			-
Transfers out of Level 3		(17,185	)		-			(395	)		-			(17,580	)		-			(17,580	)

Balance at end of period	$	3,100		$	3,600		$	2,973		$	46,816		$	56,489		$	496,087		$	552,576


Level 3 gains / losses included in earnings attributable to the change in unrealized gains /losses relating to those assets held at the reporting date	$	-		$	(119	)	$	(581	)	$	(1,134	)	$	(1,834	)	$	(2,554	)	$	(4,388	)


Six months ended June 30, 2010
Balance at beginning of period	$	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⁾		-			-			-			-			-			12,727			12,727
Total net realized and unrealized losses included in net income⁽¹⁾		(1,550	)		(119	)		(581	)		(1,134	)		(3,384	)		(146	)		(3,530	)
Change in net unrealized gains included in other comprehensive income		3,751			1,093			1,146			2,406			8,396			-			8,396
Change in net unrealized losses included in other comprehensive income		(34	)		(238	)		(20	)		(24	)		(316	)		-			(316	)
Purchases		-			3,474			-			4,000			7,474			20,000			27,474
Sales		(12	)		(206	)		(211	)		(2,004	)		(2,433	)		(44,404	)		(46,837	)
Settlements / distributions		-			(694	)		(485	)		(13	)		(1,192	)		(12,278	)		(13,470	)
Transfers into Level 3		-			-			780			-			780			-			780
Transfers out of Level 3		(17,185	)		(2,119	)		(4,295	)		-			(23,599	)		-			(23,599	)

Balance at end of period	$	3,100		$	3,600		$	2,973		$	46,816		$	56,489		$	496,087		$	552,576


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	)	$	(119	)	$	(581	)	$	(1,134	)	$	(3,384	)	$	12,581		$	9,197

(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.

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.	FAIR VALUE MEASUREMENTS (CONTINUED)


	Fixed Maturities
	Corporate Debt			Non-Agency CMBS			Non-Agency RMBS			ABS			Total			Other Investments			Total Assets			Other Liabilities
Three months ended June 30, 2009
Balance at beginning of period	$	17,534		$	565		$	49,034		$	47,758		$	114,891		$	451,982		$	566,873		$	72,597
Total net realized and unrealized gains included in net income⁽¹⁾		-			-			-			-			-			33,629			33,629			-
Total net realized and unrealized losses included in net income⁽¹⁾		-			-			-			-			-			(18,041	)		(18,041	)		15,000
Change in net unrealized gains included in other comprehensive income		150			-			5,308			7,725			13,183			-			13,183			-
Change in net unrealized losses included in other comprehensive income		(956	)		(10	)		(333	)		(1,443	)		(2,742	)		-			(2,742	)		-
Purchases		-			-			-			-			-			51,800			51,800			-
Sales		-			-			-			-			-			(19,325	)		(19,325	)		-
Settlements / distributions		(29	)		-			(5,647	)		(203	)		(5,879	)		(6,278	)		(12,157	)		-
Transfers into Level 3		224			-			14,212			20,032			34,468			-			34,468			-
Transfers out of Level 3		-			(555	)		(41,882	)		(25,526	)		(67,963	)		-			(67,963	)		-

Balance at end of period	$	16,923		$	-		$	20,692		$	48,343		$	85,958		$	493,767		$	579,725		$	87,597


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	$	-		$	-		$	-		$	-		$	-		$	15,588		$	15,588		$	15,000

Six months ended June 30, 2009
Balance at beginning of period	$	-		$	-		$	-		$	-		$	-		$	450,542		$	450,542		$	62,597
Total net realized and unrealized gains included in net income⁽¹⁾		-			-			-			-			-			40,859			40,859			-
Total net realized and unrealized losses included in net income⁽¹⁾		-			-			-			(373	)		(373	)		(18,987	)		(19,360	)		25,000
Change in net unrealized gains included in other comprehensive income		150			107			6,627			8,134			15,018			-			15,018			-
Change in net unrealized losses included in other comprehensive income		(2,240	)		(32	)		(707	)		(3,895	)		(6,874	)		-			(6,874	)		-
Purchases		-			-			-			-			-			91,800			91,800			-
Sales		-			-			-			-			-			(61,369	)		(61,369	)		-
Settlements / distributions		(29	)		-			(8,726	)		(397	)		(9,152	)		(9,078	)		(18,230	)		-
Transfers into Level 3		19,042			480			65,380			70,400			155,302			-			155,302			-
Transfers out of Level 3		-			(555	)		(41,882	)		(25,526	)		(67,963	)		-			(67,963	)		-

Balance at end of period	$	16,923		$	-		$	20,692		$	48,343		$	85,958		$	493,767		$	579,725		$	87,597


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	$	-		$	-		$	-		$	(373	)	$	(373	)	$	21,872		$	21,499		$	25,000

(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 income (loss).

