10-Q 1 axs10-qq22014.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31721
AXIS CAPITAL HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(State or other jurisdiction of incorporation or organization)
98-0395986
(I.R.S. Employer Identification No.)
92 Pitts Bay Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 496-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 23, 2014, there were 105,318,185 Common Shares, $0.0125 par value per share, of the registrant outstanding.

Table of Contents
AXIS CAPITAL HOLDINGS LIMITED
INDEX TO FORM 10-Q

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

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PART I | FINANCIAL INFORMATION

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

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

• | actual claims exceeding our loss reserves,

• | general economic, capital and credit market conditions,

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

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

• | the failure of our cedants to adequately evaluate risks,

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

• | the loss of one or more key executives,

• | a decline in our ratings with rating agencies,

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

• | changes in accounting policies or practices,

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

• | changes in governmental regulations,

• | increased competition,

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

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

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

We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2014 (UNAUDITED) AND DECEMBER 31, 2013

| 2014 |  | 2013
| (in thousands)
Assets |  |  |
Investments: |  |  |
Fixed maturities, available for sale, at fair value (Amortized cost 2014: $12,428,133; 2013: $11,987,146) | $ | 12,598,897 |  |  | $ | 11,986,327 |
Equity securities, available for sale, at fair value (Cost 2014: $614,174; 2013: $566,219) | 744,760 |  |  | 701,987 |
Other investments, at fair value | 1,044,492 |  |  | 1,045,810 |
Short-term investments, at fair value and amortized cost | 100,166 |  |  | 46,212 |
Total investments | 14,488,315 |  |  | 13,780,336 |
Cash and cash equivalents | 1,044,026 |  |  | 923,326 |
Restricted cash and cash equivalents | 145,377 |  |  | 64,550 |
Accrued interest receivable | 91,278 |  |  | 97,132 |
Insurance and reinsurance premium balances receivable | 2,422,983 |  |  | 1,688,957 |
Reinsurance recoverable on unpaid and paid losses | 1,954,985 |  |  | 1,929,988 |
Deferred acquisition costs | 623,573 |  |  | 456,122 |
Prepaid reinsurance premiums | 337,608 |  |  | 330,261 |
Receivable for investments sold | 366 |  |  | 1,199 |
Goodwill and intangible assets | 90,025 |  |  | 89,528 |
Other assets | 247,921 |  |  | 273,385 |
Total assets | $ | 21,446,457 |  |  | $ | 19,634,784 |
Liabilities |  |  |
Reserve for losses and loss expenses | $ | 9,805,988 |  |  | $ | 9,582,140 |
Unearned premiums | 3,411,108 |  |  | 2,683,849 |
Insurance and reinsurance balances payable | 272,062 |  |  | 234,412 |
Senior notes | 1,490,427 |  |  | 995,855 |
Payable for investments purchased | 237,019 |  |  | 21,744 |
Other liabilities | 221,348 |  |  | 248,822 |
Total liabilities | 15,437,952 |  |  | 13,766,822 |
Shareholders’ equity |  |  |
Preferred shares | 627,843 |  |  | 627,843 |
Common shares (2014: 175,315; 2013: 174,134 shares issued and 2014: 103,906; 2013: 109,485 shares outstanding) | 2,189 |  |  | 2,174 |
Additional paid-in capital | 2,261,084 |  |  | 2,240,125 |
Accumulated other comprehensive income | 272,664 |  |  | 117,825 |
Retained earnings | 5,331,199 |  |  | 5,062,706 |
Treasury shares, at cost (2014: 71,409; 2013: 64,649 shares) | (2,539,269 | ) |  | (2,232,711 | )
Total shareholders’ equity attributable to AXIS Capital | 5,955,710 |  |  | 5,817,962 |
Noncontrolling interests | 52,795 |  |  | 50,000 |
Total shareholders’ equity | 6,008,505 |  |  | 5,867,962 |
Total liabilities and shareholders’ equity | $ | 21,446,457 |  |  | $ | 19,634,784 |

See accompanying notes to Consolidated Financial Statements.
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013

| Three months ended |  | Six months ended
| 2014 |  | 2013 |  | 2014 |  | 2013
| (in thousands, except for per share amounts)
Revenues |  |  |  |  |  |  |
Net premiums earned | $ | 1,000,400 |  |  | $ | 945,873 |  |  | $ | 1,946,349 |  |  | $ | 1,819,911 |
Net investment income | 114,867 |  |  | 83,112 |  |  | 197,610 |  |  | 192,019 |
Other insurance related income | 1,683 |  |  | 435 |  |  | 4,766 |  |  | 1,030 |
Net realized investment gains: |  |  |  |  |  |  |
Other-than-temporary impairment (OTTI) losses | (1,905 | ) |  | (5,127 | ) |  | (2,690 | ) |  | (6,025 | )
Non-credit portion of OTTI losses recognized in other comprehensive income | — |  |  | — |  |  | — |  |  | — |
Other realized investment gains | 35,166 |  |  | 21,362 |  |  | 46,572 |  |  | 66,738 |
Total net realized investment gains | 33,261 |  |  | 16,235 |  |  | 43,882 |  |  | 60,713 |
Total revenues | 1,150,211 |  |  | 1,045,655 |  |  | 2,192,607 |  |  | 2,073,673 |
Expenses |  |  |  |  |  |  |
Net losses and loss expenses | 565,829 |  |  | 642,899 |  |  | 1,110,036 |  |  | 1,081,313 |
Acquisition costs | 191,862 |  |  | 169,719 |  |  | 363,899 |  |  | 315,209 |
General and administrative expenses | 151,081 |  |  | 149,034 |  |  | 303,810 |  |  | 290,508 |
Foreign exchange losses (gains) | 9,705 |  |  | (10,320 | ) |  | 13,939 |  |  | (45,201 | )
Interest expense and financing costs | 19,975 |  |  | 15,260 |  |  | 36,569 |  |  | 31,095 |
Total expenses | 938,452 |  |  | 966,592 |  |  | 1,828,253 |  |  | 1,672,924 |
Income before income taxes | 211,759 |  |  | 79,063 |  |  | 364,354 |  |  | 400,749 |
Income tax expense (benefit) | 9,500 |  |  | (4,662 | ) |  | 13,625 |  |  | 5,469 |
Net income | 202,259 |  |  | 83,725 |  |  | 350,729 |  |  | 395,280 |
Net income attributable to noncontrolling interests | 1,573 |  |  | — |  |  | 2,795 |  |  | — |
Net income attributable to AXIS Capital | 200,686 |  |  | 83,725 |  |  | 347,934 |  |  | 395,280 |
Preferred share dividends | 10,022 |  |  | 8,197 |  |  | 20,044 |  |  | 16,938 |
Loss on repurchase of preferred shares | — |  |  | 3,081 |  |  | — |  |  | 3,081 |
Net income available to common shareholders | $ | 190,664 |  |  | $ | 72,447 |  |  | $ | 327,890 |  |  | $ | 375,261 |
Per share data |  |  |  |  |  |  |
Net income per common share: |  |  |  |  |  |  |
Basic net income | $ | 1.81 |  |  | $ | 0.63 |  |  | $ | 3.06 |  |  | $ | 3.23 |
Diluted net income | $ | 1.79 |  |  | $ | 0.62 |  |  | $ | 3.03 |  |  | $ | 3.19 |
Weighted average number of common shares outstanding - basic | 105,118 |  |  | 115,163 |  |  | 107,075 |  |  | 116,088 |
Weighted average number of common shares outstanding - diluted | 106,289 |  |  | 116,671 |  |  | 108,329 |  |  | 117,660 |
Cash dividends declared per common share | $ | 0.27 |  |  | $ | 0.25 |  |  | $ | 0.54 |  |  | $ | 0.50 |

See accompanying notes to Consolidated Financial Statements.
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013

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

See accompanying notes to Consolidated Financial Statements.
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

| 2014 |  | 2013
| (in thousands)
Preferred shares |  |  |
Balance at beginning of period | $ | 627,843 |  |  | $ | 502,843 |
Shares issued | — |  |  | 225,000 |
Shares repurchased | — |  |  | (100,000 | )
Balance at end of period | 627,843 |  |  | 627,843 |
Common shares (par value) |  |  |
Balance at beginning of period | 2,174 |  |  | 2,146 |
Shares issued | 15 |  |  | 26 |
Balance at end of period | 2,189 |  |  | 2,172 |
Additional paid-in capital |  |  |
Balance at beginning of period | 2,240,125 |  |  | 2,179,034 |
Shares issued - common shares | 2,549 |  |  | 2,777 |
Cost of treasury shares reissued | (11,524 | ) |  | (3,984 | )
Issue costs on newly issued preferred shares | — |  |  | (6,551 | )
Reversal of issue costs on repurchase of preferred shares | — |  |  | 3,081 |
Stock options exercised | 2,134 |  |  | 12,017 |
Share-based compensation expense | 27,800 |  |  | 26,830 |
Balance at end of period | 2,261,084 |  |  | 2,213,204 |
Accumulated other comprehensive income |  |  |
Balance at beginning of period | 117,825 |  |  | 362,622 |
Unrealized appreciation on available for sale investments, net of tax: |  |  |
Balance at beginning of period | 124,945 |  |  | 348,328 |
Unrealized gains (losses) arising during the period, net of reclassification adjustment | 148,390 |  |  | (319,340 | )
Non-credit portion of OTTI losses | — |  |  | — |
Balance at end of period | 273,335 |  |  | 28,988 |
Cumulative foreign currency translation adjustments, net of tax: |  |  |
Balance at beginning of period | (7,120 | ) |  | 14,294 |
Foreign currency translation adjustments | 6,449 |  |  | (18,527 | )
Balance at end of period | (671 | ) |  | (4,233 | )
Balance at end of period | 272,664 |  |  | 24,755 |
Retained earnings |  |  |
Balance at beginning of period | 5,062,706 |  |  | 4,497,789 |
Net income | 350,729 |  |  | 395,280 |
Net income attributable to noncontrolling interests | (2,795 | ) |  | — |
Preferred share dividends | (20,044 | ) |  | (16,938 | )
Loss on repurchase of preferred shares | — |  |  | (3,081 | )
Common share dividends | (59,397 | ) |  | (59,363 | )
Balance at end of period | 5,331,199 |  |  | 4,813,687 |
Treasury shares, at cost |  |  |
Balance at beginning of period | (2,232,711 | ) |  | (1,764,673 | )
Shares repurchased for treasury | (318,082 | ) |  | (359,025 | )
Cost of treasury shares reissued | 11,524 |  |  | 3,984 |
Balance at end of period | (2,539,269 | ) |  | (2,119,714 | )
Total shareholders’ equity attributable to AXIS Capital | 5,955,710 |  |  | 5,561,947 |
Noncontrolling interests | 52,795 |  |  | — |
Total shareholders' equity | $ | 6,008,505 |  |  | $ | 5,561,947 |

See accompanying notes to Consolidated Financial Statements.
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

| 2014 |  | 2013
| (in thousands)
Cash flows from operating activities: |  |  |
Net income | $ | 350,729 |  |  | $ | 395,280 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Net realized investment gains | (43,882 | ) |  | (60,713 | )
Net realized and unrealized gains on other investments | (49,252 | ) |  | (55,279 | )
Amortization of fixed maturities | 56,122 |  |  | 72,853 |
Other amortization and depreciation | 10,919 |  |  | 11,413 |
Share-based compensation expense, net of cash payments | 27,763 |  |  | 30,936 |
Changes in: |  |  |
Accrued interest receivable | 5,929 |  |  | 2,122 |
Reinsurance recoverable balances | (20,663 | ) |  | (117,622 | )
Deferred acquisition costs | (167,095 | ) |  | (153,821 | )
Prepaid reinsurance premiums | (5,590 | ) |  | (15,852 | )
Reserve for loss and loss expenses | 217,924 |  |  | 284,086 |
Unearned premiums | 721,870 |  |  | 754,363 |
Insurance and reinsurance balances, net | (696,877 | ) |  | (670,328 | )
Other items | (15,654 | ) |  | (20,518 | )
Net cash provided by operating activities | 392,243 |  |  | 456,920 |
Cash flows from investing activities: |  |  |
Purchases of: |  |  |
Fixed maturities | (6,581,006 | ) |  | (6,079,805 | )
Equity securities | (209,381 | ) |  | (130,544 | )
Other investments | (37,512 | ) |  | (109,232 | )
Short-term investments | (463,051 | ) |  | (72,093 | )
Proceeds from the sale of: |  |  |
Fixed maturities | 5,784,439 |  |  | 5,334,043 |
Equity securities | 197,354 |  |  | 218,523 |
Other investments | 88,080 |  |  | 45,634 |
Short-term investments | 391,966 |  |  | 115,072 |
Proceeds from redemption of fixed maturities | 532,445 |  |  | 778,819 |
Proceeds from redemption of short-term investments | 16,503 |  |  | 19,119 |
Purchase of other assets | (16,039 | ) |  | (10,641 | )
Change in restricted cash and cash equivalents | (80,827 | ) |  | (14,710 | )
Net cash provided by (used in) investing activities | (377,029 | ) |  | 94,185 |
Cash flows from financing activities: |  |  |
Net proceeds from issuance of senior notes | 494,344 |  |  | — |
Net proceeds from issuance of preferred shares | — |  |  | 218,449 |
Repurchase of preferred shares | — |  |  | (100,000 | )
Repurchase of common shares | (318,082 | ) |  | (340,621 | )
Dividends paid - common shares | (60,903 | ) |  | (62,312 | )
Dividends paid - preferred shares | (20,044 | ) |  | (18,750 | )
Proceeds from issuance of common shares | 4,698 |  |  | 14,819 |
Net cash provided by (used in) financing activities | 100,013 |  |  | (288,415 | )
Effect of exchange rate changes on foreign currency cash and cash equivalents | 5,473 |  |  | (11,702 | )
Increase in cash and cash equivalents | 120,700 |  |  | 250,988 |
Cash and cash equivalents - beginning of period | 923,326 |  |  | 759,817 |
Cash and cash equivalents - end of period | $ | 1,044,026 |  |  | $ | 1,010,805 |

See accompanying notes to Consolidated Financial Statements.
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. | BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation
These interim consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”) and its subsidiaries (herein referred to as “we,” “us,” “our,” or the “Company”).
The consolidated balance sheet at June 30, 2014 and the consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the periods ended June 30, 2014 and 2013 have not been audited. The balance sheet at December 31, 2013 is derived from our audited financial statements.
These financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission's (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated.
The following information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. Tabular dollar and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars.
Significant Accounting Policies
There were no notable changes in our significant accounting policies subsequent to our Annual Report on Form 10-K for the year ended December 31, 2013.
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. | SEGMENT INFORMATION

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

|  | 2014 |  | 2013 |
| Three months ended and at June 30, | Insurance |  | Reinsurance |  | Total |  | Insurance |  | Reinsurance |  | Total |
| Gross premiums written | $ | 754,110 |  |  | $ | 477,169 |  |  | $ | 1,231,279 |  |  | $ | 781,055 |  |  | $ | 438,750 |  |  | $ | 1,219,805 |  |
| Net premiums written | 541,097 |  |  | 459,065 |  |  | 1,000,162 |  |  | 559,584 |  |  | 433,823 |  |  | 993,407 |  |
| Net premiums earned | 457,670 |  |  | 542,730 |  |  | 1,000,400 |  |  | 422,345 |  |  | 523,528 |  |  | 945,873 |  |
| Other insurance related income | — |  |  | 1,683 |  |  | 1,683 |  |  | 435 |  |  | — |  |  | 435 |  |
| Net losses and loss expenses | (290,466 | ) |  | (275,363 | ) |  | (565,829 | ) |  | (330,992 | ) |  | (311,907 | ) |  | (642,899 | ) |
| Acquisition costs | (71,039 | ) |  | (120,823 | ) |  | (191,862 | ) |  | (58,749 | ) |  | (110,970 | ) |  | (169,719 | ) |
| General and administrative expenses | (83,512 | ) |  | (34,299 | ) |  | (117,811 | ) |  | (88,526 | ) |  | (35,243 | ) |  | (123,769 | ) |
| Underwriting income (loss) | $ | 12,653 |  |  | $ | 113,928 |  |  | 126,581 |  |  | $ | (55,487 | ) |  | $ | 65,408 |  |  | 9,921 |  |
| Corporate expenses |  |  |  |  | (33,270 | ) |  |  |  |  |  | (25,265 | ) |
| Net investment income |  |  |  |  | 114,867 |  |  |  |  |  |  | 83,112 |  |
| Net realized investment gains |  |  |  |  | 33,261 |  |  |  |  |  |  | 16,235 |  |
| Foreign exchange (losses) gains |  |  |  |  | (9,705 | ) |  |  |  |  |  | 10,320 |  |
| Interest expense and financing costs |  |  |  |  | (19,975 | ) |  |  |  |  |  | (15,260 | ) |
| Income before income taxes |  |  |  |  | $ | 211,759 |  |  |  |  |  |  | $ | 79,063 |  |
| Net loss and loss expense ratio | 63.5 | % |  | 50.7 | % |  | 56.6 | % |  | 78.4 | % |  | 59.6 | % |  | 68.0 | % |
| Acquisition cost ratio | 15.5 | % |  | 22.3 | % |  | 19.2 | % |  | 13.9 | % |  | 21.2 | % |  | 17.9 | % |
| General and administrative expense ratio | 18.2 | % |  | 6.3 | % |  | 15.0 | % |  | 20.9 | % |  | 6.7 | % |  | 15.8 | % |
| Combined ratio | 97.2 | % |  | 79.3 | % |  | 90.8 | % |  | 113.2 | % |  | 87.5 | % |  | 101.7 | % |
| Goodwill and intangible assets | $ | 90,025 |  |  | $ | — |  |  | $ | 90,025 |  |  | $ | 91,370 |  |  | $ | — |  |  | $ | 91,370 |  |

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. | SEGMENT INFORMATION (CONTINUED)

|  | 2014 |  | 2013 |
| Six months ended and at June 30, | Insurance |  | Reinsurance |  | Total |  | Insurance |  | Reinsurance |  | Total |
| Gross premiums written | $ | 1,355,831 |  |  | $ | 1,696,847 |  |  | $ | 3,052,678 |  |  | $ | 1,377,769 |  |  | $ | 1,588,518 |  |  | $ | 2,966,287 |  |
| Net premiums written | 997,789 |  |  | 1,666,957 |  |  | 2,664,746 |  |  | 992,264 |  |  | 1,571,582 |  |  | 2,563,846 |  |
| Net premiums earned | 906,884 |  |  | 1,039,465 |  |  | 1,946,349 |  |  | 824,224 |  |  | 995,687 |  |  | 1,819,911 |  |
| Other insurance related income | — |  |  | 4,766 |  |  | 4,766 |  |  | 1,030 |  |  | — |  |  | 1,030 |  |
| Net losses and loss expenses | (569,889 | ) |  | (540,147 | ) |  | (1,110,036 | ) |  | (548,328 | ) |  | (532,985 | ) |  | (1,081,313 | ) |
| Acquisition costs | (136,096 | ) |  | (227,803 | ) |  | (363,899 | ) |  | (116,009 | ) |  | (199,200 | ) |  | (315,209 | ) |
| General and administrative expenses | (171,459 | ) |  | (70,375 | ) |  | (241,834 | ) |  | (175,415 | ) |  | (68,283 | ) |  | (243,698 | ) |
| Underwriting income (loss) | $ | 29,440 |  |  | $ | 205,906 |  |  | 235,346 |  |  | $ | (14,498 | ) |  | $ | 195,219 |  |  | 180,721 |  |
| Corporate expenses |  |  |  |  | (61,976 | ) |  |  |  |  |  | (46,810 | ) |
| Net investment income |  |  |  |  | 197,610 |  |  |  |  |  |  | 192,019 |  |
| Net realized investment gains |  |  |  |  | 43,882 |  |  |  |  |  |  | 60,713 |  |
| Foreign exchange (losses) gains |  |  |  |  | (13,939 | ) |  |  |  |  |  | 45,201 |  |
| Interest expense and financing costs |  |  |  |  | (36,569 | ) |  |  |  |  |  | (31,095 | ) |
| Income before income taxes |  |  |  |  | $ | 364,354 |  |  |  |  |  |  | $ | 400,749 |  |
| Net loss and loss expense ratio | 62.8 | % |  | 52.0 | % |  | 57.0 | % |  | 66.5 | % |  | 53.5 | % |  | 59.4 | % |
| Acquisition cost ratio | 15.0 | % |  | 21.9 | % |  | 18.7 | % |  | 14.1 | % |  | 20.0 | % |  | 17.3 | % |
| General and administrative expense ratio | 19.0 | % |  | 6.7 | % |  | 15.6 | % |  | 21.3 | % |  | 6.9 | % |  | 16.0 | % |
| Combined ratio | 96.8 | % |  | 80.6 | % |  | 91.3 | % |  | 101.9 | % |  | 80.4 | % |  | 92.7 | % |
| Goodwill and intangible assets | $ | 90,025 |  |  | $ | — |  |  | $ | 90,025 |  |  | $ | 91,370 |  |  | $ | — |  |  | $ | 91,370 |  |