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.	FAIR VALUE MEASUREMENTS (CONTINUED)

Following 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 three and six months ended June 30, 2010, are not comparable with prior periods as transfers into Level 3 were previously recorded at the fair value of the security at the beginning of the reporting period.

Transfers into Level 3 from Level 2

During the three months ended June 30, 2010, we had no transfers. For the same period in 2009, we transferred $14 million and $20 million of non-agency RMBS and ABS, respectively.

During the six months ended June 30, 2010, we transferred $1 million of non-agency RMBS. For the same period in 2009, we transferred $19 million, $65 million, and $70 million of corporate debt, non-agency RMBS and ABS, respectively.

The transfers to Level 3 from Level 2 were made due to a reduction in the volume of recently executed transactions or a lack of available quotes from pricing vendors and broker-dealers. None of the above transfers were as a result of changes in valuation methodology that we made.

Transfers out of Level 3 into Level 2

During the three months ended June 30, 2010, we transferred $17 million of corporate debt securities. The transfers were primarily related to a private corporate debt security as a result of entering into an agreement with the issuer to take delivery of a new corporate debt security, which its fair value measurement was based on observable market inputs at June 30, 2010. For the same period in 2009, we transferred $42 million and $26 million of non-agency RMBS and ABS, respectively.

During the six months ended June 30, 2010, we transferred $17 million, $2 million, and $4 million of corporate debt, non-agency CMBS and non-agency RMBS, respectively. For the same period in 2009, we transferred $1 million, $42 million, and $26 million of non-agency CMBS, non-agency RMBS, and ABS, respectively.

Except as noted above, the transfers out of Level 3 into Level 2 made in 2009 and 2010 were primarily due to the availability of multiple quotes from pricing vendors and broker-dealers as a result of the 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 June 30, 2010, and December 31, 2009 approximated their fair values with the exception of senior notes. At June 30, 2010, the senior notes are recorded at amortized cost with a carrying value of $994 million (2009: $499 million) and a fair value of $997 million (2009: $510 million).

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.	RESERVE FOR LOSSES AND LOSS EXPENSES

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


	Six months ended June 30,
	2010			2009
Gross reserve for losses and loss expenses, beginning of period	$	6,564,133		$	6,244,783
Less reinsurance recoverable on unpaid losses, beginning of period		(1,381,058	)		(1,314,551	)

Net reserve for losses and loss expenses, beginning of period		5,183,075			4,930,232


Net incurred losses related to:
Current year		1,031,704			947,327
Prior years		(160,072	)		(181,076	)

		871,632			766,251


Net paid losses related to:
Current year		(102,327	)		(54,467	)
Prior years		(604,286	)		(525,573	)

		(706,613	)		(580,040	)

Foreign exchange and other		(135,778	)		54,381

Net reserve for losses and loss expenses, end of period		5,212,316			5,170,824
Reinsurance recoverable on unpaid losses, end of period		1,506,460			1,391,070

Gross reserve for losses and loss expenses, end of period	$	6,718,776		$	6,561,894

We write business with loss experience generally characterized as low frequency and high severity in nature, which results in volatility in our financial results. During the six months ended June 30, 2010, we recognized net loss and loss expenses of $133 million in relation to the February 2010 Chilean earthquake. Our estimate was derived from a ground-up assessment of our individual contracts and treaties in the affected regions and is consistent with our market share in the region. As part of our estimation process, we also considered current industry insured loss estimates, market share analysis, catastrophe modeling analysis and the information available to date from clients, brokers and loss adjusters. Industry-wide insured loss estimates and our own loss estimate for the Chilean earthquake are subject to change, as additional actual loss data becomes available. Actual losses in relation to this event may ultimately differ materially from current loss estimates.

Net losses and loss expenses incurred include net favorable prior period reserve development of $160 million and $181 million for the six months ended June 30, 2010 and 2009, respectively. Prior period reserve development arises from changes to loss estimates recognized in the current year that relate to losses incurred in previous calendar years.

The following table summarizes net favorable reserve development by segment:


	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Insurance	$	30,541	$	46,860	$	55,910	$	82,766
Reinsurance		48,065		49,882		104,162		98,310

Total	$	78,606	$	96,742	$	160,072	$	181,076

Overall, a significant portion of the net favorable prior period reserve development in the second quarters of 2010 and 2009 was generated from the property, marine, terrorism (included in “other”) and aviation lines of our insurance segment and the property, catastrophe and crop (included in “other”) lines of our reinsurance segment. These lines of business, the majority of which have short

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.	RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)

tail exposures, contributed $38 million and $71 million of the total net favorable reserve development in the second quarters of 2010 and 2009, respectively. The favorable development on these lines of business primarily reflects the recognition of better than expected loss emergence, rather than explicit changes in our actuarial assumptions.