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3. | INVESTMENTS

a) Fixed Maturities and Equities
The amortized cost or cost and fair values of our fixed maturities and equities were as follows:

|  | Amortized Cost or Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value |  | Non-credit OTTI in AOCI(5) |
| At June 30, 2014 |  |  |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |  |  |
| U.S. government and agency | $ | 1,607,568 |  |  | $ | 4,761 |  |  | $ | (14,009 | ) |  | $ | 1,598,320 |  |  | $ | — |  |
| Non-U.S. government | 1,238,471 |  |  | 30,486 |  |  | (21,290 | ) |  | 1,247,667 |  |  | — |  |
| Corporate debt | 4,177,454 |  |  | 91,862 |  |  | (5,342 | ) |  | 4,263,974 |  |  | — |  |
| Agency RMBS(1) | 2,076,932 |  |  | 37,725 |  |  | (9,078 | ) |  | 2,105,579 |  |  | — |  |
| CMBS(2) | 923,294 |  |  | 17,187 |  |  | (787 | ) |  | 939,694 |  |  | — |  |
| Non-Agency RMBS | 80,243 |  |  | 5,069 |  |  | (366 | ) |  | 84,946 |  |  | (879 | ) |
| ABS(3) | 1,309,555 |  |  | 5,162 |  |  | (7,792 | ) |  | 1,306,925 |  |  | — |  |
| Municipals(4) | 1,014,616 |  |  | 39,099 |  |  | (1,923 | ) |  | 1,051,792 |  |  | — |  |
| Total fixed maturities | $ | 12,428,133 |  |  | $ | 231,351 |  |  | $ | (60,587 | ) |  | $ | 12,598,897 |  |  | $ | (879 | ) |
| Equity securities |  |  |  |  |  |  |  |  |  |
| Common stocks | $ | 307,392 |  |  | $ | 80,750 |  |  | $ | (3,140 | ) |  | $ | 385,002 |  |  |  |
| Exchange-traded funds | 193,582 |  |  | 41,790 |  |  | — |  |  | 235,372 |  |  |  |
| Non-U.S. bond mutual funds | 113,200 |  |  | 11,186 |  |  | — |  |  | 124,386 |  |  |  |
| Total equity securities | $ | 614,174 |  |  | $ | 133,726 |  |  | $ | (3,140 | ) |  | $ | 744,760 |  |  |  |
| At December 31, 2013 |  |  |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |  |  |
| U.S. government and agency | $ | 1,421,245 |  |  | $ | 1,405 |  |  | $ | (33,952 | ) |  | $ | 1,388,698 |  |  | $ | — |  |
| Non-U.S. government | 1,208,384 |  |  | 17,990 |  |  | (49,992 | ) |  | 1,176,382 |  |  | — |  |
| Corporate debt | 3,533,585 |  |  | 84,881 |  |  | (10,228 | ) |  | 3,608,238 |  |  | — |  |
| Agency RMBS(1) | 2,485,139 |  |  | 21,979 |  |  | (58,291 | ) |  | 2,448,827 |  |  | — |  |
| CMBS(2) | 790,095 |  |  | 11,285 |  |  | (3,966 | ) |  | 797,414 |  |  | — |  |
| Non-Agency RMBS | 65,590 |  |  | 2,375 |  |  | (398 | ) |  | 67,567 |  |  | (868 | ) |
| ABS(3) | 955,274 |  |  | 6,871 |  |  | (8,694 | ) |  | 953,451 |  |  | — |  |
| Municipals(4) | 1,527,834 |  |  | 32,432 |  |  | (14,516 | ) |  | 1,545,750 |  |  | — |  |
| Total fixed maturities | $ | 11,987,146 |  |  | $ | 179,218 |  |  | $ | (180,037 | ) |  | $ | 11,986,327 |  |  | $ | (868 | ) |
| Equity securities |  |  |  |  |  |  |  |  |  |
| Common stocks | $ | 345,759 |  |  | $ | 98,742 |  |  | $ | (6,183 | ) |  | $ | 438,318 |  |  |  |
| Exchange-traded funds | 106,762 |  |  | 32,085 |  |  | — |  |  | 138,847 |  |  |  |
| Non-U.S. bond mutual funds | 113,698 |  |  | 11,124 |  |  | — |  |  | 124,822 |  |  |  |
| Total equity securities | $ | 566,219 |  |  | $ | 141,951 |  |  | $ | (6,183 | ) |  | $ | 701,987 |  |  |  |

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

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

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

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

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

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3. | INVESTMENTS (CONTINUED)

In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we also invest in limited partnerships (hedge funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 3(b)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly we are not the primary beneficiary for any of these VIEs. Our maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.
Contractual Maturities
The contractual maturities of fixed maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

|  | Amortized Cost |  | Fair Value |  | % of Total Fair Value |
| At June 30, 2014 |  |  |  |  |  |
| Maturity |  |  |  |  |  |
| Due in one year or less | $ | 496,073 |  |  | $ | 502,045 |  |  | 4.0 | % |
| Due after one year through five years | 5,399,655 |  |  | 5,503,744 |  |  | 43.7 | % |
| Due after five years through ten years | 1,907,336 |  |  | 1,913,017 |  |  | 15.2 | % |
| Due after ten years | 235,045 |  |  | 242,947 |  |  | 1.9 | % |
|  | 8,038,109 |  |  | 8,161,753 |  |  | 64.8 | % |
| Agency RMBS | 2,076,932 |  |  | 2,105,579 |  |  | 16.7 | % |
| CMBS | 923,294 |  |  | 939,694 |  |  | 7.5 | % |
| Non-Agency RMBS | 80,243 |  |  | 84,946 |  |  | 0.7 | % |
| ABS | 1,309,555 |  |  | 1,306,925 |  |  | 10.3 | % |
| Total | $ | 12,428,133 |  |  | $ | 12,598,897 |  |  | 100.0 | % |
| At December 31, 2013 |  |  |  |  |  |
| Maturity |  |  |  |  |  |
| Due in one year or less | $ | 710,079 |  |  | $ | 717,052 |  |  | 5.9 | % |
| Due after one year through five years | 5,030,728 |  |  | 5,116,060 |  |  | 42.7 | % |
| Due after five years through ten years | 1,852,877 |  |  | 1,791,835 |  |  | 14.9 | % |
| Due after ten years | 97,364 |  |  | 94,121 |  |  | 0.8 | % |
|  | 7,691,048 |  |  | 7,719,068 |  |  | 64.3 | % |
| Agency RMBS | 2,485,139 |  |  | 2,448,827 |  |  | 20.4 | % |
| CMBS | 790,095 |  |  | 797,414 |  |  | 6.7 | % |
| Non-Agency RMBS | 65,590 |  |  | 67,567 |  |  | 0.6 | % |
| ABS | 955,274 |  |  | 953,451 |  |  | 8.0 | % |
| Total | $ | 11,987,146 |  |  | $ | 11,986,327 |  |  | 100.0 | % |

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3. | INVESTMENTS (CONTINUED)

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

|  | 12 months or greater |  | Less than 12 months |  | Total |
|  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |
| At June 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |  |  |  |  |
| U.S. government and agency | $ | 400,317 |  |  | $ | (13,879 | ) |  | $ | 242,865 |  |  | $ | (130 | ) |  | $ | 643,182 |  |  | $ | (14,009 | ) |
| Non-U.S. government | 186,998 |  |  | (20,060 | ) |  | 133,205 |  |  | (1,230 | ) |  | 320,203 |  |  | (21,290 | ) |
| Corporate debt | 62,552 |  |  | (2,713 | ) |  | 539,287 |  |  | (2,629 | ) |  | 601,839 |  |  | (5,342 | ) |
| Agency RMBS | 366,449 |  |  | (8,547 | ) |  | 101,488 |  |  | (531 | ) |  | 467,937 |  |  | (9,078 | ) |
| CMBS | 82,434 |  |  | (638 | ) |  | 24,935 |  |  | (149 | ) |  | 107,369 |  |  | (787 | ) |
| Non-Agency RMBS | 8,884 |  |  | (366 | ) |  | 215 |  |  | — |  |  | 9,099 |  |  | (366 | ) |
| ABS | 309,814 |  |  | (5,670 | ) |  | 372,067 |  |  | (2,122 | ) |  | 681,881 |  |  | (7,792 | ) |
| Municipals | 95,013 |  |  | (1,717 | ) |  | 48,227 |  |  | (206 | ) |  | 143,240 |  |  | (1,923 | ) |
| Total fixed maturities | $ | 1,512,461 |  |  | $ | (53,590 | ) |  | $ | 1,462,289 |  |  | $ | (6,997 | ) |  | $ | 2,974,750 |  |  | $ | (60,587 | ) |
| Equity securities |  |  |  |  |  |  |  |  |  |  |  |
| Common stocks | $ | 9,909 |  |  | $ | (1,339 | ) |  | $ | 44,822 |  |  | $ | (1,801 | ) |  | $ | 54,731 |  |  | $ | (3,140 | ) |
| Total equity securities | $ | 9,909 |  |  | $ | (1,339 | ) |  | $ | 44,822 |  |  | $ | (1,801 | ) |  | $ | 54,731 |  |  | $ | (3,140 | ) |
| At December 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |  |  |  |  |
| U.S. government and agency | $ | — |  |  | $ | — |  |  | $ | 982,307 |  |  | $ | (33,952 | ) |  | $ | 982,307 |  |  | $ | (33,952 | ) |
| Non-U.S. government | 35,577 |  |  | (3,430 | ) |  | 420,622 |  |  | (46,562 | ) |  | 456,199 |  |  | (49,992 | ) |
| Corporate debt | 27,696 |  |  | (802 | ) |  | 606,592 |  |  | (9,426 | ) |  | 634,288 |  |  | (10,228 | ) |
| Agency RMBS | 144,468 |  |  | (5,247 | ) |  | 1,478,527 |  |  | (53,044 | ) |  | 1,622,995 |  |  | (58,291 | ) |
| CMBS | 13,319 |  |  | (116 | ) |  | 298,863 |  |  | (3,850 | ) |  | 312,182 |  |  | (3,966 | ) |
| Non-Agency RMBS | 4,287 |  |  | (315 | ) |  | 5,319 |  |  | (83 | ) |  | 9,606 |  |  | (398 | ) |
| ABS | 37,765 |  |  | (2,941 | ) |  | 553,803 |  |  | (5,753 | ) |  | 591,568 |  |  | (8,694 | ) |
| Municipals | 8,408 |  |  | (615 | ) |  | 543,474 |  |  | (13,901 | ) |  | 551,882 |  |  | (14,516 | ) |
| Total fixed maturities | $ | 271,520 |  |  | $ | (13,466 | ) |  | $ | 4,889,507 |  |  | $ | (166,571 | ) |  | $ | 5,161,027 |  |  | $ | (180,037 | ) |
| Equity securities |  |  |  |  |  |  |  |  |  |  |  |
| Common stocks | $ | 3,499 |  |  | $ | (398 | ) |  | $ | 48,828 |  |  | $ | (5,785 | ) |  | $ | 52,327 |  |  | $ | (6,183 | ) |
| Total equity securities | $ | 3,499 |  |  | $ | (398 | ) |  | $ | 48,828 |  |  | $ | (5,785 | ) |  | $ | 52,327 |  |  | $ | (6,183 | ) |

Fixed Maturities
At June 30, 2014, 687 fixed maturities (2013: 1,127) were in an unrealized loss position of $61 million (2013: $180 million), of which $2 million (2013: $2 million) was related to securities below investment grade or not rated.
At June 30, 2014, 317 (2013: 99) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $1,512 million (2013: $272 million). Following our credit impairment review, we concluded that these securities as well as
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3. | INVESTMENTS (CONTINUED)

the remaining securities in an unrealized loss position in the above table were temporarily impaired at June 30, 2014, and were expected to recover in value as the securities approach maturity. Further, at June 30, 2014, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that we will not be required to sell these securities before the anticipated recovery of their amortized costs.
Equity Securities
At June 30, 2014, 58 securities (2013: 63) were in an unrealized loss position of $3 million (2013: $6 million).
At June 30, 2014, 10 (2013: 9) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $10 million (2013: $3 million). Based on our impairment review process and our ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, we concluded that the above equities in an unrealized loss position were temporarily impaired at June 30, 2014.
b) Other Investments
The following table provides a breakdown of our investments in hedge funds, direct lending funds and CLO Equities, together with additional information relating to the liquidity of each category:

|  | Fair Value |  | Redemption Frequency (if currently eligible) |  | Redemption Notice Period |
| At June 30, 2014 |  |  |  |  |  |  |  |  |  |
| Long/short equity funds | $ | 373,539 |  |  | 36 | % |  | Quarterly, Semi-annually |  | 30-60 days |
| Multi-strategy funds | 306,215 |  |  | 29 | % |  | Quarterly, Semi-annually |  | 60-95 days |
| Event-driven funds | 191,735 |  |  | 18 | % |  | Quarterly, Annually |  | 45-60 days |
| Leveraged bank loan funds | 48,430 |  |  | 5 | % |  | Quarterly |  | 65 days |
| Direct lending funds | 33,467 |  |  | 3 | % |  | n/a |  | n/a |
| CLO - Equities | 91,106 |  |  | 9 | % |  | n/a |  | n/a |
| Total other investments | $ | 1,044,492 |  |  | 100 | % |  |  |  |  |
| At December 31, 2013 |  |  |  |  |  |  |  |  |  |
| Long/short equity funds | $ | 425,444 |  |  | 41 | % |  | Monthly, Quarterly, Semi-annually |  | 30-60 days |
| Multi-strategy funds | 285,155 |  |  | 27 | % |  | Quarterly, Semi-annually |  | 60-95 days |
| Event-driven funds | 190,458 |  |  | 18 | % |  | Quarterly, Annually |  | 45-60 days |
| Leveraged bank loan funds | 48,753 |  |  | 5 | % |  | Quarterly |  | 65 days |
| Direct lending funds | 22,134 |  |  | 2 | % |  | n/a |  | n/a |
| CLO - Equities | 73,866 |  |  | 7 | % |  | n/a |  | n/a |
| Total other investments | $ | 1,045,810 |  |  | 100 | % |  |  |  |  |

n/a - not applicable
The investment strategies for the above funds are as follows:

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

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

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3. | INVESTMENTS (CONTINUED)

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

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

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

Two common redemption restrictions which may impact our ability to redeem our hedge funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund's net assets which may otherwise hinder the general partner or investment manager's ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2014 and 2013, neither of these restrictions impacted our redemption requests. At June 30, 2014, $71 million (2013: $99 million), representing 8% (2013: 10%) of our total hedge funds, relate to holdings where we are still within the lockup period. The expiries of these lockup periods range from September 2014 to April 2016.
At June 30, 2014, $8 million (2013: $11 million) was invested in hedge funds that are not accepting redemption requests. Of this amount, substantially all relates to a leveraged bank loan fund in a period of planned principal distributions. Based on market conditions and payments made to date, management's current expectation is that the distribution process will be completed in 2014. The remainder primarily relates to funds that entered liquidation or had their assets side pocketed as a result of the global financial crisis which began in late 2008. For these funds, management is currently unable to estimate when those funds will be distributed.
At June 30, 2014, we have $77 million (2013: $88 million) of unfunded commitments within our other investments portfolio relating to our future investments in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to three years.
During 2013, we made a $60 million commitment as a limited partner in a multi-strategy hedge fund. Once the full amount of committed capital has been called by the General Partner, the assets will not be fully returned until the completion of the fund's investment term which ends in December, 2018. The General Partner then has the option to extend the term by up to three years. At June 30, 2014, $47 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the multi-strategy funds line of the table above.
During 2013, we made a $60 million commitment as a limited partner in a fund that invest s primarily in CLO equities ("CLO fund"). We will not be eligible to redeem our investment until December, 2017 but expect to receive interest distributions on a quarterly basis. At June 30, 2014, $7 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the CLO - Equities line of the table above. The CLO - Equities line also includes direct investment in the equity tranches of CLOs.
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3. | INVESTMENTS (CONTINUED)

c) Net Investment Income
Net investment income was derived from the following sources:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Fixed maturities | $ | 78,523 |  |  | $ | 74,503 |  |  | $ | 151,480 |  |  | $ | 144,185 |  |
| Other investments | 32,492 |  |  | 11,848 |  |  | 49,252 |  |  | 55,279 |  |
| Equity securities | 5,301 |  |  | 3,134 |  |  | 7,587 |  |  | 4,548 |  |
| Cash and cash equivalents | 6,183 |  |  | 1,265 |  |  | 7,046 |  |  | 2,533 |  |
| Short-term investments | 246 |  |  | 397 |  |  | 459 |  |  | 929 |  |
| Gross investment income | 122,745 |  |  | 91,147 |  |  | 215,824 |  |  | 207,474 |  |
| Investment expenses | (7,878 | ) |  | (8,035 | ) |  | (18,214 | ) |  | (15,455 | ) |
| Net investment income | $ | 114,867 |  |  | $ | 83,112 |  |  | $ | 197,610 |  |  | $ | 192,019 |  |

d) Net Realized Investment Gains
The following table provides an analysis of net realized investment gains:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Gross realized gains |  |  |  |  |  |  |  |
| Fixed maturities and short-term investments | $ | 26,650 |  |  | $ | 34,355 |  |  | $ | 60,420 |  |  | $ | 66,986 |  |
| Equities | 32,609 |  |  | 10,132 |  |  | 51,876 |  |  | 36,282 |  |
| Gross realized gains | 59,259 |  |  | 44,487 |  |  | 112,296 |  |  | 103,268 |  |
| Gross realized losses |  |  |  |  |  |  |  |
| Fixed maturities and short-term investments | (14,392 | ) |  | (29,538 | ) |  | (48,096 | ) |  | (46,812 | ) |
| Equities | (2,546 | ) |  | (3,715 | ) |  | (4,984 | ) |  | (7,010 | ) |
| Gross realized losses | (16,938 | ) |  | (33,253 | ) |  | (53,080 | ) |  | (53,822 | ) |
| Net OTTI recognized in earnings | (1,905 | ) |  | (5,127 | ) |  | (2,690 | ) |  | (6,025 | ) |
| Change in fair value of investment derivatives(1) | (7,155 | ) |  | 10,128 |  |  | (12,644 | ) |  | 17,292 |  |
| Net realized investment gains | $ | 33,261 |  |  | $ | 16,235 |  |  | $ | 43,882 |  |  | $ | 60,713 |  |

(1) Refer to Note 5 – Derivative Instruments
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3. | INVESTMENTS (CONTINUED)

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Fixed maturities: |  |  |  |  |  |  |  |
| Non-U.S. government | $ | 1,774 |  |  | $ | 25 |  |  | $ | 1,812 |  |  | $ | 25 |  |
| Corporate debt | 67 |  |  | 3,535 |  |  | 81 |  |  | 3,950 |  |
| ABS | — |  |  | — |  |  | 56 |  |  | 129 |  |
|  | 1,841 |  |  | 3,560 |  |  | 1,949 |  |  | 4,104 |  |
| Equity Securities |  |  |  |  |  |  |  |
| Common stocks | 64 |  |  | 1,046 |  |  | 741 |  |  | 1,400 |  |
| Exchange-traded funds | — |  |  | 521 |  |  | — |  |  | 521 |  |
|  | 64 |  |  | 1,567 |  |  | 741 |  |  | 1,921 |  |
| Total OTTI recognized in earnings | $ | 1,905 |  |  | $ | 5,127 |  |  | $ | 2,690 |  |  | $ | 6,025 |  |

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Balance at beginning of period | $ | 1,590 |  |  | $ | 1,712 |  |  | $ | 1,594 |  |  | $ | 1,809 |  |
| Credit impairments recognized on securities not previously impaired | — |  |  | — |  |  | — |  |  | — |  |
| Additional credit impairments recognized on securities previously impaired | — |  |  | — |  |  | — |  |  | — |  |
| Change in timing of future cash flows on securities previously impaired | — |  |  | — |  |  | — |  |  | — |  |
| Intent to sell of securities previously impaired | — |  |  | — |  |  | — |  |  | — |  |
| Securities sold/redeemed/matured | (9 | ) |  | (13 | ) |  | (13 | ) |  | (110 | ) |
| Balance at end of period | $ | 1,581 |  |  | $ | 1,699 |  |  | $ | 1,581 |  |  | $ | 1,699 |  |

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

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

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

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

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

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead us to change the selection of our valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels within the fair value hierarchy.
We used the following valuation techniques and assumptions in estimating the fair value of our financial instruments as well as the general classification of such financial instruments pursuant to the above fair value hierarchy.
Fixed Maturities
At each valuation date, we use the market approach valuation technique to estimate the fair value of our fixed maturities portfolio, when possible. This market approach includes, but is not limited to, prices obtained from third party pricing services for identical or comparable securities and the use of “pricing matrix models” using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services is sourced from multiple vendors, when available, and we maintain a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, we obtain non-binding quotes from broker-dealers who are active in the corresponding markets.
The following describes the significant inputs generally used to determine the fair value of our fixed maturities by asset class.
U.S. government and agency
U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. As the fair values of our U.S. Treasury securities are based on unadjusted market prices in active markets, they are classified within Level 1. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.
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Non-U.S. government
Non-U.S. government securities comprise bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair value of these securities is based on prices obtained from international indices or a valuation model that includes the following inputs: interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the sovereign bond in terms of issuer, maturity and seniority. As the significant inputs are observable market inputs, the fair value of non-U.S. government securities are classified within Level 2.
Corporate debt
Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our corporate debt securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3.
MBS
Our portfolio of RMBS and CMBS are originated by both agencies and non-agencies. The fair values of these securities are determined through the use of a pricing model (including Option Adjusted Spread) which uses prepayment speeds and spreads to determine the appropriate average life of the MBS. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the significant inputs used to price MBS are observable market inputs, the fair values of the MBS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3.
ABS
ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and CLO Debt originated by a variety of financial institutions. Similarly to MBS, the fair values of ABS are priced through the use of a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers or use a discounted cash flow model to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are priced within Level 3.
Municipals
Our municipal portfolio comprises revenue and general obligation bonds issued by U.S. domiciled state and municipal entities. The fair value of these securities is determined using spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipals are observable market inputs, municipals are classified within Level 2.
Equity Securities
Equity securities include U.S. and non-U.S. common stocks, exchange-traded funds, and non-U.S. bond mutual funds. For common stocks and exchange-traded funds, we classified these within Level 1 as their fair values are based on unadjusted quoted market prices in active markets. Our investments in non-U.S. bond mutual funds have daily liquidity, with redemption based on the net asset value (NAV) of the funds. Accordingly, we have classified these investments as Level 2.
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Other Investments
As a practical expedient, we estimate fair values for hedge funds, direct lending funds and the CLO fund using NAVs as advised by external fund managers or third party administrators. For each of these funds, the NAV is based on the manager's or administrator's valuation of the underlying holdings in accordance with the fund's governing documents and in accordance with U.S. GAAP. For any funds for which we have not yet received a NAV concurrent with our period end date, we record an estimate of the change in fair value for the period subsequent to the most recent NAV. Such estimates are based on return estimates for the period between the most recently issued NAV and the period end date; these estimates are obtained from the relevant fund managers. Accordingly, we do not typically have a reporting lag in our fair value measurements for these funds. Historically, our valuation estimates incorporating these return estimates have not significantly diverged from the subsequent NAVs.
Within the hedge fund, direct lending fund and CLO fund industries, there is a general lack of transparency necessary to facilitate a detailed independent assessment of the values placed on the securities underlying the NAV provided by the fund manager or fund administrator. To address this, on a quarterly basis, we perform a number of monitoring procedures designed to assist us in the assessment of the quality of the information provided by managers and administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager, regular evaluation of fund performance against applicable benchmarks and the backtesting of our fair value estimates against subsequently received NAVs. Backtesting involves comparing our previously reported values for each individual fund against NAVs per audited financial statements (for year-end values) and final NAVs from fund managers and fund administrators (for interim values).
For our hedge fund investments with liquidity terms allowing us to fully redeem our holdings at the applicable NAV in the near term, we have classified these investments as Level 2. Certain investments in hedge funds, all of our direct lending funds and our CLO fund have redemption restrictions (see Note 3(b) for further details) that prevent us from redeeming in the near term and therefore we have classified these investments as Level 3.
At June 30, 2014, our direct investments in CLO - Equities were classified within Level 3 as we estimated the fair value for these securities using an income approach valuation technique (discounted cash flow model) due to the lack of observable and relevant trades in the secondary markets.
Short-Term Investments
Short-term investments primarily comprise highly liquid securities with maturities greater than three months but less than one year from the date of purchase. These securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value.
Derivative Instruments
Our foreign currency forward contracts, interest rate swaps and commodity contracts are customized to our economic hedging strategies and trade in the over-the-counter derivative market. We use the market approach valuation technique to estimate the fair value for these derivatives based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. Accordingly, we classified these derivatives within Level 2.
We also participate in non-exchange traded derivative-based risk management products addressing weather risks. We use observable market inputs and unobservable inputs in combination with industry or internally-developed valuation and forecasting techniques to determine fair value. We classify these instruments within Level 3.
Cash Settled Awards
Cash settled awards comprise restricted stock units that form part of our compensation program. Although the fair value of these awards is determined using observable quoted market prices in active markets, the stock units themselves are not actively traded. Accordingly, we have classified these liabilities within Level 2.
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4. | FAIR VALUE MEASUREMENTS (CONTINUED)

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

|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total Fair Value |
| At June 30, 2014 |  |  |  |  |  |  |  |
| Assets |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |
| U.S. government and agency | $ | 1,435,966 |  |  | $ | 162,354 |  |  | $ | — |  |  | $ | 1,598,320 |  |
| Non-U.S. government | — |  |  | 1,247,667 |  |  | — |  |  | 1,247,667 |  |
| Corporate debt | — |  |  | 4,263,974 |  |  | — |  |  | 4,263,974 |  |
| Agency RMBS | — |  |  | 2,105,579 |  |  | — |  |  | 2,105,579 |  |
| CMBS | — |  |  | 935,761 |  |  | 3,933 |  |  | 939,694 |  |
| Non-Agency RMBS | — |  |  | 84,946 |  |  | — |  |  | 84,946 |  |
| ABS | — |  |  | 1,276,042 |  |  | 30,883 |  |  | 1,306,925 |  |
| Municipals | — |  |  | 1,051,792 |  |  | — |  |  | 1,051,792 |  |
|  | 1,435,966 |  |  | 11,128,115 |  |  | 34,816 |  |  | 12,598,897 |  |
| Equity securities |  |  |  |  |  |  |  |
| Common stocks | 385,002 |  |  | — |  |  | — |  |  | 385,002 |  |
| Exchange-traded funds | 235,372 |  |  | — |  |  | — |  |  | 235,372 |  |
| Non-U.S. bond mutual funds | — |  |  | 124,386 |  |  | — |  |  | 124,386 |  |
|  | 620,374 |  |  | 124,386 |  |  | — |  |  | 744,760 |  |
| Other investments |  |  |  |  |  |  |  |
| Hedge funds | — |  |  | 443,111 |  |  | 476,808 |  |  | 919,919 |  |
| Direct lending funds | — |  |  | — |  |  | 33,467 |  |  | 33,467 |  |
| CLO - Equities | — |  |  | — |  |  | 91,106 |  |  | 91,106 |  |
|  | — |  |  | 443,111 |  |  | 601,381 |  |  | 1,044,492 |  |
| Short-term investments | — |  |  | 100,166 |  |  | — |  |  | 100,166 |  |
| Derivative instruments (see Note 5) | — |  |  | 9,191 |  |  | — |  |  | 9,191 |  |
| Total Assets | $ | 2,056,340 |  |  | $ | 11,804,969 |  |  | $ | 636,197 |  |  | $ | 14,497,506 |  |
| Liabilities |  |  |  |  |  |  |  |
| Derivative instruments (see Note 5) | $ | — |  |  | $ | 2,283 |  |  | $ | 750 |  |  | $ | 3,033 |  |
| Cash settled awards (see Note 7) | — |  |  | 8,656 |  |  | — |  |  | 8,656 |  |
| Total Liabilities | $ | — |  |  | $ | 10,939 |  |  | $ | 750 |  |  | $ | 11,689 |  |
| At December 31, 2013 |  |  |  |  |  |  |  |
| Assets |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |
| U.S. government and agency | $ | 1,119,632 |  |  | $ | 269,066 |  |  | $ | — |  |  | $ | 1,388,698 |  |
| Non-U.S. government | — |  |  | 1,176,382 |  |  | — |  |  | 1,176,382 |  |
| Corporate debt | — |  |  | 3,608,238 |  |  | — |  |  | 3,608,238 |  |
| Agency RMBS | — |  |  | 2,448,827 |  |  | — |  |  | 2,448,827 |  |
| CMBS | — |  |  | 793,396 |  |  | 4,018 |  |  | 797,414 |  |
| Non-Agency RMBS | — |  |  | 67,567 |  |  | — |  |  | 67,567 |  |
| ABS | — |  |  | 922,652 |  |  | 30,799 |  |  | 953,451 |  |
| Municipals | — |  |  | 1,545,750 |  |  | — |  |  | 1,545,750 |  |
|  | 1,119,632 |  |  | 10,831,878 |  |  | 34,817 |  |  | 11,986,327 |  |
| Equity securities |  |  |  |  |  |  |  |
| Common stocks | 438,318 |  |  | — |  |  | — |  |  | 438,318 |  |
| Exchange-traded funds | 138,847 |  |  | — |  |  | — |  |  | 138,847 |  |
| Non-U.S. bond mutual funds | — |  |  | 124,822 |  |  | — |  |  | 124,822 |  |
|  | 577,165 |  |  | 124,822 |  |  | — |  |  | 701,987 |  |
| Other investments |  |  |  |  |  |  |  |
| Hedge funds | — |  |  | 488,755 |  |  | 461,055 |  |  | 949,810 |  |
| Direct lending funds | — |  |  | — |  |  | 22,134 |  |  | 22,134 |  |
| CLO - Equities | — |  |  | — |  |  | 73,866 |  |  | 73,866 |  |
|  | — |  |  | 488,755 |  |  | 557,055 |  |  | 1,045,810 |  |
| Short-term investments | — |  |  | 46,212 |  |  | — |  |  | 46,212 |  |
| Derivative instruments (see Note 5) | — |  |  | 6,824 |  |  | 984 |  |  | 7,808 |  |
| Total Assets | $ | 1,696,797 |  |  | $ | 11,498,491 |  |  | $ | 592,856 |  |  | $ | 13,788,144 |  |
| Liabilities |  |  |  |  |  |  |  |
| Derivative instruments (see Note 5) | $ | — |  |  | $ | 1,152 |  |  | $ | 815 |  |  | $ | 1,967 |  |
| Cash settled awards (see Note 7) | — |  |  | 8,693 |  |  | — |  |  | 8,693 |  |
| Total Liabilities | $ | — |  |  | $ | 9,845 |  |  | $ | 815 |  |  | $ | 10,660 |  |

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4. | FAIR VALUE MEASUREMENTS (CONTINUED)

During 2014 and 2013, we had no transfers between Levels 1 and 2.
Level 3 Fair Value Measurements
Except for hedge funds, direct lending funds and our CLO fund priced using NAV as a practical expedient and certain fixed maturities priced using broker-dealer quotes (underlying inputs are not available), the following table quantifies the significant unobservable inputs we have used in estimating fair value at June 30, 2014 for our investments classified as Level 3 in the fair value hierarchy. These significant unobservable inputs have not changed significantly from December 31, 2013. Where appropriate, this table has been reconciled back to the asset class total Level 3 holdings.

|  | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted Average |
| ABS - CLO Debt | $ | 30,091 |  | Discounted cash flow | Credit spreads | 3.0% - 4.7% | 3.5% |
|  |  |  | Illiquidity discount (1) | 5.0% | 5.0% |
|  | 792 |  | Broker-dealer quote | n/a | n/a | n/a |
|  | $ | 30,883 |  |  |  |  |  |
| Other investments - CLO - Equities | $ | 37,719 |  | Discounted cash flow | Default rates | 4.0% - 5.0% | 4.3% |
|  |  |  | Loss severity rate | 53.5% | 53.5% |
|  |  |  | Collateral spreads | 2.6% - 3.5% | 3.3% |
|  |  |  | Estimated maturity dates | 3.5 - 4.5 years | 4.0 years |
|  | 53,387 |  | Net asset value | n/a | n/a | n/a |
|  | $ | 91,106 |  |  |  |  |  |
| Derivatives - Weather derivatives, net | $ | (750 | ) | Simulation model | Weather curve | 21 - 106(2) | n/a (3) |
|  |  |  | Weather standard deviation | 12 - 58(2) | n/a (3) |

(1) Judgmentally determined based on limited trades of similar securities observed in the secondary markets.
(2) Measured in Heating Degree Days ("HDD") which is the number of degrees the daily temperature is below a reference temperature. The cumulative HDD for the duration of the derivatives contract is compared to the strike value to determine the necessary settlement.

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

Our CLO Debt represent holdings of investment-grade debt tranches within collateralized loan obligations with underlying collateral of loans originated primarily by U.S. corporations. The CLO Debt in the table represent securities where broker-dealer quotes are unavailable so we estimate fair value through the use of a discounted cash flow model (income approach). This model estimates fair values by discounting the estimated cash flows based on current credit spreads for similar securities, derived from observable offer prices. As these securities are thinly traded in the secondary market, we apply an illiquidity discount to these discounted cash flows in developing our estimate of fair value. Significant increases (decreases) in either of the significant unobservable inputs (credit spread, illiquidity discount) in isolation would result in lower (higher) fair value estimates for our CLO Debt. The interrelationship between these inputs is insignificant. These inputs are updated on a quarterly basis and the reasonableness of the resulting prices is assessed through a comparison to observable offer prices for similar securities.
The CLO - Equities market continues to be mostly inactive with only a small number of transactions being observed in the market and fewer still involving transactions in our CLO - Equities. Accordingly, we continue to rely on the use of our internal discounted cash flow model (income approach) to estimate fair value of our direct investments in CLO - Equities. Of the significant inputs into this model, the default and loss severity rates are the most judgmental unobservable market inputs to which the valuation of CLO - Equities is most sensitive. A significant increase (decrease) in either of these significant inputs in isolation would result in lower (higher) fair value estimates for direct investments in our CLO - Equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs as they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (decrease) in either of these significant inputs in isolation would result in
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higher (lower) fair value estimates for direct investments in our CLO - Equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, our valuation processes for both CLO Debt and CLO - Equities include a review of the underlying cash flows and key assumptions used in the discounted cash flow models. We review and update the above significant unobservable inputs based on information obtained from secondary markets, including from the managers of the CLOs we hold. These inputs are the responsibility of management and, in order to ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we update our assumptions through regular communication with industry participants and ongoing monitoring of the deals in which we participate (e.g. default and loss severity rate trends), we maintain a current understanding of the market conditions, historical results, as well as emerging trends that may impact future cash flows. By maintaining this current understanding, we are able to assess the reasonableness of the inputs we ultimately use in our models.
Weather derivatives relate to non-exchange traded risk management products addressing weather risks. We use observable market inputs and unobservable inputs in combination with industry or internally-developed simulation models to determine fair value; these models may reference market price information for similar instruments. The pricing models are internally reviewed by Risk Management personnel prior to implementation and are reviewed periodically thereafter.
Observable and unobservable inputs to these models vary by contract type and would typically include the following:

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

• | Unobservable inputs: correlation; and

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

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

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

|  | Opening Balance |  | Transfers into Level 3 |  | Transfers out of Level 3 |  | Included in earnings (1) |  | Included in OCI (2) |  | Purchases |  | Sales |  | Settlements/ Distributions |  | Closing Balance |  | Change in unrealized investment gain/(loss) (3) |
| Three months ended June 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Corporate debt | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Non-Agency RMBS | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
| CMBS | 3,969 |  |  | — |  |  | — |  |  | — |  |  | (23 | ) |  | — |  |  | — |  |  | (13 | ) |  | 3,933 |  |  | — |  |
| ABS | 30,724 |  |  | — |  |  | — |  |  | — |  |  | 273 |  |  | — |  |  | — |  |  | (114 | ) |  | 30,883 |  |  | — |  |
|  | 34,693 |  |  | — |  |  | — |  |  | — |  |  | 250 |  |  | — |  |  | — |  |  | (127 | ) |  | 34,816 |  |  | — |  |
| Other investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Hedge funds | 464,666 |  |  | — |  |  | — |  |  | 12,746 |  |  | — |  |  | 3,000 |  |  | — |  |  | (3,604 | ) |  | 476,808 |  |  | 12,746 |  |
| Direct lending funds | 26,003 |  |  | — |  |  | — |  |  | 367 |  |  | — |  |  | 7,300 |  |  | — |  |  | (203 | ) |  | 33,467 |  |  | 367 |  |
| CLO - Equities | 86,179 |  |  | — |  |  | — |  |  | 5,181 |  |  | — |  |  | 6,422 |  |  | — |  |  | (6,676 | ) |  | 91,106 |  |  | 5,181 |  |
|  | 576,848 |  |  | — |  |  | — |  |  | 18,294 |  |  | — |  |  | 16,722 |  |  | — |  |  | (10,483 | ) |  | 601,381 |  |  | 18,294 |  |
| Other assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Derivative instruments | 1,707 |  |  | — |  |  | — |  |  | 293 |  |  | — |  |  | — |  |  | — |  |  | (2,000 | ) |  | — |  |  | — |  |
|  | 1,707 |  |  | — |  |  | — |  |  | 293 |  |  | — |  |  | — |  |  | — |  |  | (2,000 | ) |  | — |  |  | — |  |
| Total assets | $ | 613,248 |  |  | $ | — |  |  | $ | — |  |  | $ | 18,587 |  |  | $ | 250 |  |  | $ | 16,722 |  |  | $ | — |  |  | $ | (12,610 | ) |  | $ | 636,197 |  |  | $ | 18,294 |  |
| Other liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Derivative instruments | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (90 | ) |  | $ | — |  |  | $ | 840 |  |  | $ | — |  |  | $ | — |  |  | $ | 750 |  |  | $ | (90 | ) |
| Total liabilities | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (90 | ) |  | $ | — |  |  | $ | 840 |  |  | $ | — |  |  | $ | — |  |  | $ | 750 |  |  | $ | (90 | ) |
| Six months ended June 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Corporate debt | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Non-Agency RMBS | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
| CMBS | 4,018 |  |  | — |  |  | — |  |  | — |  |  | (43 | ) |  | — |  |  | — |  |  | (42 | ) |  | 3,933 |  |  | — |  |
| ABS | 30,799 |  |  | 128 |  |  | — |  |  | — |  |  | 178 |  |  | — |  |  | — |  |  | (222 | ) |  | 30,883 |  |  | — |  |
|  | 34,817 |  |  | 128 |  |  | — |  |  | — |  |  | 135 |  |  | — |  |  | — |  |  | (264 | ) |  | 34,816 |  |  | — |  |
| Other investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Hedge funds | 461,055 |  |  | — |  |  | — |  |  | 20,923 |  |  | — |  |  | 7,500 |  |  | — |  |  | (12,670 | ) |  | 476,808 |  |  | 20,923 |  |
| Direct lending funds | 22,134 |  |  | — |  |  | — |  |  | 919 |  |  | — |  |  | 10,745 |  |  | — |  |  | (331 | ) |  | 33,467 |  |  | 919 |  |
| CLO - Equities | 73,866 |  |  | — |  |  | — |  |  | 11,331 |  |  | — |  |  | 19,267 |  |  | — |  |  | (13,358 | ) |  | 91,106 |  |  | 11,331 |  |
|  | 557,055 |  |  | — |  |  | — |  |  | 33,173 |  |  | — |  |  | 37,512 |  |  | — |  |  | (26,359 | ) |  | 601,381 |  |  | 33,173 |  |
| Other assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Derivative instruments | 984 |  |  | — |  |  | — |  |  | 5,011 |  |  | — |  |  | — |  |  | — |  |  | (5,995 | ) |  | — |  |  | — |  |
|  | 984 |  |  | — |  |  | — |  |  | 5,011 |  |  | — |  |  | — |  |  | — |  |  | (5,995 | ) |  | — |  |  | — |  |
| Total assets | $ | 592,856 |  |  | $ | 128 |  |  | $ | — |  |  | $ | 38,184 |  |  | $ | 135 |  |  | $ | 37,512 |  |  | $ | — |  |  | $ | (32,618 | ) |  | $ | 636,197 |  |  | $ | 33,173 |  |
| Other liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Derivative instruments | $ | 815 |  |  | $ | — |  |  | $ | — |  |  | $ | 896 |  |  | $ | — |  |  | $ | 840 |  |  | $ | — |  |  | $ | (1,801 | ) |  | $ | 750 |  |  | $ | (90 | ) |
| Total liabilities | $ | 815 |  |  | $ | — |  |  | $ | — |  |  | $ | 896 |  |  | $ | — |  |  | $ | 840 |  |  | $ | — |  |  | $ | (1,801 | ) |  | $ | 750 |  |  | $ | (90 | ) |