Approximately $36 million and $9 million of the net favorable reserve development in the second quarter of 2010 and 2009, respectively, was generated from professional lines insurance and reinsurance business. This favorable development was driven by increased incorporation of our own historical claims experience into our ultimate expected loss ratios for accident years 2006 and prior, with less weighting being given to information derived from industry benchmarks. We began to give weight to our own loss experience on 2005 and prior accident year professional lines business in 2008 because they had developed a reasonable level of credible loss data. However, the impact of this change was somewhat muted in the second quarter of 2009 due to the strengthening of reserves on the 2008 accident year in relation to the credit crisis.

During the second quarter of 2010, we recognized net favorable prior period reserve development of $13 million on our credit and bond reinsurance business, primarily on the 2009 accident year and, to a lesser extent, the 2007 and 2008 accident years, in recognition of better than expected loss experience. Partially offsetting the net favorable development recognized in the second quarter of 2010, we recognized $6 million in net adverse prior period development on our credit and political risk insurance business, primarily due to reduced recovery estimates on 2009 accident year credit business, after taking into consideration updated publicly available information and discussions with our insureds. The impact of the reduced recovery estimates was somewhat offset by favorable development on the 2008 and 2007 accident years, as a result of better than expected loss emergence on both traditional political risk (i.e. confiscation, expropriation, nationalization and deprivation, or “CEND”) and credit related business. During the second quarter of 2010, we concluded the settlement and policy cancellation on one peak credit insurance exposure, Blue City Investments 1 Limited; the net payment fell within the provision established in prior periods. During the second quarter of 2009, we recognized favorable reserve development of $13 million on our insurance liability lines of business, following incorporation of more of our own reinsurance recovery experience on our excess and surplus (“E&S”) umbrella lines.

For the six months ended June 30, 2010 and 2009, our net favorable development included $89 million and $149 million, respectively, in relation to the primarily short tail exposure lines outlined above. This favorable development primarily reflects the recognition of better than expected loss emergence, rather than explicit changes in our actuarial assumptions. Development on our professional lines business accounted for $72 million and $24 million for the six months ended June 30, 2010 and 2009, respectively, with the rationale being consistent with that outlined above.

6.	DERIVATIVE INSTRUMENTS

The following table summarizes information on the location and amounts of derivative fair values on the consolidated balance sheet at June 30, 2010:

Asset Derivatives

Liability Derivatives

Notional
Amount

Balance Sheet
Location

Fair
value

Balance Sheet
Location

Fair
Value

Derivatives designated as hedging instruments

Foreign exchange contracts

561,720

Other assets

3,942

Other liabilities

Derivatives not designated as hedging instruments

Relating to investment portfolio:

Foreign exchange contracts

74,844

Other assets

3,511

Other liabilities

Relating to underwriting portfolio:

Foreign exchange contracts

25,669

Other assets

180

Other liabilities

Total derivatives

7,633

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.	DERIVATIVE INSTRUMENTS (CONTINUED)

The following table summarizes information on the location and amounts of derivative fair values on the consolidated balance sheet at December 31, 2009:


			Asset Derivatives			Liability Derivatives
	Notional Amount		Balance Sheet Location	Fair value		Balance Sheet Location	Fair Value
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		$	-

For the fair value hierarchy level, refer to Note 4 – Fair Value Measurements.

The following table provides the total unrealized and realized gains (losses) on derivatives recorded in earnings:


	Location of Gain (Loss) Recognized in Income on Derivative	Three months ended June 30,					Six months ended June 30,
		2010		2009			2010		2009
Derivatives in fair value hedging relationships
Foreign exchange contracts	Net realized investment gains (losses)	$	57,296	$	(26,713	)	$	92,223	$	(6,648	)

Derivatives not designated as hedging instruments
Relating to investment portfolio:
Foreign exchange contracts	Net realized investment gains (losses)	$	2,988	$	(391	)	$	2,830	$	1,009
Relating to underwriting portfolio:
Longevity risk derivative	Other insurance related income (loss)		-		(15,000	)		-		(25,000	)
Currency collar options:
Put options - Long	Foreign exchange gains (losses)		-		-			-		2,331
Call options - Short	Foreign exchange gains (losses)		-		-			-		97
Foreign exchange contracts	Foreign exchange gains (losses)		4,352		(7,043	)		7,416		(3,891	)
Catastrophe-related risk	Other insurance related income (loss)		-		80			-		45

Total		$	7,340	$	(22,354	)	$	10,246	$	(25,409	)

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 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 gains (losses).

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6.	DERIVATIVE INSTRUMENTS (CONTINUED)

The following table provides the net earnings impact of the fair value hedges:


	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Foreign exchange contracts	$	57,296		$	(26,713	)	$	92,223		$	(6,648	)
Hedged investment portfolio		(52,996	)		24,727			(84,706	)		6,742

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