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4. | FAIR VALUE MEASUREMENTS (CONTINUED)

|  | Opening Balance |  | Transfers into Level 3 |  | Transfers out of Level 3 |  | Included in earnings (1) |  | Included in OCI (2) |  | Purchases |  | Sales |  | Settlements/ Distributions |  | Closing Balance |  | Change in unrealized investment gain/(loss) (3) |
| Three months ended June 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Corporate debt | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Non-Agency RMBS | 1,300 |  |  | — |  |  | (1,223 | ) |  | — |  |  | (77 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
| CMBS | 12,600 |  |  | — |  |  | — |  |  | — |  |  | (69 | ) |  | — |  |  | — |  |  | (746 | ) |  | 11,785 |  |  | — |  |
| ABS | 266,749 |  |  | — |  |  | (213,212 | ) |  | — |  |  | 693 |  |  | — |  |  | — |  |  | (105 | ) |  | 54,125 |  |  | — |  |
|  | 280,649 |  |  | — |  |  | (214,435 | ) |  | — |  |  | 547 |  |  | — |  |  | — |  |  | (851 | ) |  | 65,910 |  |  | — |  |
| Other investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Hedge funds | 414,716 |  |  | 29,953 |  |  | — |  |  | 6,962 |  |  | — |  |  | — |  |  | — |  |  | (7,411 | ) |  | 444,220 |  |  | 6,962 |  |
| Direct lending funds | 2,436 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,796 |  |  | — |  |  | — |  |  | 4,232 |  |  | — |  |
| CLO - Equities | 64,255 |  |  | — |  |  | — |  |  | 5,072 |  |  | — |  |  | — |  |  | — |  |  | (16,283 | ) |  | 53,044 |  |  | 5,072 |  |
|  | 481,407 |  |  | 29,953 |  |  | — |  |  | 12,034 |  |  | — |  |  | 1,796 |  |  | — |  |  | (23,694 | ) |  | 501,496 |  |  | 12,034 |  |
| Other assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Derivative instruments | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
|  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
| Total assets | $ | 762,056 |  |  | $ | 29,953 |  |  | $ | (214,435 | ) |  | $ | 12,034 |  |  | $ | 547 |  |  | $ | 1,796 |  |  | $ | — |  |  | $ | (24,545 | ) |  | $ | 567,406 |  |  | $ | 12,034 |  |
| Other liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Derivative instruments | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Total liabilities | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Six months ended June 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Fixed maturities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Corporate debt | $ | 1,550 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,550 |  |  | $ | — |  |  | $ | — |  |  | $ | (3,100 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Non-Agency RMBS | 1,110 |  |  | — |  |  | (1,223 | ) |  | — |  |  | 135 |  |  | — |  |  | — |  |  | (22 | ) |  | — |  |  | — |  |
| CMBS | 4,296 |  |  | 8,382 |  |  | — |  |  | — |  |  | (147 | ) |  | — |  |  | — |  |  | (746 | ) |  | 11,785 |  |  | — |  |
| ABS | 63,975 |  |  | — |  |  | (213,212 | ) |  | (112 | ) |  | 981 |  |  | 212,889 |  |  | (10,190 | ) |  | (206 | ) |  | 54,125 |  |  | — |  |
|  | 70,931 |  |  | 8,382 |  |  | (214,435 | ) |  | 1,438 |  |  | 969 |  |  | 212,889 |  |  | (13,290 | ) |  | (974 | ) |  | 65,910 |  |  | — |  |
| Other investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Hedge funds | 359,996 |  |  | 29,953 |  |  | — |  |  | 25,490 |  |  | — |  |  | 50,000 |  |  | — |  |  | (21,219 | ) |  | 444,220 |  |  | 25,490 |  |
| Direct lending funds | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 4,232 |  |  | — |  |  | — |  |  | 4,232 |  |  | — |  |
| CLO - Equities | 62,435 |  |  | — |  |  | — |  |  | 15,025 |  |  | — |  |  | — |  |  | — |  |  | (24,416 | ) |  | 53,044 |  |  | 15,025 |  |
|  | 422,431 |  |  | 29,953 |  |  | — |  |  | 40,515 |  |  | — |  |  | 54,232 |  |  | — |  |  | (45,635 | ) |  | 501,496 |  |  | 40,515 |  |
| Other assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Derivative instruments | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
|  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
| Total assets | $ | 493,362 |  |  | $ | 38,335 |  |  | $ | (214,435 | ) |  | $ | 41,953 |  |  | $ | 969 |  |  | $ | 267,121 |  |  | $ | (13,290 | ) |  | $ | (46,609 | ) |  | $ | 567,406 |  |  | $ | 40,515 |  |
| Other liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Derivative instruments | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |
| Total liabilities | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4. | FAIR VALUE MEASUREMENTS (CONTINUED)

The transfers into and out of fair value hierarchy levels reflect the fair value of the securities at the end of the reporting period.
Transfers into Level 3 from Level 2
There were no transfers into Level 3 from Level 2 during the three months ended June 30, 2014. The transfers to Level 3 from Level 2 made during the six months ended June 30, 2014 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities. The transfers to Level 3 from Level 2 made during the three and six months ended June 30, 2013 were primarily due to redemption provisions in hedge fund holdings and the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers.
Transfers out of Level 3 into Level 2
There were no transfers to Level 2 from Level 3 made during the three and six months ended June 30, 2014. The transfers to Level 2 from Level 3 made during the three and six months ended June 30, 2013 were primarily due to the availability of observable market inputs and multiple quotes from pricing vendors and broker-dealers on CLO Debt securities purchased during the first quarter of 2013.
Financial Instruments Not Carried at Fair Value
U.S. GAAP guidance over disclosures about the fair value of financial instruments are also applicable to financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts.
The carrying values of cash equivalents (including restricted amounts), accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated their fair values at June 30, 2014, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At June 30, 2014, our senior notes are recorded at amortized cost with a carrying value of $1,490 million (2013: $996 million) and have a fair value of $1,600 million (2013: $1,073 million). The fair values of these securities were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our senior notes are classified within Level 2.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. | DERIVATIVE INSTRUMENTS

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

|  | June 30, 2014 |  | December 31, 2013 |
|  | Derivative Notional Amount |  | Asset Derivative Fair Value(1) |  | Liability Derivative Fair Value(1) |  | Derivative Notional Amount |  | Asset Derivative Fair Value(1) |  | Liability Derivative Fair Value(1) |
| Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |
| Relating to investment portfolio: |  |  |  |  |  |  |  |  |  |  |  |
| Foreign exchange forward contracts | $ | 132,230 |  |  | $ | 12 |  |  | $ | 2,011 |  |  | $ | 254,023 |  |  | $ | 1,214 |  |  | $ | 1,032 |  |
| Interest rate swaps | 281,250 |  |  | — |  |  | 272 |  |  | 281,250 |  |  | 873 |  |  | — |  |
| Relating to underwriting portfolio: |  |  |  |  |  |  |  |  |  |  |  |
| Foreign exchange forward contracts | 605,076 |  |  | 5,608 |  |  | — |  |  | 390,663 |  |  | 4,737 |  |  | 120 |  |
| Weather-related contracts | 3,000 |  |  | — |  |  | 750 |  |  | 24,451 |  |  | 984 |  |  | 815 |  |
| Commodity contracts | 100,850 |  |  | 3,571 |  |  | — |  |  | — |  |  | — |  |  | — |  |
| Total derivatives |  |  | $ | 9,191 |  |  | $ | 3,033 |  |  |  |  | $ | 7,808 |  |  | $ | 1,967 |  |

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

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

|  | June 30, 2014 |  | December 31, 2013 |
|  | Gross Amounts | Gross Amounts Offset | Net Amounts(1) |  | Gross Amounts | Gross Amounts Offset | Net Amounts(1) |
| Derivative assets | $ | 11,985 |  | $ | (2,794 | ) | $ | 9,191 |  |  | $ | 9,796 |  | $ | (1,988 | ) | $ | 7,808 |  |
| Derivative liabilities | 5,827 |  | (2,794 | ) | 3,033 |  |  | 3,955 |  | (1,988 | ) | 1,967 |  |

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

Refer to Note 3 - Investments for information on reverse repurchase agreements.
Derivative Instruments not Designated as Hedging Instruments
a) Relating to Investment Portfolio
Foreign Currency Risk
Within our investment portfolio we are exposed to foreign currency risk. Accordingly, the fair values for our investment portfolio are partially influenced by the change in foreign exchange rates. We may enter into foreign exchange forward contracts to manage the effect of this currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. | DERIVATIVE INSTRUMENTS (CONTINUED)

In addition, our external equity investment managers have the discretion to hold foreign currency exposures as part of their total return strategy.
The decrease in the notional amount of investment-related derivatives since December 31, 2013 was due to a decrease in sterling and Canadian dollar-denominated fixed maturities being hedged.
Interest Rate Risk
Our investment portfolio contains a large percentage of fixed maturities which exposes us to significant interest rate risk. As part of our overall management of this risk, we may use interest rate swaps. The interest rate swaps held at June 30, 2014 convert part of our overall fixed rate exposure to a variable rate exposure which effectively reduces the duration of our overall portfolio.
b) Relating to Underwriting Portfolio
Foreign Currency Risk
Our (re)insurance subsidiaries and branches operate in various foreign countries. Consequently, some of our business is written in currencies other than the U.S. dollar and, therefore, our underwriting portfolio is exposed to significant foreign currency risk. We manage foreign currency risk by seeking to match our foreign-denominated net liabilities under (re)insurance contracts with cash and investments that are denominated in such currencies. We may also use derivative instruments, specifically forward contracts and currency options, to economically hedge foreign currency exposures.
The increase in the notional amount of underwriting related derivatives since December 31, 2013, was primarily due to new business written in the first half of 2014.
Weather Risk
During 2013, we began to write derivative-based risk management products designed to address weather risks with the objective of generating profits on a portfolio basis. The majority of this business consists of receiving a payment at contract inception in exchange for bearing the risk of variations in a quantifiable weather-related phenomenon, such as temperature. Where a client wishes to minimize the upfront payment, these transactions may be structured as swaps or collars. In general, our portfolio of such derivative contracts is of short duration, with contracts being predominantly seasonal in nature. In order to economically hedge a portion of this portfolio, we may also purchase weather derivatives.
Commodity Risk
Within our (re)insurance portfolio we are exposed to commodity price risk. During 2014, we began to hedge this price risk by entering into commodity derivative contracts.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5. | DERIVATIVE INSTRUMENTS (CONTINUED)

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

|  | Location of Gain (Loss) Recognized in Income on Derivative | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
| Relating to investment portfolio: |  |  |  |  |  |  |  |  |
| Foreign exchange forward contracts | Net realized investment gains | $ | (2,355 | ) |  | $ | 10,128 |  |  | $ | (3,684 | ) |  | $ | 17,292 |  |
| Interest rate swaps | Net realized investment gains | (4,800 | ) |  | — |  |  | (8,960 | ) |  | — |  |
| Relating to underwriting portfolio: |  |  |  |  |  |  |  |  |
| Foreign exchange forward contracts | Foreign exchange losses (gains) | 1,058 |  |  | (4,685 | ) |  | 13,131 |  |  | (2,197 | ) |
| Weather-related contracts | Other insurance related income | 383 |  |  | — |  |  | 4,061 |  |  | — |  |
| Commodity contracts | Other insurance related income | 1,713 |  |  | — |  |  | 1,713 |  |  | — |  |
| Total |  | $ | (4,001 | ) |  | $ | 5,443 |  |  | $ | 6,261 |  |  | $ | 15,095 |  |

6. | RESERVE FOR LOSSES AND LOSS EXPENSES

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

| Six months ended June 30, | 2014 |  | 2013 |
| Gross reserve for losses and loss expenses, beginning of period | $ | 9,582,140 |  |  | $ | 9,058,731 |  |
| Less reinsurance recoverable on unpaid losses, beginning of period | (1,900,112 | ) |  | (1,825,617 | ) |
| Net reserve for unpaid losses and loss expenses, beginning of period | 7,682,028 |  |  | 7,233,114 |  |
| Net incurred losses and loss expenses related to: |  |  |  |
| Current year | 1,238,883 |  |  | 1,177,926 |  |
| Prior years | (128,847 | ) |  | (96,613 | ) |
|  | 1,110,036 |  |  | 1,081,313 |  |
| Net paid losses and loss expenses related to: |  |  |  |
| Current year | (93,218 | ) |  | (54,732 | ) |
| Prior years | (857,004 | ) |  | (732,135 | ) |
|  | (950,222 | ) |  | (786,867 | ) |
| Foreign exchange and other | 35,122 |  |  | (130,536 | ) |
| Net reserve for unpaid losses and loss expenses, end of period | 7,876,964 |  |  | 7,397,024 |  |
| Reinsurance recoverable on unpaid losses, end of period | 1,929,024 |  |  | 1,945,793 |  |
| Gross reserve for losses and loss expenses, end of period | $ | 9,805,988 |  |  | $ | 9,342,817 |  |

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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. | RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Insurance | $ | 32,963 |  |  | $ | 6,693 |  |  | $ | 44,571 |  |  | $ | 12,290 |  |
| Reinsurance | 52,391 |  |  | 35,422 |  |  | 84,276 |  |  | 84,323 |  |
| Total | $ | 85,354 |  |  | $ | 42,115 |  |  | $ | 128,847 |  |  | $ | 96,613 |  |

The majority of the net favorable prior year reserve development in each period related to short-tail lines of business. Net favorable prior year reserve development for liability reinsurance and professional lines reinsurance business also contributed in the three and six months ended June 30, 2014 and 2013.
The underlying exposures in the property, marine and aviation reserving classes within our insurance segment and the property reserving class within our reinsurance segment largely relate to short-tail business. Development from these classes contributed $73 million and $32 million of the total net favorable prior year reserve development for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, these short-tail lines contributed $101 million and $62 million, respectively, of net favorable prior year reserve development. The net favorable development for these classes primarily reflected the recognition of better than expected loss emergence.
In the first quarter of 2013, we began to give weight to actuarial methods that reflect our actual experience for liability reinsurance business, as we believe that our older accident years are now at a stage of expected development where such methods will produce meaningful actuarial indications. Favorable development was recognized of $6 million and $22 million for the three months ended June 30, 2014 and 2013, respectively, and $12 million and $38 million for the six months ended June 30, 2014 and 2013, respectively, primarily reflecting the greater weight management is giving to experience based indications and our experience which has been favorable for the 2004 through 2008 accident years.
Our professional lines reinsurance business contributed further net favorable prior year reserve development of $6 million and $12 million in the three and six months ended June 30, 2014, respectively. This prior year reserve development was driven by increased weight being given to experience based actuarial methods in selecting our ultimate loss estimates for accident years 2008 and prior. As our loss experience has generally been better than expected, this resulted in the recognition of favorable development.
The frequency and severity of natural catastrophe and weather activity was high in recent years and our June 30, 2014 net reserve for losses and loss expenses continues to include estimated amounts for numerous events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular Storm Sandy, the 2011 Japanese earthquake and tsunami and 2010 and 2011 New Zealand earthquakes, inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.

7. | SHARE-BASED COMPENSATION

For the three months ended June 30, 2014, we incurred share-based compensation costs of $19 million (2013: $17 million) and recorded associated tax benefits of $3 million (2013: $3 million). For the six months ended June 30, 2014, we incurred share-based compensation costs of $37 million (2013: $31 million) and recorded tax benefits thereon of $6 million (2013:$6 million).
The fair value of shares vested during the six months ended June 30, 2014 was $65 million (2013: $67 million). At June 30, 2014 there were $148 million of unrecognized share-based compensation costs, which are expected to be recognized over the weighted average period of 2.6 years.
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7. | SHARE-BASED COMPENSATION (CONTINUED)

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

|  | Performance-based Stock Awards |  | Service-based Stock Awards |
|  | Number of Restricted Stock |  | Weighted Average Grant Date Fair Value |  | Number of Restricted Stock |  | Weighted Average Grant Date Fair Value |
| Nonvested restricted stock - beginning of period | 283 |  |  | $ | 35.74 |  |  | 3,430 |  |  | $ | 34.72 |  |
| Granted | 68 |  |  | 44.33 |  |  | 1,036 |  |  | 44.42 |  |
| Vested | — |  |  | — |  |  | (1,415 | ) |  | 33.76 |  |
| Forfeited | — |  |  | — |  |  | (157 | ) |  | 36.26 |  |
| Nonvested restricted stock - end of period | 351 |  |  | $ | 37.41 |  |  | 2,894 |  |  | $ | 38.47 |  |

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

8. | EARNINGS PER COMMON SHARE

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Basic earnings per common share |  |  |  |  |  |  |  |
| Net income | $ | 202,259 |  |  | $ | 83,725 |  |  | $ | 350,729 |  |  | $ | 395,280 |  |
| Less: noncontrolling interests | 1,573 |  |  | — |  |  | 2,795 |  |  | — |  |
| Less: preferred shares dividends | 10,022 |  |  | 8,197 |  |  | 20,044 |  |  | 16,938 |  |
| Less: loss on repurchase of preferred shares | — |  |  | 3,081 |  |  | — |  |  | 3,081 |  |
| Net income available to common shareholders | 190,664 |  |  | 72,447 |  |  | 327,890 |  |  | 375,261 |  |
| Weighted average common shares outstanding - basic | 105,118 |  |  | 115,163 |  |  | 107,075 |  |  | 116,088 |  |
| Basic earnings per common share | $ | 1.81 |  |  | $ | 0.63 |  |  | $ | 3.06 |  |  | $ | 3.23 |  |
| Diluted earnings per common share |  |  |  |  |  |  |  |
| Net income available to common shareholders | $ | 190,664 |  |  | $ | 72,447 |  |  | $ | 327,890 |  |  | $ | 375,261 |  |
| Weighted average common shares outstanding - basic | 105,118 |  |  | 115,163 |  |  | 107,075 |  |  | 116,088 |  |
| Stock compensation plans | 1,171 |  |  | 1,508 |  |  | 1,254 |  |  | 1,572 |  |
| Weighted average common shares outstanding - diluted | 106,289 |  |  | 116,671 |  |  | 108,329 |  |  | 117,660 |  |
| Diluted earnings per common share | $ | 1.79 |  |  | $ | 0.62 |  |  | $ | 3.03 |  |  | $ | 3.19 |  |
| Anti-dilutive shares excluded from the dilutive computation | 73 |  |  | 35 |  |  | 562 |  |  | 473 |  |

9. | SHAREHOLDERS' EQUITY

The following table presents our common shares issued and outstanding:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Shares issued, balance at beginning of period | 175,195 |  |  | 173,595 |  |  | 174,134 |  |  | 171,867 |  |
| Shares issued | 120 |  |  | 311 |  |  | 1,181 |  |  | 2,039 |  |
| Total shares issued at end of period | 175,315 |  |  | 173,906 |  |  | 175,315 |  |  | 173,906 |  |
| Treasury shares, balance at beginning of period | (68,450 | ) |  | (57,289 | ) |  | (64,649 | ) |  | (53,947 | ) |
| Shares repurchased | (3,058 | ) |  | (5,122 | ) |  | (7,094 | ) |  | (8,491 | ) |
| Shares reissued from treasury | 99 |  |  | 93 |  |  | 334 |  |  | 120 |  |
| Total treasury shares at end of period | (71,409 | ) |  | (62,318 | ) |  | (71,409 | ) |  | (62,318 | ) |
| Total shares outstanding | 103,906 |  |  | 111,588 |  |  | 103,906 |  |  | 111,588 |  |

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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9. | SHAREHOLDERS' EQUITY (CONTINUED)

Treasury Shares
The following table presents our share repurchases:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| In the open market: |  |  |  |  |  |  |  |
| Total shares | 2,970 |  |  | 5,048 |  |  | 6,680 |  |  | 5,048 |  |
| Total cost | $ | 135,395 |  |  | $ | 225,000 |  |  | $ | 300,000 |  |  | $ | 225,000 |  |
| Average price per share(1) | $ | 45.59 |  |  | $ | 44.57 |  |  | $ | 44.91 |  |  | $ | 44.57 |  |
| From employees: |  |  |  |  |  |  |  |
| Total shares | 88 |  |  | 74 |  |  | 414 |  |  | 443 |  |
| Total cost | $ | 3,985 |  |  | $ | 3,256 |  |  | $ | 18,082 |  |  | $ | 17,925 |  |
| Average price per share(1) | $ | 45.57 |  |  | $ | 44.10 |  |  | $ | 43.66 |  |  | $ | 40.47 |  |
| From founding shareholder:(2) |  |  |  |  |  |  |  |
| Total shares | — |  |  | — |  |  | — |  |  | 3,000 |  |
| Total cost | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 116,100 |  |
| Average price per share(1) | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 38.70 |  |
| Total shares repurchased: |  |  |  |  |  |  |  |
| Total shares | 3,058 |  |  | 5,122 |  |  | 7,094 |  |  | 8,491 |  |
| Total cost | $ | 139,380 |  |  | $ | 228,256 |  |  | $ | 318,082 |  |  | $ | 359,025 |  |
| Average price per share(1) | $ | 45.59 |  |  | $ | 44.57 |  |  | $ | 44.84 |  |  | $ | 42.28 |  |

(1) | Calculated using whole figures.

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

10. | NONCONTROLLING INTERESTS

During November 2013, the Company formed AXIS Ventures Reinsurance Limited (Ventures Re), a Bermuda domiciled insurer. Ventures Re was formed to write reinsurance on a fully collateralized basis.
In conjunction with the formation of Ventures Re, third party investors purchased $50 million of non-voting redeemable preferred share capital issued by this entity. The preferred shares are redeemable at the sole discretion of Ventures Re's Board of Directors, and are expected to be redeemed on or before July 1, 2016.
Ventures Re is considered to be a variable interest entity. The Company has concluded that it is the primary beneficiary of Ventures Re as it has the power to direct, and has more than an insignificant economic interest in, the activities of this entity. Following this determination, Ventures Re was consolidated by the Company. Shareholders' equity attributable to Ventures Re's third party investors is recorded in the Consolidated Financial Statements as noncontrolling interests.
At June 30, 2014, total assets of Ventures Re were $58 million (2013: $50 million), consisting primarily of cash and cash equivalents and insurance receivables. Total liabilities were $5 million (2013: $nil) primarily consisting of unearned premium. The assets of Ventures Re can only be used to settle its own liabilities, and there is no recourse to the Company for any liabilities incurred by this entity.
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

10. | NONCONTROLLING INTERESTS (CONTINUED)

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

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

11. | DEBT AND FINANCING ARRANGEMENTS

a) | Senior Notes

On March 13, 2014, AXIS Specialty Finance PLC, a 100% owned finance subsidiary, issued $250 million aggregate principal amount of 2.65% senior unsecured notes (the "2.65% Senior Notes") at an issue price of 99.896% and $250 million aggregate principal amount of 5.15% senior unsecured notes (the "5.15% Senior Notes") at an issue price of 99.474%. The net proceeds of the issuance, after consideration of the offering discount and underwriting expenses and commissions, totaled approximately $248 million and $246 million for the 2.65% Senior Notes and the 5.15% Senior Notes, respectively. Interest on the 2.65% Senior Notes and the 5.15% Senior Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. Unless previously redeemed, the 2.65% Senior Notes and the 5.15% Senior Notes will mature on April 1, 2019 and April 1, 2045, respectively. The 2.65% Senior Notes and the 5.15% Senior Notes are ranked as unsecured senior obligations of AXIS Specialty Finance PLC. AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance PLC under the 2.65% Senior Notes and the 5.15% Senior Notes. AXIS Capital's obligations under this guarantee are unsecured and senior and rank equally with all other senior obligations of AXIS Capital. Net proceeds from this offering are expected to be used towards the repayment of $500 million of AXIS Capital’s 5.75% senior unsecured notes which mature on December 1, 2014.
We have the option to redeem the 2.65% Senior Notes and the 5.15% Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price, which is equal to the greater of the aggregate principal amount or the sum of the present values of the remaining scheduled payments of principal and interest. The related indentures contain various covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. We were in compliance with all the covenants contained in the indentures at June 30, 2014.
Interest expense recognized in relation to all of our senior unsecured notes includes interest payable, amortization of the offering discounts and amortization of debt offering expenses. The offering discounts and debt offering expenses are amortized over the period of time during which the underlying senior notes are outstanding. During the three months ended June 30, 2014, we incurred interest expense of $20 million (2013: $15 million) and for the six months ended June 30, 2014 we incurred $35 million (2013: $30 million), relating to all of our senior unsecured notes.

b) | Credit Facilities

Effective February 10, 2014, AXIS Specialty Finance PLC was added as a guarantor to our $250 million credit facility (the "Credit Facility").
On March 31, 2014, AXIS Capital's subsidiary, AXIS Specialty Limited, terminated the $170 million secured letter of credit facility (the "Lloyd's LOC Facility") with ING Bank N.V., London Branch ("ING"). The Funds at Lloyd's requirements for the Company's subsidiary, AXIS Corporate Capital UK Limited, to support the underwriting capacity of the Company's Lloyd's syndicate, AXIS Syndicate 1686, are now being met by capital pledged in the form of fixed income securities deposited directly with Lloyd's.
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

11. | DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

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

12. | COMMITMENTS AND CONTINGENCIES

We purchase reinsurance coverage for our insurance lines of business. The minimum reinsurance premiums are contractually due in advance on a quarterly basis. Actual payments under the reinsurance contracts will depend on the underlying subject premium and may exceed the minimum premium. In addition, we have entered into a reinsurance agreement that covers both our insurance and reinsurance segments for a period longer than one year. At June 30, 2014, we have outstanding reinsurance purchase commitments of $131 million relati ng to these annual and multi-year a greements.
Refer 'Note 3 - Investments' for information on commitments related to our investment portfolio.

13. | OTHER COMPREHENSIVE INCOME (LOSS)

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

|  | 2014 |  | 2013 |
|  | Before Tax Amount |  | Tax (Expense) Benefit |  | Net of Tax Amount |  | Before Tax Amount |  | Tax (Expense) Benefit |  | Net of Tax Amount |
| Three months ended June 30, |  |  |  |  |  |  |  |  |  |  |  |
| Available for sale investments: |  |  |  |  |  |  |  |  |  |  |  |
| Unrealized gains (losses) arising during the period | $ | 133,575 |  |  | $ | (13,025 | ) |  | $ | 120,550 |  |  | $ | (289,028 | ) |  | $ | 26,127 |  |  | $ | (262,901 | ) |
| Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income | (40,259 | ) |  | 6,330 |  |  | (33,929 | ) |  | (5,697 | ) |  | 1,631 |  |  | (4,066 | ) |
| Unrealized gains (losses) arising during the period, net of reclassification adjustment | 93,316 |  |  | (6,695 | ) |  | 86,621 |  |  | (294,725 | ) |  | 27,758 |  |  | (266,967 | ) |
| Non-credit portion of OTTI losses | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
| Foreign currency translation adjustment | 3,790 |  |  | — |  |  | 3,790 |  |  | (18,386 | ) |  | — |  |  | (18,386 | ) |
| Total other comprehensive income (loss), net of tax | $ | 97,106 |  |  | $ | (6,695 | ) |  | $ | 90,411 |  |  | $ | (313,111 | ) |  | $ | 27,758 |  |  | $ | (285,353 | ) |
| Six months ended June 30, |  |  |  |  |  |  |  |  |  |  |  |
| Available for sale investments: |  |  |  |  |  |  |  |  |  |  |  |
| Unrealized gains (losses) arising during the period | $ | 214,135 |  |  | $ | (22,202 | ) |  | $ | 191,933 |  |  | $ | (307,629 | ) |  | $ | 26,203 |  |  | $ | (281,426 | ) |
| Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income | (56,328 | ) |  | 12,785 |  |  | (43,543 | ) |  | (42,951 | ) |  | 5,037 |  |  | (37,914 | ) |
| Unrealized gains (losses) arising during the period, net of reclassification adjustment | 157,807 |  |  | (9,417 | ) |  | 148,390 |  |  | (350,580 | ) |  | 31,240 |  |  | (319,340 | ) |
| Non-credit portion of OTTI losses | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
| Foreign currency translation adjustment | 6,449 |  |  | — |  |  | 6,449 |  |  | (18,527 | ) |  | — |  |  | (18,527 | ) |
| Total other comprehensive income (loss), net of tax | $ | 164,256 |  |  | $ | (9,417 | ) |  | $ | 154,839 |  |  | $ | (369,107 | ) |  | $ | 31,240 |  |  | $ | (337,867 | ) |

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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13. | OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED)

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

|  |  | Amount Reclassified from AOCI(1) |
| Details About AOCI Components | Consolidated Statement of Operations Line Item That Includes Reclassification | Three months ended June 30, |  | Six months ended June 30, |
| 2014 |  | 2013 |  | 2014 |  | 2013 |
| Unrealized appreciation on available for sale investments |  |  |  |  |  |  |  |  |
|  | Other realized investment gains | $ | 42,164 |  |  | $ | 10,824 |  |  | $ | 59,018 |  |  | $ | 48,976 |  |
|  | OTTI losses | (1,905 | ) |  | (5,127 | ) |  | (2,690 | ) |  | (6,025 | ) |
|  | Total before tax | 40,259 |  |  | 5,697 |  |  | 56,328 |  |  | 42,951 |  |
|  | Income tax expense | (6,330 | ) |  | (1,631 | ) |  | (12,785 | ) |  | (5,037 | ) |
|  | Net of tax | $ | 33,929 |  |  | $ | 4,066 |  |  | $ | 43,543 |  |  | $ | 37,914 |  |

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

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

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

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

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SECOND QUARTER 2014 FINANCIAL HIGHLIGHTS

Second Quarter 2014 Consolidated Results of Operations

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

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

• | Gross premiums written of $1.2 billion

• | Net premiums written of $1.0 billion

• | Net premiums earned of $1.0 billion

• | Net favorable prior year reserve development of $85 million

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

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

• | Net investment income of $115 million

• | Net realized investment gains of $33 million

Second Quarter 2014 Consolidated Financial Condition

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

• | Total assets of $21.4 billion

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

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

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

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

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

Business Overview
We are a Bermuda-based global provider of specialty lines insurance and treaty reinsurance products with operations in Bermuda, the United States, Europe, Singapore, Canada, Australia and Latin America. Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Re.
Our mission is to provide our clients and distribution partners with a broad range of risk transfer products and services and meaningful capacity, backed by significant financial strength. We manage our portfolio holistically, aiming to construct the optimum consolidated portfolio of funded and unfunded risks, consistent with our risk appetite and development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a leading global, diversified specialty insurance and reinsurance company, as measured by quality, sustainability and profitability. Our execution on this strategy in the first six months of 2014 included:

• | continued expansion of our agriculture reinsurance business;

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

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

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

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

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Change |  | 2013 |  | 2014 |  | % Change |  | 2013 |
| Underwriting income (loss): |  |  |  |  |  |  |  |  |  |  |  |
| Insurance | $ | 12,653 |  |  | nm |  | $ | (55,487 | ) |  | $ | 29,440 |  |  | nm |  | $ | (14,498 | ) |
| Reinsurance | 113,928 |  |  | 74% |  | 65,408 |  |  | 205,906 |  |  | 5% |  | 195,219 |  |
| Net investment income | 114,867 |  |  | 38% |  | 83,112 |  |  | 197,610 |  |  | 3% |  | 192,019 |  |
| Net realized investment gains | 33,261 |  |  | 105% |  | 16,235 |  |  | 43,882 |  |  | (28%) |  | 60,713 |  |
| Other expenses, net | (72,450 | ) |  | 184% |  | (25,543 | ) |  | (126,109 | ) |  | 230% |  | (38,173 | ) |
| Net income | 202,259 |  |  | 142% |  | 83,725 |  |  | 350,729 |  |  | (11%) |  | 395,280 |  |
| Net income attributable to noncontrolling interests | (1,573 | ) |  | nm |  | — |  |  | (2,795 | ) |  | nm |  | — |  |
| Preferred share dividends | (10,022 | ) |  | 22% |  | (8,197 | ) |  | (20,044 | ) |  | 18% |  | (16,938 | ) |
| Loss on repurchase of preferred shares | — |  |  | nm |  | (3,081 | ) |  | — |  |  | nm |  | (3,081 | ) |
| Net income available to common shareholders | $ | 190,664 |  |  | 163% |  | $ | 72,447 |  |  | $ | 327,890 |  |  | (13%) |  | $ | 375,261 |  |
| Operating income | $ | 172,743 |  |  | 245% |  | $ | 50,045 |  |  | $ | 309,811 |  |  | 12% |  | $ | 277,536 |  |

nm – not meaningful
Underwriting Results
Total underwriting income for the three months ended June 30, 2014 was $127 million, an increase of $117 million compared to $10 million for the three months ended June 30, 2013. The increase in underwriting income was primarily driven by a decrease in the current accident year loss ratio, driven by a decrease in natural catastrophe and weather-related net losses (after reinstatement premiums) of $104 million and a $43 million increase in net favorable prior year reserve development. The decrease was partially offset by an increase in the current accident year loss ratios, after adjusting for the impact of the natural catastrophe and weather-related events, driven by the insurance property and professional lines.
The insurance segment underwriting income increased by $68 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in underwriting income was primarily due to a lower current accident year loss ratio, reflecting a decrease in the natural catastrophe and weather-related losses incurred which was partially offset by higher loss ratios primarily in the property and professional lines, and an increase in net favorable prior year reserve development of $26 million.
The reinsurance segment underwriting income increased by $49 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase in underwriting income was primarily due to a lower current accident year loss ratio, reflecting a decrease in the natural catastrophe and weather-related losses incurred, and an increase in net favorable prior year reserve development of $17 million.
For the six months ended June 30, 2014 underwriting income increased by $54 million to $235 million, compared to $181 million for the six months ended June 30, 2013. The increase in underwriting income was primarily driven by the same factors discussed for the quarterly increase above.
Underwriting income for our insurance segment improved by $44 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, primarily driven by a $61 million decrease in natural catastrophe and weather-related losses. A $32 million increase in net favorable prior year reserve development also contributed to the improvement. This was partially offset by an increase in the current accident year loss ratio, after adjusting for natural catastrophe and weather-related losses, driven by the professional and property lines.
Our reinsurance segment underwriting improved by $11 million for the six months ended June 30, 2014 compared to the same period of 2013. The improvement was primarily due to a decrease in the level of natural catastrophe and weather-related losses which was partially offset by an increase in the current accident year loss ratio due to a change in the business mix and an increase in the segment's acquisition costs.
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Net Investment Income
Net investment income was $115 million in the three months ended June 30, 2014, an increase of $32 million from $83 million in the three months ended June 30, 2013. The increase was primarily driven by our other investments; these investments generated $32 million of income this quarter, compared to $12 million in the second quarter of 2013. Net investment income for the six months ended June 30, 2014 was $198 million, an increase of $6 million compared to the same period in 2013. The increase was mainly attributable to income from fixed maturities and equities as a result of the growth in our fixed maturities and equity portfolios.
Net Realized Investment Gains
During each period presented, we realized investment gains on sales related to minor fixed maturity reallocations. In addition, during the six months ended June 30, 2014, we realized gains of $47 million on the sale of equities, this was higher than the $29 million of net realized gains from the same period of 2013. The increase reflected gains taken as a result of the strong performance of the global equity markets during the second half of 2013 and the first half of 2014. Net losses of $7 million and $13 million for the change in fair value of our investment derivatives during the three and six month periods of 2014 reflected net losses relating to interest rate swaps which were introduced during September 2013 to hedge interest rate risk for certain parts of our fixed maturity portfolio. These losses were more than offset by an increase in unrealized gains on our fixed maturity portfolio.
Other Expenses, Net
Foreign exchange losses for the three months and six months ended June 30, 2014 were $10 million and $14 million respectively, compared to foreign exchange gains of $10 million and $45 million for the three and six months ended June 30, 2013, respectively, and reflected the re-measurement of our foreign denominated net insurance related liabilities. Excluding the movements in foreign exchange, other expenses increased by $27 million and $29 million in the three and six months ended June 30, 2014 respectively. The increase was primarily due to a higher income tax expense which is impacted by the geographical distribution of our net income, an increase in corporate expenses which increased driven by personnel expenses and related costs as we continue the build-out of our global operations, and an increase in interest expense and financing costs driven by new debt issued during the three months ended March 31, 2014.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests relates to income for the three month and six months ended June 30, 2014 attributable to the third party investors in Ventures Re. Refer Item 1, Note 10 to our Consolidated Financial Statements for additional information.
Preferred Share Dividends
The increase in preferred share dividends for the three months and six months ended June 30, 2014 was driven by the increase in our preferred equity capital, following the preferred equity transactions executed during the second quarter of 2013, when we issued $225 million of 5.50% Series D preferred shares.
Outlook
In the insurance markets, ample capacity and competition combined with low frequency of large market losses in recent years has led to increasing competitive pressures. Price improvements noted in recent periods have leveled off overall, with modest decreases across certain lines. However, despite this slowdown in pricing, there remain good fundamentals and opportunities for profitable growth in many of the insurance lines of business. We continue to observe better market opportunities in the U.S. markets, where rate changes have generally been stronger, than those observed in international markets.
In reinsurance, abundant supply of capacity driven by record reinsurer capital levels and continually building interest from alternative capital investors, exacerbated by increased retentions from traditional cedants, is placing significant pressure on reinsurance rates with some softening of contract terms and conditions also noted. While the outlook is for a continuing competitive global reinsurance market, we continue to adapt to the challenging conditions by focusing on delivering meaningful value to our clients while writing and renewing business with acceptable profitability.
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Financial Measures
We believe the following financial indicators are important in evaluating our performance and measuring the overall growth in value generated for our common shareholders:

|  | Three months ended and at June 30, |  | Six months ended and at June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| ROACE (annualized)(1) | 14.5 | % |  | 5.6 | % |  | 12.5 | % |  | 14.7 | % |
| Operating ROACE (annualized)(2) | 13.1 | % |  | 3.9 | % |  | 11.8 | % |  | 10.9 | % |
| DBV per common share(3) | $ | 49.69 |  |  | $ | 42.67 |  |  | $ | 49.69 |  |  | $ | 42.67 |  |
| Cash dividends declared per common share | $ | 0.27 |  |  | $ | 0.25 |  |  | $ | 0.54 |  |  | $ | 0.50 |  |
| Increase in diluted book value per common share adjusted for dividends | $ | 2.83 |  |  | $ | (1.75 | ) |  | $ | 4.43 |  |  | $ | 0.20 |  |

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

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

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

Return on Equity
The increase in ROACE for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 is driven by the increase in underwriting income and the increase in net investment income. The decrease in ROACE for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 reflects a decrease in foreign exchange gains, net realized investment gains and higher corporate expenses which were partially offset by increases in underwriting income and net investment income. As operating ROACE excludes the impact of net realized investment gains and foreign exchange gains (losses), operating ROACE for the six months ended June 30, 2014 improved compared to the six months ended June 30, 2013.
Diluted Book Value per Common Share
Our DBV per common share increase of 16% from $42.67 at June 30, 2013 to $49.69 at June 30, 2014 primarily reflected the generation of $637 million in net income available to common shareholders over the past twelve months and the increase in unrealized gains on investments included in accumulated other comprehensive income due to the general decline in U.S. interest rates and the tightening of credit spreads. This increase was partially offset by common dividends.
Diluted Book Value per Common Share Adjusted for Dividends
Taken together, we believe that growth in diluted book value per common share and common share dividends declared represent the total value created for our common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe that the investors use the DBV per common share adjusted for dividends metric to measure comparable performance across the industry.
During the three months ended June 30, 2014, the diluted book value per common share adjusted for dividends grew by $2.83, or 6%, driven primarily by our diluted net income per share of $1.79, unrealized gains on investments included in other comprehensive income and dividends declared. During the six months ended June 30, 2014, the diluted book value per common share adjusted for dividends grew by $4.43, or 10%, driven primarily by our diluted net income per share of $3.03, unrealized gains on investments included in other comprehensive income and dividends declared.
During the three months ended June 30, 2013, an upward shift in sovereign yield curves and widening of credit spreads drove a significant reduction in the fair value of our fixed maturity portfolio; substantially all of this change was recognized in other comprehensive income. This drove a $2.00 reduction in our diluted book value per share during the quarter which was partially offset by the common dividends. For the six months ended June 30, 2013, our diluted net income per common share of $3.19, in addition to dividends declared, more than offset the impact of this yield curve shift and created value for our shareholders.
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UNDERWRITING RESULTS – GROUP

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Change |  | 2013 |  | 2014 |  | % Change |  | 2013 |
| Revenues: |  |  |  |  |  |  |  |  |  |  |  |
| Gross premiums written | $ | 1,231,279 |  |  | 1% |  | $ | 1,219,805 |  |  | $ | 3,052,678 |  |  | 3% |  | $ | 2,966,287 |  |
| Net premiums written | 1,000,162 |  |  | 1% |  | 993,407 |  |  | 2,664,746 |  |  | 4% |  | 2,563,846 |  |
| Net premiums earned | 1,000,400 |  |  | 6% |  | 945,873 |  |  | 1,946,349 |  |  | 7% |  | 1,819,911 |  |
| Other insurance related income | 1,683 |  |  | 287% |  | 435 |  |  | 4,766 |  |  | 363% |  | 1,030 |  |
| Expenses: |  |  |  |  |  |  |  |  |  |  |  |
| Current year net losses and loss expenses | (651,183 | ) |  |  |  | (685,014 | ) |  | (1,238,883 | ) |  |  |  | (1,177,926 | ) |
| Prior year reserve development | 85,354 |  |  |  |  | 42,115 |  |  | 128,847 |  |  |  |  | 96,613 |  |
| Acquisition costs | (191,862 | ) |  |  |  | (169,719 | ) |  | (363,899 | ) |  |  |  | (315,209 | ) |
| Underwriting-related general and administrative |  |  |  |  |  |  |  |  |  |  |  |
| expenses(1) | (117,811 | ) |  |  |  | (123,769 | ) |  | (241,834 | ) |  |  |  | (243,698 | ) |
| Underwriting income(2) | $ | 126,581 |  |  | nm |  | $ | 9,921 |  |  | $ | 235,346 |  |  | 30% |  | $ | 180,721 |  |
| General and administrative expenses(1) | $ | 151,081 |  |  |  |  | $ | 149,034 |  |  | $ | 303,810 |  |  |  |  | $ | 290,508 |  |
| Income before income taxes(2) | $ | 211,759 |  |  |  |  | $ | 79,063 |  |  | $ | 364,354 |  |  |  |  | $ | 400,749 |  |

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

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

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UNDERWRITING REVENUES
Premiums Written:
Gross and net premiums written, by segment, were as follows:

|  | Gross Premiums Written |
|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Change |  | 2013 |  | 2014 |  | % Change |  | 2013 |
| Insurance | $ | 754,110 |  |  | (3%) |  | $ | 781,055 |  |  | $ | 1,355,831 |  |  | (2%) |  | $ | 1,377,769 |  |
| Reinsurance | 477,169 |  |  | 9% |  | 438,750 |  |  | 1,696,847 |  |  | 7% |  | 1,588,518 |  |
| Total | $ | 1,231,279 |  |  | 1% |  | $ | 1,219,805 |  |  | $ | 3,052,678 |  |  | 3% |  | $ | 2,966,287 |  |
| % ceded |  |  |  |  |  |  |  |  |  |  |  |
| Insurance | 28% |  | — |  | 28% |  | 26% |  | (2) pts |  | 28% |
| Reinsurance | 4% |  | 3 pts |  | 1% |  | 2% |  | 1 pts |  | 1% |
| Total | 19% |  | — |  | 19% |  | 13% |  | (1) pts |  | 14% |
|  | Net Premiums Written |
|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Change |  | 2013 |  | 2014 |  | % Change |  | 2013 |
| Insurance | $ | 541,097 |  |  | (3%) |  | $ | 559,584 |  |  | $ | 997,789 |  |  | 1% |  | $ | 992,264 |  |
| Reinsurance | 459,065 |  |  | 6% |  | 433,823 |  |  | 1,666,957 |  |  | 6% |  | 1,571,582 |  |
| Total | $ | 1,000,162 |  |  | 1% |  | $ | 993,407 |  |  | $ | 2,664,746 |  |  | 4% |  | $ | 2,563,846 |  |

Gross premiums written for the three months ended June 30, 2014 increased by $11 million or 1% compared to the three months ended June 30, 2013, and the increase was driven by growth in our reinsurance segment which was partially offset by decreases in our insurance segment.
The increase in our reinsurance segment of $38 million in the three months ended June 30, 2014 compared to the same period of 2013 was primarily driven by professional and agriculture lines which were partially offset by decreases in the catastrophe and motor lines. Professional lines growth reflected premium increases due to an extension to a large proportional treaty. The growth in the agriculture lines reflected differences in the timing of certain renewals and our continuing initiatives to grow this line of business. Gross premiums written during the second quarter were also impacted by an increased level of contracts written on a multi-year basis, primarily in the liability and property lines. This growth was partially offset by decreases in our catastrophe business primarily due to differences in timing of certain renewals as well as the increasingly competitive market conditions and the resulting underwriting actions. Decreases in motor were driven by non-renewal of certain treaties and favorable premium adjustments which impacted the second quarter of 2013.
Our insurance segment's gross written premiums decreased by $27 million in the three months ended June 30, 2014 compared to the same period of 2013. The decrease was driven by the property lines, impacted by timing differences in renewals of certain contracts and increasingly competitive market conditions, professional lines driven by the reshaping of our U.S. D&O portfolio and credit and political risk lines where the decrease reflected a lower volume of new business written during the quarter compared to the same quarter in the prior year. These decreases were partially offset by our accident and health lines, which benefitted primarily from higher renewal premiums and continued strong new business production, and increases in the liability lines reflecting growth in the U.S. casualty markets.
Gross premiums written for the six months ended June 30, 2014 increased by $86 million or 3% compared to the six months ended June 30, 2013, and the increase was driven by growth in our reinsurance segment which was partially offset by decreases in our insurance segment.
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The increase in our reinsurance segment of $108 million in the six months ended June 30, 2014 compared to the same period of 2013 was significantly impacted by a number of treaties written on a multi-year basis, especially in the property, motor and catastrophe lines, and included written premium that related to future underwriting years of $90 million. After adjusting for the impact of the multi-year contracts the increase in gross written premiums of 2% was primarily driven by agriculture and reflected growth initiatives for this line of business.
The insurance segment decrease of $22 million in the six months ended June 30, 2014 compared to the same period of 2013, was driven by property, due to timing differences for renewals of certain contracts and increasingly competitive market conditions and a decrease in professional lines, driven by the the reshaping of our U.S. D&O portfolio. These decreases were partially offset by growth in the liability lines which increased due to growth in the U.S. casualty markets with both new business and rate increases noted and increases in accident and health primarily reflecting higher insurance renewal premiums and continued strong new business production.
In the three months ended June 30, 2014 the ceded ratio has remained consistent with the quarter ended June 30, 2013 at 19% of gross written premiums. For the first six months of 2014, premiums ceded ratio was 13% of gross premiums written, compared with 14% of gross premiums written, in the same period of 2013. The reduction in premium ceded between the two periods related primarily to changes in our reinsurance purchasing program implemented during 2013, which included excess of loss treaty reductions driven by both retention and rate, and proportional changes related to reductions in the cession rates on our professional lines and liability reinsurance programs. As certain of these changes were already effective during the second quarter of 2013 the reduction had a lesser impact on the quarterly results compared to the year to date movement. In addition for the three months ended June 30, 2014, this reduction was offset by an increased level of retrocessional covers purchased by the reinsurance segment covering the catastrophe, agriculture and property lines.
Net Premiums Earned:
Net premiums earned by segment were as follows:

|  | Three months ended June 30, |  |  |  | Six months ended June 30, |  |  |
|  | 2014 |  |  |  | 2013 |  |  |  | % Change |  | 2014 |  |  |  | 2013 |  |  |  | % Change |
| Insurance | $ | 457,670 |  |  | 46 | % |  | $ | 422,345 |  |  | 45 | % |  | 8% |  | $ | 906,884 |  |  | 47 | % |  | $ | 824,224 |  |  | 45 | % |  | 10% |
| Reinsurance | 542,730 |  |  | 54 | % |  | 523,528 |  |  | 55 | % |  | 4% |  | 1,039,465 |  |  | 53 | % |  | 995,687 |  |  | 55 | % |  | 4% |
| Total | $ | 1,000,400 |  |  | 100 | % |  | $ | 945,873 |  |  | 100 | % |  | 6% |  | $ | 1,946,349 |  |  | 100 | % |  | $ | 1,819,911 |  |  | 100 | % |  | 7% |

Changes in net premiums earned reflect period to period changes in net premiums written and business mix, together with normal variability in premium earning patterns.
Growth in net premiums earned for our insurance segment was driven by the growth in the premiums written in the professional, accident and health and liability lines in recent periods as well as the impact of the reductions in the ceded reinsurance program. The reinsurance segment increase primarily reflected business written in recent periods in the professional lines, the continued expansion of our agriculture business, and increases in the motor proportional and liability books of business. This growth was partially offset by decreases in catastrophe lines.
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UNDERWRITING EXPENSES
The following table provides a breakdown of our combined ratio:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Point Change |  | 2013 |  | 2014 |  | % Point Change |  | 2013 |
| Current accident year loss ratio | 65.1 | % |  | (7.3) |  | 72.4 | % |  | 63.7 | % |  | (1.0) |  | 64.7 | % |
| Prior year reserve development | (8.5 | %) |  | (4.1) |  | (4.4 | %) |  | (6.7 | %) |  | (1.4) |  | (5.3 | %) |
| Acquisition cost ratio | 19.2 | % |  | 1.3 |  | 17.9 | % |  | 18.7 | % |  | 1.4 |  | 17.3 | % |
| General and administrative expense ratio(1) | 15.0 | % |  | (0.8) |  | 15.8 | % |  | 15.6 | % |  | (0.4) |  | 16.0 | % |
| Combined ratio | 90.8 | % |  | (10.9) |  | 101.7 | % |  | 91.3 | % |  | (1.4) |  | 92.7 | % |

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

Current Accident Year Loss Ratio
The decrease in the current accident year loss ratio for the three months ended June 30, 2014 of 7.3 points compared to the same period in 2013, was primarily attributable to the decrease in natural catastrophe and weather-related losses. During the second quarter of 2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $36 million primarily related to weather losses in the United States. Comparatively during the second quarter of 2013, we recognized aggregate natural catastrophe and weather-related pre-tax net losses (net of related reinstatement premiums) of $140 million with tornadoes and hailstorms in the U.S. making the largest contribution to this amount, with flooding in Canada, Argentina and Europe also significant. The impact of the decrease in the natural catastrophe and weather-related losses was partially offset by a higher loss ratio due to a change in the business mix, which impacted both segments, an increase in the insurance property and professional lines' loss ratios reflecting a higher level of loss activity in recent per iods, and the impact of lower rates. In addition, with the exception of our property lines, during the quarter ended June 30, 2014 we experienced lower mid-size and attritional losses across most lines of business which reduced the current accident year loss ratio.
The improvement in the year to date current accident year loss ratio of 1.0 point for the six months ended June 30, 2014, compared to the six months ended June 30, 2013 was primarily driven by the decrease in natural catastrophe and weather-related losses. During the six months ended June 30,2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $50 million primarily related to weather losses in the United States. Comparatively during the first half of 2013, we recognized aggregate pre-tax natural catastrophe and weather-related net losses (net of related reinstatement premiums) of $153 million, primarily driven by the second quarter 2013 events described above. The decrease in the current accident year loss ratio due to the decrease in the natural catastrophe and weather-related events was partially offset by the same factors as those discussed under the quarterly result above.
Prior Year Reserve Development
Our favorable prior year reserve development was the net result of several underlying reserve developments on prior accident years, identified during our quarterly reserve review process. The following table provides a breakdown of prior year reserve development by segment:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Insurance | $ | 32,963 |  |  | $ | 6,693 |  |  | $ | 44,571 |  |  | $ | 12,290 |  |
| Reinsurance | 52,391 |  |  | 35,422 |  |  | 84,276 |  |  | 84,323 |  |
| Total | $ | 85,354 |  |  | $ | 42,115 |  |  | $ | 128,847 |  |  | $ | 96,613 |  |

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Overview
The majority of the net favorable prior year reserve development in each period related to short-tail lines of business. Net favorable prior year reserve development for liability reinsurance and professional lines reinsurance business also contributed in the three and six months ended June 30, 2014 and 2013.
The underlying exposures in the property, marine and aviation reserving classes within our insurance segment and the property reserving class within our reinsurance segment largely relate to short-tail business. Development from these classes contributed $73 million and $32 million of the total net favorable prior year reserve development for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, these short-tail lines contributed $101 million and $62 million, respectively, of net favorable prior year reserve development. The net favorable development for these classes primarily reflected the recognition of better than expected loss emergence. The reserve releases in three and six months ended June 30, 2014 included $13 million and $18 million respectively, of favorable development across both segments relating to natural catastrophe and weather-related losses incurred during the second quarter of 2013.
In the first quarter of 2013, we began to give weight to actuarial methods that reflect our actual experience for liability reinsurance business, as we believe that our older accident years are now at a stage of expected development where such methods will produce meaningful actuarial indications. Favorable development was recognized of $6 million and $22 million for the three months ended June 30, 2014 and 2013, respectively, and $12 million and $38 million for the six months ended June 30, 2014 and 2013, respectively, primarily reflecting the greater weight management is giving to experience based indications and our experience which has been favorable for the 2004 through 2008 accident years.
Our professional lines reinsurance business contributed further net favorable prior year reserve development of $6 million and $12 million in the three and six months ended June 30, 2014, respectively. This prior year reserve development was driven by increased weight being given to experience based actuarial methods in selecting our ultimate loss estimates for accident years 2008 and prior. As our loss experience has generally been better than expected, this resulted in the recognition of favorable development.
We caution that conditions and trends that impacted the development of our liabilities in the past may not necessarily occur in the future.
Estimates of Natural Catastrophe and Weather Related-Losses
The frequency and severity of natural catastrophe and weather activity was high in recent years and our June 30, 2014 net reserve for losses and loss expenses continues to include estimated amounts for numerous events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular tropical storm Sandy, the 2011 Japanese earthquake and tsunami and 2010 and 2011 New Zealand earthquakes, inherently increases the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.
Our estimated net losses for natural catastrophe and weather events are derived from ground-up assessments of our in-force contracts and treaties providing coverage in the affected regions. These assessments take into account the latest information available from clients, brokers and loss adjusters. In addition, we consider industry insured loss estimates, market share analyses and catastrophe modeling analyses, when appropriate. Our estimates remain subject to change, as additional loss data becomes available.
The following sections provide further details on prior year reserve development by segment, reserving class and accident year.
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Insurance Segment:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Property and other | $ | 28,016 |  |  | $ | 8,611 |  |  | $ | 29,476 |  |  | $ | 13,966 |  |
| Marine | 1,943 |  |  | 10,741 |  |  | 4,644 |  |  | 23,870 |  |
| Aviation | 2,564 |  |  | 2,607 |  |  | 5,647 |  |  | 5,758 |  |
| Credit and political risk | (6 | ) |  | (11 | ) |  | 3,993 |  |  | (19 | ) |
| Professional lines | 574 |  |  | (14,453 | ) |  | 231 |  |  | (16,109 | ) |
| Liability | (128 | ) |  | (802 | ) |  | 580 |  |  | (15,176 | ) |
| Total | $ | 32,963 |  |  | $ | 6,693 |  |  | $ | 44,571 |  |  | $ | 12,290 |  |

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reinsurance Segment:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Property and other | $ | 39,991 |  |  | $ | 10,030 |  |  | $ | 61,414 |  |  | $ | 18,855 |  |
| Credit and surety | (3 | ) |  | 12,371 |  |  | (793 | ) |  | 21,965 |  |
| Professional lines | 6,186 |  |  | 1,831 |  |  | 11,865 |  |  | 9,759 |  |
| Motor | 114 |  |  | (10,864 | ) |  | (330 | ) |  | (4,351 | ) |
| Liability | 6,103 |  |  | 22,054 |  |  | 12,120 |  |  | 38,095 |  |
| Total | $ | 52,391 |  |  | $ | 35,422 |  |  | $ | 84,276 |  |  | $ | 84,323 |  |

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Acquisition Cost Ratio: The increase in the acquisition cost ratio for the three and six months ended June 30, 2014 to 19.2% and 18.7%, respectively, compared to 17.9% and 17.3% in the three and six months ended June 30, 2013 respectively, reflected increases in both segments. The increase in the reinsurance segment was primarily driven by higher acquisition costs paid on certain lines of business, while business mix changes and a reduction in commissions received following the reductions in our ceded reinsurance programs drove the increase in the insurance segment.
General and Administrative Expense Ratio: The general and administrative expense ratio for the three and six months ended June 30, 2014 has decreased to 15.0% and 15.6%, respectively, from 15.8% and 16.0% for the three and six months ended June 30, 2013, respectively. Although there was an increase in personnel costs associated with the continued build-out of the Company's global platforms, this increase was more than offset by the increases in net premiums earned.
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RESULTS BY SEGMENT

INSURANCE SEGMENT
Results from our insurance segment were as follows:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Change |  | 2013 |  | 2014 |  | % Change |  | 2013 |
| Revenues: |  |  |  |  |  |  |  |  |  |  |  |
| Gross premiums written | $ | 754,110 |  |  | (3%) |  | $ | 781,055 |  |  | $ | 1,355,831 |  |  | (2%) |  | $ | 1,377,769 |  |
| Net premiums written | 541,097 |  |  | (3%) |  | 559,584 |  |  | 997,789 |  |  | 1% |  | 992,264 |  |
| Net premiums earned | 457,670 |  |  | 8% |  | 422,345 |  |  | 906,884 |  |  | 10% |  | 824,224 |  |
| Other insurance related income | — |  |  | nm |  | 435 |  |  | — |  |  | nm |  | 1,030 |  |
| Expenses: |  |  |  |  |  |  |  |  |  |  |  |
| Current year net losses and loss expenses | (323,429 | ) |  |  |  | (337,685 | ) |  | (614,460 | ) |  |  |  | (560,618 | ) |
| Prior year reserve development | 32,963 |  |  |  |  | 6,693 |  |  | 44,571 |  |  |  |  | 12,290 |  |
| Acquisition costs | (71,039 | ) |  |  |  | (58,749 | ) |  | (136,096 | ) |  |  |  | (116,009 | ) |
| General and administrative expenses | (83,512 | ) |  |  |  | (88,526 | ) |  | (171,459 | ) |  |  |  | (175,415 | ) |
| Underwriting income (loss) | $ | 12,653 |  |  | nm |  | $ | (55,487 | ) |  | $ | 29,440 |  |  | nm |  | $ | (14,498 | ) |
| Ratios: |  |  | % Point Change |  |  |  |  |  | % Point Change |  |  |
| Current year loss ratio | 70.7 | % |  | (9.3) |  | 80.0 | % |  | 67.8 | % |  | (0.2) |  | 68.0 | % |
| Prior year reserve development | (7.2 | %) |  | (5.6) |  | (1.6 | %) |  | (5.0 | %) |  | (3.5) |  | (1.5 | %) |
| Acquisition cost ratio | 15.5 | % |  | 1.6 |  | 13.9 | % |  | 15.0 | % |  | 0.9 |  | 14.1 | % |
| General and administrative expense ratio | 18.2 | % |  | (2.7) |  | 20.9 | % |  | 19.0 | % |  | (2.3) |  | 21.3 | % |
| Combined ratio | 97.2 | % |  | (16.0) |  | 113.2 | % |  | 96.8 | % |  | (5.1) |  | 101.9 | % |

nm- not meaningful
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Gross Premiums Written:
The following table provides gross premiums written by line of business:

|  | Three months ended June 30, |  |  |  | Six months ended June 30, |  |  |
|  | 2014 |  |  |  | 2013 |  |  |  | % Change |  | 2014 |  |  |  | 2013 |  |  |  | % Change |
| Property | $ | 207,788 |  |  | 29 | % |  | $ | 228,741 |  |  | 29 | % |  | (9%) |  | $ | 347,717 |  |  | 26 | % |  | $ | 380,165 |  |  | 28 | % |  | (9%) |
| Marine | 84,833 |  |  | 11 | % |  | 88,047 |  |  | 11 | % |  | (4%) |  | 170,555 |  |  | 13 | % |  | 167,940 |  |  | 12 | % |  | 2% |
| Terrorism | 9,478 |  |  | 1 | % |  | 9,478 |  |  | 1 | % |  | —% |  | 16,456 |  |  | 1 | % |  | 17,691 |  |  | 1 | % |  | (7%) |
| Aviation | 10,568 |  |  | 1 | % |  | 12,321 |  |  | 2 | % |  | (14%) |  | 13,285 |  |  | 1 | % |  | 15,697 |  |  | 1 | % |  | (15%) |
| Credit and political risk | 7,179 |  |  | 1 | % |  | 19,537 |  |  | 3 | % |  | (63%) |  | 25,486 |  |  | 2 | % |  | 29,540 |  |  | 2 | % |  | (14%) |
| Professional lines | 244,011 |  |  | 32 | % |  | 262,611 |  |  | 34 | % |  | (7%) |  | 398,259 |  |  | 29 | % |  | 422,373 |  |  | 31 | % |  | (6%) |
| Liability | 106,643 |  |  | 14 | % |  | 104,952 |  |  | 13 | % |  | 2% |  | 181,009 |  |  | 13 | % |  | 162,762 |  |  | 12 | % |  | 11% |
| Accident and health | 83,610 |  |  | 11 | % |  | 55,368 |  |  | 7 | % |  | 51% |  | 203,064 |  |  | 15 | % |  | 181,601 |  |  | 13 | % |  | 12% |
| Total | $ | 754,110 |  |  | 100 | % |  | $ | 781,055 |  |  | 100 | % |  | (3%) |  | $ | 1,355,831 |  |  | 100 | % |  | $ | 1,377,769 |  |  | 100 | % |  | (2%) |

Gross premiums written decreased by $27 million and $22 million for the three and six months ended June 30, 2014, respectively, compared to the same periods of 2013. Property lines decrease was primarily driven by timing differences for renewals of certain contracts and increasingly competitive market conditions. The professional lines decrease was driven by the reshaping of our D&O business written in the United States. Reduced level of new business impacted the credit and political lines. Partially offsetting these decreases was the continued expansion of our accident and health lines, primarily due to higher renewal insurance premiums and continued strong new business production, and increases in the liability lines reflecting growth in the U.S. casualty markets.
Premiums Ceded: Premiums ceded were $213 million for the three months ended June 30, 2014 compared to $221 million for the three months ended June 30, 2013. The ceded ratio has remained consistent between the comparative quarters at 28% of gross written premiums. For the first six months of 2014, premiums ceded were $358 million, or 26% of gross premiums written, compared with $386 million, or 28% of gross premiums written, in the same period of 2013. The reduction in premium ceded between the two periods related primarily to changes in our reinsurance purchasing program implemented during 2013, which included excess of loss treaty reductions driven by both retention and rate, and proportional changes related to reductions in the cession rates on our professional lines and liability reinsurance programs. As certain of these changes were already effective during the second quarter of 2013, the reduction had a lesser impact on the quarterly results compared to the year to date movement.
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Net Premiums Earned:
The following table provides net premiums earned by line of business:

|  | Three months ended June 30, |  |  |  | Six months ended June 30, |  |  |
|  | 2014 |  |  |  | 2013 |  |  |  | % Change |  | 2014 |  |  |  | 2013 |  |  |  | % Change |
| Property | $ | 108,195 |  |  | 23 | % |  | $ | 111,957 |  |  | 26 | % |  | (3%) |  | $ | 223,581 |  |  | 24 | % |  | $ | 220,070 |  |  | 26 | % |  | 2% |
| Marine | 43,536 |  |  | 10 | % |  | 44,179 |  |  | 10 | % |  | (1%) |  | 88,529 |  |  | 10 | % |  | 87,698 |  |  | 11 | % |  | 1% |
| Terrorism | 8,128 |  |  | 2 | % |  | 11,115 |  |  | 3 | % |  | (27%) |  | 16,919 |  |  | 2 | % |  | 21,395 |  |  | 3 | % |  | (21%) |
| Aviation | 10,118 |  |  | 2 | % |  | 12,443 |  |  | 3 | % |  | (19%) |  | 20,024 |  |  | 2 | % |  | 25,752 |  |  | 3 | % |  | (22%) |
| Credit and political risk | 16,759 |  |  | 4 | % |  | 17,458 |  |  | 4 | % |  | (4%) |  | 32,694 |  |  | 4 | % |  | 35,427 |  |  | 4 | % |  | (8%) |
| Professional lines | 160,287 |  |  | 35 | % |  | 141,891 |  |  | 34 | % |  | 13% |  | 316,267 |  |  | 35 | % |  | 280,021 |  |  | 34 | % |  | 13% |
| Liability | 36,073 |  |  | 8 | % |  | 25,171 |  |  | 6 | % |  | 43% |  | 71,129 |  |  | 8 | % |  | 47,360 |  |  | 6 | % |  | 50% |
| Accident and health | 74,574 |  |  | 16 | % |  | 58,131 |  |  | 14 | % |  | 28% |  | 137,741 |  |  | 15 | % |  | 106,501 |  |  | 13 | % |  | 29% |
| Total | $ | 457,670 |  |  | 100 | % |  | $ | 422,345 |  |  | 100 | % |  | 8% |  | $ | 906,884 |  |  | 100 | % |  | $ | 824,224 |  |  | 100 | % |  | 10% |

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Point Change |  | 2013 |  | 2014 |  | % Point Change |  | 2013 |
| Current accident year | 70.7 | % |  | (9.3) |  | 80.0 | % |  | 67.8 | % |  | (0.2) |  | 68.0 | % |
| Prior year reserve development | (7.2 | %) |  | (5.6) |  | (1.6 | %) |  | (5.0 | %) |  | (3.5) |  | (1.5 | %) |
| Loss ratio | 63.5 | % |  | (14.9) |  | 78.4 | % |  | 62.8 | % |  | (3.7) |  | 66.5 | % |

Current Accident Year Loss Ratio:
The current accident year loss ratio decreased to 70.7% for the three months ended June 30, 2014 from 80.0% for the three months ended June 30, 2013. The decreases in the insurance segment's current accident year loss ratios for both the quarter and year to date were primarily attributable to natural catastrophe and weather-related losses.
During the second quarter of 2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $30 million, primarily emanating from U.S. weather events. Comparatively, during the second quarter of 2013, we recognized aggregate natural catastrophe and weather-related pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) of $90 million, primarily emanating from tornadoes and hailstorms in the U.S. and flooding in Argentina and Canada.
After adjusting for the impact of the natural catastrophe and weather-related losses the current accident year loss ratio increased by 5.1 points primarily due to:

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

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

• | a change in the business mix; partially offset by

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

For the six-months ended June 30, 2014, natural catastrophe and weather-related pre-tax net losses aggregated to $36 million, primarily driven by the second quarter events noted above. For the comparative six-month period of 2013, natural catastrophe and weather-related pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) aggregated to $97 million. After adjusting for the natural catastrophe and weather-related losses the current accident year loss ratio increased by 7.4 points primarily due to the increases in the professional and property lines discussed above, and a change in the business mix.
Refer to the ‘Prior Year Reserve Development’ section for further details.
Acquisition Cost Ratio: The insurance segment's acquisition cost ratio increased in both the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to a change in the business mix and reductions in commissions earned due to lower ceded premiums following changes in our reinsurance purchasing program .
General and Administrative Expense Ratio: The insurance segment's general and administrative expense ratio decreased in both the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to a reduction in allocation of certain corporate expenses and the growth in net premiums earned partially offset by growth in personnel expenses as we build out our global platform and costs associated with new initiatives.
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REINSURANCE SEGMENT
Results from our reinsurance segment were as follows:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Change |  | 2013 |  | 2014 |  | % Change |  | 2013 |
| Revenues: |  |  |  |  |  |  |  |  |  |  |  |
| Gross premiums written | $ | 477,169 |  |  | 9% |  | $ | 438,750 |  |  | $ | 1,696,847 |  |  | 7% |  | $ | 1,588,518 |  |
| Net premiums written | 459,065 |  |  | 6% |  | 433,823 |  |  | 1,666,957 |  |  | 6% |  | 1,571,582 |  |
| Net premiums earned | 542,730 |  |  | 4% |  | 523,528 |  |  | 1,039,465 |  |  | 4% |  | 995,687 |  |
| Other insurance related income | 1,683 |  |  | nm |  | — |  |  | 4,766 |  |  | nm |  | — |  |
| Expenses: |  |  |  |  |  |  |  |  |  |  |  |
| Current year net losses and loss expenses | (327,754 | ) |  |  |  | (347,329 | ) |  | (624,423 | ) |  |  |  | (617,308 | ) |
| Prior year reserve development | 52,391 |  |  |  |  | 35,422 |  |  | 84,276 |  |  |  |  | 84,323 |  |
| Acquisition costs | (120,823 | ) |  |  |  | (110,970 | ) |  | (227,803 | ) |  |  |  | (199,200 | ) |
| General and administrative expenses | (34,299 | ) |  |  |  | (35,243 | ) |  | (70,375 | ) |  |  |  | (68,283 | ) |
| Underwriting income | $ | 113,928 |  |  | 74% |  | $ | 65,408 |  |  | $ | 205,906 |  |  | 5% |  | $ | 195,219 |  |
| Ratios: |  |  | % Point Change |  |  |  |  |  | % Point Change |  |  |
| Current year loss ratio | 60.4 | % |  | (5.9) |  | 66.3 | % |  | 60.1 | % |  | (1.9) |  | 62.0 | % |
| Prior year reserve development | (9.7 | %) |  | (3.0) |  | (6.7 | %) |  | (8.1 | %) |  | 0.4 |  | (8.5 | %) |
| Acquisition cost ratio | 22.3 | % |  | 1.1 |  | 21.2 | % |  | 21.9 | % |  | 1.9 |  | 20.0 | % |
| General and administrative expense ratio | 6.3 | % |  | (0.4) |  | 6.7 | % |  | 6.7 | % |  | (0.2) |  | 6.9 | % |
| Combined ratio | 79.3 | % |  | (8.2) |  | 87.5 | % |  | 80.6 | % |  | 0.2 |  | 80.4 | % |

nm – not meaningful
Gross Premiums Written:
The following table provides gross premiums written by line of business for the periods indicated:

|  | Three months ended June 30, |  |  |  | Six months ended June 30, |  |  |
|  | 2014 |  |  |  | 2013 |  |  |  | % Change |  | 2014 |  |  |  | 2013 |  |  |  | % Change |
| Catastrophe | $ | 117,245 |  |  | 24 | % |  | $ | 138,461 |  |  | 31 | % |  | (15%) |  | $ | 288,505 |  |  | 17 | % |  | $ | 306,264 |  |  | 20 | % |  | (6%) |
| Property | 61,027 |  |  | 13 | % |  | 63,457 |  |  | 14 | % |  | (4%) |  | 300,646 |  |  | 18 | % |  | 285,333 |  |  | 18 | % |  | 5% |
| Professional lines | 104,801 |  |  | 22 | % |  | 57,406 |  |  | 13 | % |  | 83% |  | 173,021 |  |  | 10 | % |  | 147,961 |  |  | 9 | % |  | 17% |
| Credit and surety | 20,359 |  |  | 4 | % |  | 20,327 |  |  | 5 | % |  | —% |  | 228,827 |  |  | 13 | % |  | 228,635 |  |  | 14 | % |  | —% |
| Motor | 2,676 |  |  | 1 | % |  | 16,557 |  |  | 4 | % |  | (84%) |  | 276,696 |  |  | 16 | % |  | 241,548 |  |  | 15 | % |  | 15% |
| Liability | 82,566 |  |  | 17 | % |  | 78,868 |  |  | 18 | % |  | 5% |  | 185,210 |  |  | 11 | % |  | 178,456 |  |  | 11 | % |  | 4% |
| Agriculture | 76,665 |  |  | 16 | % |  | 55,319 |  |  | 13 | % |  | 39% |  | 179,830 |  |  | 11 | % |  | 135,336 |  |  | 9 | % |  | 33% |
| Engineering | 8,772 |  |  | 2 | % |  | 5,741 |  |  | 1 | % |  | 53% |  | 45,282 |  |  | 3 | % |  | 46,653 |  |  | 3 | % |  | (3%) |
| Other | 3,058 |  |  | 1 | % |  | 2,614 |  |  | 1 | % |  | 17% |  | 18,830 |  |  | 1 | % |  | 18,332 |  |  | 1 | % |  | 3% |
| Total | $ | 477,169 |  |  | 100 | % |  | $ | 438,750 |  |  | 100 | % |  | 9% |  | $ | 1,696,847 |  |  | 100 | % |  | $ | 1,588,518 |  |  | 100 | % |  | 7% |

Gross premiums written increased by $38 million and $108 million in the three and six months ended June 30, 2014, respectively, compared to the same periods of 2013. The increase in the gross premiums written for the three months ended was primarily driven by increases in our professional and agriculture lines, which were partially offset by decreases in catastrophe and motor lines.
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Professional lines growth reflected premium increases due to an extension to a large proportional treaty. The growth in the agriculture lines reflected differences in the timing of certain renewals and our continuing initiatives to grow this line of business. Gross premiums written during the quarter were also impacted by an increased level of contracts written on a multi-year basis, primarily in the liability and property lines. This growth was partially offset by decreases in our catastrophe business due to differences in timing of certain renewals and competitive market conditions and the resulting underwriting actions. Decreases in motor were driven by non-renewal of certain treaties and favorable premium adjustments which impacted the second quarter of 2013.
The increase in the gross premiums written of $108 million in the six months ended June 30, 2014 compared to the same period of 2013 was significantly impacted by a number of treaties written on a multi-year basis, especially in the property, motor and catastrophe lines, and included written premium that relate to future underwriting years of $90 million (in 2013 the comparative total was $12 million). After adjusting for the impact of the multi-year contracts, the increase in gross written premiums of 2% was primarily driven by the agriculture lines reflecting growth initiatives for this line of business.
Net Premiums Earned:
The following table provides net premiums earned by line of business:

|  | Three months ended June 30, |  |  |  | Six months ended June 30, |  |  |
|  | 2014 |  |  |  | 2013 |  |  |  | % Change |  | 2014 |  |  |  | 2013 |  |  |  | % Change |
| Catastrophe | $ | 79,182 |  |  | 15 | % |  | $ | 97,663 |  |  | 18 | % |  | (19%) |  | $ | 163,898 |  |  | 16 | % |  | $ | 191,755 |  |  | 19 | % |  | (15%) |
| Property | 81,380 |  |  | 15 | % |  | 88,364 |  |  | 17 | % |  | (8%) |  | 163,920 |  |  | 16 | % |  | 173,211 |  |  | 17 | % |  | (5%) |
| Professional lines | 88,342 |  |  | 16 | % |  | 75,567 |  |  | 14 | % |  | 17% |  | 173,120 |  |  | 17 | % |  | 146,046 |  |  | 15 | % |  | 19% |
| Credit and surety | 69,920 |  |  | 13 | % |  | 71,485 |  |  | 14 | % |  | (2%) |  | 129,283 |  |  | 12 | % |  | 138,144 |  |  | 14 | % |  | (6%) |
| Motor | 65,470 |  |  | 12 | % |  | 62,070 |  |  | 12 | % |  | 5% |  | 136,033 |  |  | 13 | % |  | 118,667 |  |  | 12 | % |  | 15% |
| Liability | 72,417 |  |  | 13 | % |  | 60,338 |  |  | 12 | % |  | 20% |  | 138,463 |  |  | 13 | % |  | 118,749 |  |  | 12 | % |  | 17% |
| Agriculture | 62,436 |  |  | 12 | % |  | 46,376 |  |  | 9 | % |  | 35% |  | 93,075 |  |  | 9 | % |  | 68,769 |  |  | 7 | % |  | 35% |
| Engineering | 17,767 |  |  | 3 | % |  | 16,687 |  |  | 3 | % |  | 6% |  | 31,119 |  |  | 3 | % |  | 31,133 |  |  | 3 | % |  | —% |
| Other | 5,816 |  |  | 1 | % |  | 4,978 |  |  | 1 | % |  | 17% |  | 10,554 |  |  | 1 | % |  | 9,213 |  |  | 1 | % |  | 15% |
| Total | $ | 542,730 |  |  | 100 | % |  | $ | 523,528 |  |  | 100 | % |  | 4% |  | $ | 1,039,465 |  |  | 100 | % |  | $ | 995,687 |  |  | 100 | % |  | 4% |

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Point Change |  | 2013 |  | 2014 |  | % Point Change |  | 2013 |
| Current accident year | 60.4 | % |  | (5.9) |  | 66.3 | % |  | 60.1 | % |  | (1.9) |  | 62.0 | % |
| Prior year reserve development | (9.7 | %) |  | (3.0) |  | (6.7 | %) |  | (8.1 | %) |  | 0.4 |  | (8.5 | %) |
| Loss ratio | 50.7 | % |  | (8.9) |  | 59.6 | % |  | 52.0 | % |  | (1.5) |  | 53.5 | % |

Current Accident Year Loss Ratio
The current accident year loss ratio decreased to 60.4% and 60.1% in the three and six months ended June 30, 2014, respectively, from 66.3% and 62.0% in the three and six months ended June 30, 2013, respectively. The decreases for both periods were driven by a reduced level of natural catastrophe and weather-related losses.
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For the three and six months ended June 30, 2014, natural catastrophe and weather-related pre-tax net losses aggregated to $6 million and $14 million respectively, and primarily related to weather events in the United States. For the comparative three and six months ended June 30, 2013, natural catastrophe and weather-related pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) aggregated to $50 million and $56 million, respectively.
After adjusting for the impact of natural catastrophe and weather-related losses the current accident year loss ratio increased in both the three and six months ended June 30, 2014, primarily due to changes in the business mix and lower rates partially offset by a lower level of attritional losses.
Refer ‘Prior Year Reserve Development’ for further details.
Acquisition Cost Ratio: The reinsurance segment's acquisition cost ratio increased in both the three and six months ended June 30, 2014 compared to the same periods in 2013, primarily due to higher acquisition costs paid on certain lines of business. The increase for the six months ended June 30, 2014 was also impacted by variances in accruals for loss-sensitive features in underlying contracts. Accruals related to loss-sensitive features decreased the segment's acquisition cost ratio in the first half of 2013; however, these features had a lesser impact on the first half of 2014.

OTHER EXPENSES, NET

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Change |  | 2013 |  | 2014 |  | % Change |  | 2013 |
| Corporate expenses | $ | 33,270 |  |  | 32% |  | $ | 25,265 |  |  | $ | 61,976 |  |  | 32% |  | $ | 46,810 |  |
| Foreign exchange losses (gains) | 9,705 |  |  | nm |  | (10,320 | ) |  | 13,939 |  |  | nm |  | (45,201 | ) |
| Interest expense and financing costs | 19,975 |  |  | 31% |  | 15,260 |  |  | 36,569 |  |  | 18% |  | 31,095 |  |
| Income tax expense (benefit) | 9,500 |  |  | nm |  | (4,662 | ) |  | 13,625 |  |  | 149% |  | 5,469 |  |
| Total | $ | 72,450 |  |  | 184% |  | $ | 25,543 |  |  | $ | 126,109 |  |  | 230% |  | $ | 38,173 |  |

nm – not meaningful
Corporate Expenses: Our corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 3.3% and 3.2%, respectively, for the three and six months ended June 30, 2014, compared to 2.7% and 2.6% respectfully, for the same periods in 2013. The increase in corporate expenses primarily related to increased personnel costs and a reduction in certain allocated costs to the segments.
Foreign Exchange Losses (Gains): Some of our business is written in currencies other than the U.S. dollar. The foreign exchange gains and losses for the periods presented were largely driven by the re-measurement of net insurance related liabilities. The foreign exchange losses for the three months ended June 30, 2014 were primarily driven by appreciation of the sterling against the U.S. Dollar. Comparatively, for the three months ended June 30, 2013, depreciation of the Australian dollar was the primary driver of the gain, partially offset by appreciation of the euro. The loss for the six months ended June 30, 2014 was primarily driven by appreciation of the sterling and Australian dollar. Comparatively, the gain for the six months ended June 30, 2013 was driven by depreciation in the sterling and Australian dollar.
Interest Expense and Financing Costs: Interest expense and financing costs primarily relate to interest due on our senior notes and has increased following the issuance in the first quarter of 2014 of $250 million of 2.65% senior unsecured notes due in 2019, and $250 million of 5.15% senior unsecured notes which are due in 2045. See 'Liquidity and Capital Resources - Senior Notes' for further details.
Income Tax Expense (Benefit): Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the United States and Europe. Our effective tax rate, which is calculated as income tax expense (benefit) divided by
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income before tax, was 4.5% and 3.7% for the three and six months ended June 30, 2014, respectively, compared to (5.9%) and 1.4% in the three and six months ended June 30, 2013, respectfully. This effective rate can vary between periods depending on the distribution of net income amongst tax jurisdictions, as well as other factors.
We generated consolidated pre-tax net income for the three months ended June 30, 2013; however, the magnitude of natural catastrophe and weather-related losses borne by our U.S and European operations drove the recognition of an income tax benefit for the period.

NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | % Change |  | 2013 |  | 2014 |  | % Change |  | 2013 |
| Fixed maturities | $ | 78,523 |  |  | 5% |  | $ | 74,503 |  |  | $ | 151,480 |  |  | 5% |  | $ | 144,185 |  |
| Other investments | 32,492 |  |  | 174% |  | 11,848 |  |  | 49,252 |  |  | (11%) |  | 55,279 |  |
| Equities | 5,301 |  |  | 69% |  | 3,134 |  |  | 7,587 |  |  | 67% |  | 4,548 |  |
| Cash and cash equivalents | 6,183 |  |  | 389% |  | 1,265 |  |  | 7,046 |  |  | 178% |  | 2,533 |  |
| Short-term investments | 246 |  |  | (38%) |  | 397 |  |  | 459 |  |  | (51%) |  | 929 |  |
| Gross investment income | 122,745 |  |  | 35% |  | 91,147 |  |  | 215,824 |  |  | 4% |  | 207,474 |  |
| Investment expense | (7,878 | ) |  | (2%) |  | (8,035 | ) |  | (18,214 | ) |  | 18% |  | (15,455 | ) |
| Net investment income | $ | 114,867 |  |  | 38% |  | $ | 83,112 |  |  | $ | 197,610 |  |  | 3% |  | $ | 192,019 |  |
| Pre-tax yield:(1) |  |  |  |  |  |  |  |  |  |  |  |
| Fixed maturities | 2.6 | % |  |  |  | 2.5 | % |  | 2.5 | % |  |  |  | 2.5 | % |

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

Fixed Maturities
Larger average investment balances and a small increase in pre-tax yields contributed to the increase in investment income from fixed maturities for both periods presented.
Equities
The increase in dividend income (net of withholding taxes) in the current quarter and year-to-date is mainly due to higher dividend yields and larger average holdings on our equity exchange traded funds ("ETFs").
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Other Investments
The following table provides a breakdown of total net investment income from other investments:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Hedge funds | $ | 27,311 |  |  | $ | 6,776 |  |  | $ | 37,921 |  |  | $ | 40,254 |  |
| CLO - Equities | 5,181 |  |  | 5,072 |  |  | 11,331 |  |  | 15,025 |  |
| Total net investment income from other investments | $ | 32,492 |  |  | $ | 11,848 |  |  | $ | 49,252 |  |  | $ | 55,279 |  |
| Pre-tax return on other investments(1) | 3.2 | % |  | 1.2 | % |  | 4.8 | % |  | 5.9 | % |

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

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

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| On sale of investments: |  |  |  |  |  |  |  |
| Fixed maturities and short-term investments | $ | 12,258 |  |  | $ | 4,817 |  |  | $ | 12,324 |  |  | $ | 20,174 |  |
| Equity securities | 30,063 |  |  | 6,417 |  |  | 46,892 |  |  | 29,272 |  |
|  | 42,321 |  |  | 11,234 |  |  | 59,216 |  |  | 49,446 |  |
| OTTI charges recognized in earnings | (1,905 | ) |  | (5,127 | ) |  | (2,690 | ) |  | (6,025 | ) |
| Change in fair value of investment derivatives | (7,155 | ) |  | 10,128 |  |  | (12,644 | ) |  | 17,292 |  |
| Net realized investment gains | $ | 33,261 |  |  | $ | 16,235 |  |  | $ | 43,882 |  |  | $ | 60,713 |  |

On sale of investments
Generally, sales of individual securities occur when there are changes in the relative value, credit quality or duration of a particular issue. We may also sell to rebalance our investment portfolio in order to change exposure to particular asset classes or sectors. Higher net gains during the current quarter are reflective of the improvement in pricing for our fixed maturities versus the comparative quarter.
Improvements in global equity markets during 2013 and 2014 enabled us to realize net gains on sales of our equity securities (primarily common stock) during the quarter and year-to-date.
Change in fair value of investment derivatives
From time to time, we may economically hedge the foreign exchange exposure of non-U.S. denominated securities by entering into foreign exchange forward contracts. During the current quarter, our foreign exchange hedges resulted in $2 million of net losses which related primarily to securities denominated in Australian dollar.
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During 2013, we introduced the use of interest rate swaps to reduce duration risk of our fixed income portfolio. During the current
quarter, we recorded $5 million of net losses relating to our interest rate swaps.
Total Return
The following table provides a breakdown of the total return on cash and investments for the period indicated:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Net investment income | $ | 114,867 |  |  | $ | 83,112 |  |  | $ | 197,610 |  |  | $ | 192,019 |  |
| Net realized investments gains | 33,261 |  |  | 16,235 |  |  | 43,882 |  |  | 60,713 |  |
| Change in net unrealized gains/losses | 93,317 |  |  | (294,725 | ) |  | 157,807 |  |  | (350,580 | ) |
| Total | $ | 241,445 |  |  | $ | (195,378 | ) |  | $ | 399,299 |  |  | $ | (97,848 | ) |
| Average cash and investments(1) | $ | 15,497,729 |  |  | $ | 14,630,809 |  |  | $ | 15,226,403 |  |  | $ | 14,567,669 |  |
| Total return on average cash and investments, pre-tax(2) | 1.6 | % |  | (1.3 | %) |  | 2.6 | % |  | (0.7 | %) |

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

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

CASH AND INVESTMENTS

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

|  | June 30, 2014 |  | December 31, 2013 |
|  | Amortized Cost or Cost |  | Fair Value |  | Amortized Cost or Cost |  | Fair Value |
| Fixed maturities | $ | 12,428,133 |  |  | $ | 12,598,897 |  |  | $ | 11,987,146 |  |  | $ | 11,986,327 |  |
| Equities | 614,174 |  |  | 744,760 |  |  | 566,219 |  |  | 701,987 |  |
| Other investments | 809,226 |  |  | 1,044,492 |  |  | 839,177 |  |  | 1,045,810 |  |
| Short-term investments | 100,166 |  |  | 100,166 |  |  | 46,212 |  |  | 46,212 |  |
| Total investments | $ | 13,951,699 |  |  | $ | 14,488,315 |  |  | $ | 13,438,754 |  |  | $ | 13,780,336 |  |
| Cash and cash equivalents(1) | $ | 1,189,403 |  |  | $ | 1,189,403 |  |  | $ | 987,876 |  |  | $ | 987,876 |  |

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

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

|  | June 30, 2014 |  | December 31, 2013 |
|  | Fair Value |  | % of Total |  | Fair Value |  | % of Total |
| Fixed maturities: |  |  |  |  |  |  |  |
| U.S. government and agency | $ | 1,598,320 |  |  | 13 | % |  | $ | 1,388,698 |  |  | 11 | % |
| Non-U.S. government | 1,247,667 |  |  | 10 | % |  | 1,176,382 |  |  | 10 | % |
| Corporate debt | 4,263,974 |  |  | 34 | % |  | 3,608,238 |  |  | 30 | % |
| Agency RMBS | 2,105,579 |  |  | 17 | % |  | 2,448,827 |  |  | 20 | % |
| CMBS | 939,694 |  |  | 7 | % |  | 797,414 |  |  | 7 | % |
| Non-Agency RMBS | 84,946 |  |  | 1 | % |  | 67,567 |  |  | 1 | % |
| ABS | 1,306,925 |  |  | 10 | % |  | 953,451 |  |  | 8 | % |
| Municipals(1) | 1,051,792 |  |  | 8 | % |  | 1,545,750 |  |  | 13 | % |
| Total | $ | 12,598,897 |  |  | 100 | % |  | $ | 11,986,327 |  |  | 100 | % |
| Credit ratings: |  |  |  |  |  |  |  |
| U.S. government and agency | $ | 1,598,320 |  |  | 13 | % |  | $ | 1,388,698 |  |  | 11 | % |
| AAA(2) | 4,304,136 |  |  | 33 | % |  | 4,160,744 |  |  | 35 | % |
| AA | 1,583,807 |  |  | 13 | % |  | 1,795,291 |  |  | 15 | % |
| A | 2,487,191 |  |  | 20 | % |  | 2,220,263 |  |  | 19 | % |
| BBB | 1,617,381 |  |  | 13 | % |  | 1,468,669 |  |  | 12 | % |
| Below BBB(3) | 1,008,062 |  |  | 8 | % |  | 952,662 |  |  | 8 | % |
| Total | $ | 12,598,897 |  |  | 100 | % |  | $ | 11,986,327 |  |  | 100 | % |

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

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

(3) | Non-investment grade securities.

During the first half of 2014, we reduced our allocation to municipals after spreads tightened and their after-tax valuations became less attractive. We increased our allocation to CLO Debt securities which form part of our ABS category. Other sector changes reflect relative value decisions.
At June 30, 2014, our fixed maturities had a weighted average credit rating of AA- (2013: AA-) and an average duration of 3.0 years (2013: 3.3 years). An interest rate swap further reduced our duration to 2.9 years (2013: 3.2 years). When incorporating short-term investments and cash and cash equivalents into the calculation (bringing the total to $13.9 billion), the average credit rating would be AA- (2013: AA-) and duration (including interest rate swaps) would be 2.6 years (2013: 2.9 years).
During the year, net unrealized gains/losses on fixed maturities moved from a net unrealized loss of $1 million at December 31, 2013 to a net unrealized gain of $171 million June 30, 2014.
Equities
During the year, net unrealized gains on equities decreased from $136 million at December 31, 2013 to $131 million at June 30, 2014. The decline was due to sales resulting in net realized gains of $47 million during the year, offset by improved valuations reflective of markets.
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Other Investments
The composition of our other investments portfolio is summarized as follows:

|  | June 30, 2014 |  | December 31, 2013 |
| Hedge funds |  |  |  |  |  |  |  |
| Long/short equity funds | $ | 373,539 |  |  | 36 | % |  | $ | 425,444 |  |  | 41 | % |
| Multi-strategy funds | 306,215 |  |  | 29 | % |  | 285,155 |  |  | 27 | % |
| Event-driven funds | 191,735 |  |  | 18 | % |  | 190,458 |  |  | 18 | % |
| Leveraged bank loan funds | 48,430 |  |  | 5 | % |  | 48,753 |  |  | 5 | % |
| Total hedge funds | 919,919 |  |  | 88 | % |  | 949,810 |  |  | 91 | % |
| Direct lending funds | 33,467 |  |  | 3 | % |  | 22,134 |  |  | 2 | % |
| Total hedge and direct lending funds | 953,386 |  |  | 91 | % |  | 971,944 |  |  | 93 | % |
| CLO - Equities | 91,106 |  |  | 9 | % |  | 73,866 |  |  | 7 | % |
| Total other investments | $ | 1,044,492 |  |  | 100 | % |  | $ | 1,045,810 |  |  | 100 | % |

The $30 million decrease in the fair value of our total hedge funds in 2014 was driven by $68 million of net redemptions offset by $38 million of price appreciation as our hedge funds benefited from the strong performance of the global equity and credit markets.
We have made total commitments of $110 million to managers of direct lending funds. To date, $33 million of our total commitment has been called.
We made total commitments of $60 million to a CLO fund. To date, $53 million of our total commitment has been called.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

|  | June 30, 2014 |  | December 31, 2013 |
| Senior notes | $ | 1,490,427 |  |  | $ | 995,855 |  |
| Preferred shares | 627,843 |  |  | 627,843 |  |
| Common equity | 5,327,867 |  |  | 5,190,119 |  |
| Shareholders’ equity attributable to AXIS Capital | 5,955,710 |  |  | 5,817,962 |  |
| Total capital | $ | 7,446,137 |  |  | $ | 6,813,817 |  |
| Ratio of debt to total capital | 20.0 | % |  | 14.6 | % |
| Ratio of debt and preferred equity to total capital | 28.4 | % |  | 23.8 | % |

We finance our operations with a combination of debt and equity capital. Our debt to total capital and debt and preferred equity to total capital ratios provide an indication of our capital structure, along with some insight into our financial strength. A company with higher ratios in comparison to industry average may show weak financial strength because the cost of its debts may adversely affect results of operations and/or increase its default risk.
Our Consolidated Balance Sheet at June 30, 2014 reflected the issuance of $250 million of 2.65% senior unsecured notes due in 2019, and $250 million of 5.15% senior unsecured notes which are due in 2045 (discussed further below). The net proceeds from these offerings are expected to be used towards the repayment of $500 million of AXIS Capital’s 5.75% senior unsecured notes which mature on December 1, 2014. As such, the increases in our debt to total capital and debt and preferred equity to total capital ratios are expected to be temporary. We believe that our financial flexibility remains strong.
Senior Notes
On March 13, 2014, AXIS Specialty Finance PLC, a 100% owned finance subsidiary, issued $250 million aggregate principal amount of 2.65% senior unsecured notes (the "2.65% Senior Notes") at an issue price of 99.896% and $250 million aggregate principal amount of 5.15% senior unsecured notes (the "5.15% Senior Notes") at an issue price of 99.474%. The net proceeds of the issuance, after consideration of the offering discount and underwriting expenses and commissions, totaled approximately $248 million and $246 million for the 2.65% Senior Notes and the 5.15% Senior Notes, respectively. Interest on the 2.65% Senior Notes and the 5.15% Senior Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. Unless previously redeemed, the 2.65% Senior Notes and the 5.15% Senior Notes will mature on April 1, 2019 and April 1, 2045, respectively. The 2.65% Senior Notes and the 5.15% Senior Notes are ranked as unsecured senior obligations of AXIS Specialty Finance PLC. AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance PLC under the 2.65% Senior Notes and the 5.15% Senior Notes. AXIS Capital's obligations under this guarantee are unsecured and senior and rank equally with all other senior obligations of AXIS Capital. Net proceeds from this offering are expected to be used towards the repayment of AXIS Capital’s 5.75% senior unsecured notes which mature on December 1, 2014.
We have the option to redeem the 2.65% Senior Notes and the 5.15% Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price, which is equal to the greater of the aggregate principal amount or the sum of the present values of the remaining scheduled payments of principal and interest. The related indentures contain various covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. We were in compliance with all the covenants contained in the indentures at June 30, 2014.
Secured Letter of Credit Facilities
On March 31, 2014, AXIS Capital's subsidiary, AXIS Specialty Limited, terminated our Lloyd's LOC Facility with ING Bank N.V., London Branch. The Funds at Lloyd's requirements for the Company's subsidiary, AXIS Corporate Capital UK Limited, to support the underwriting capacity of the Company's Lloyd's syndicate, AXIS Syndicate 1686, are now being met by capital pledged in the form of fixed income securities deposited directly with Lloyd's.
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Credit Facility
Effective February 10, 2014, AXIS Specialty Finance PLC was added as a guarantor to our $250 million credit facility.
Common Equity
During the six months ended June 30, 2014, our common equity increased by $138 million. The following table reconciles our opening and closing common equity positions:

| Six months ended June 30, | 2014 |
| Common equity - opening | $ | 5,190,119 |  |
| Net income attributable to AXIS Capital | 347,934 |  |
| Shares repurchased for treasury | (318,082 | ) |
| Change in unrealized appreciation on available for sale investments, net of tax | 148,390 |  |
| Common share dividends | (59,397 | ) |
| Preferred share dividends | (20,044 | ) |
| Share-based compensation expense recognized in equity | 27,800 |  |
| Foreign currency translation adjustment | 6,449 |  |
| Shares issued and stock options exercised | 4,698 |  |
| Common equity - closing | $ | 5,327,867 |  |

During the six months ended June 30, 2014, we repurchased 7 million common shares for a total of $318 million (including $300 million pursuant to our Board-authorized share repurchase program and $18 million relating to shares purchased in connection with the vesting of restricted stock awards granted under our 2007 Long-Term Equity Compensation Plan). At July 30, 2014, the remaining authorization under the common share repurchase program approved by our Board of Directors was $450 million (refer to Part II, Item 2 'Unregistered Sales of Equity Securities and Use of Proceeds' for additional information).
We continue to expect that cash flows generated from our operations, combined with the liquidity provided by our investment portfolio, will be sufficient to cover our required cash outflows and other contractual commitments through the foreseeable future.
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CRITICAL ACCOUNTING ESTIMATES

Our Consolidated Financial Statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates in order to determine the reported values. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.
As disclosed in our 2013 Annual Report on Form 10-K, we believe that the material items requiring such subjective and complex estimates are our:

• | reserves for losses and loss expenses;

• | reinsurance recoverable balances;

• | premiums;

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

• | assessments of other-than-temporary impairments.

With the exception of the update outlined in the section below, we believe that the critical accounting estimates discussion in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013 continues to describe the significant estimates and judgments included in the preparation of our Consolidated Financial Statements.
RESERVE FOR LOSSES AND LOSS EXPENSES
Selection of Reported Reserves (Management’s Best Estimate)
Our quarterly reserving process involves the collaboration of our underwriting, claims, actuarial, legal and finance departments, includes various segmental committee meetings and culminates with the approval of a single point best estimate by our Group Reserving Committee, which comprises senior management. In selecting this best estimate, management considers actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to: the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, potential severity of individual claims and the extent of internal historical loss data versus industry information. While these qualitative factors are considered in arriving at the point estimate, no specific provisions for qualitative factors are established.
During 2013, the Company significantly enhanced the capabilities and resources dedicated to the actuarial reserving function. During the first quarter of 2014, management has relied upon its internal actuarial reserving function for the quarterly reserve evaluation process and did not utilize the services of an independent actuarial firm. The Company will continue to rely on its internal actuarial function for future quarterly reserving process. On an annual basis, the Company will use an independent actuarial firm to provide an actuarial opinion on the reasonableness of our loss reserves for each of our operating subsidiaries; such actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm discusses its conclusions from the annual review with management and presents its findings to our Board of Directors.
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NEW ACCOUNTING STANDARDS

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

OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS

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

NON-GAAP FINANCIAL MEASURES

In this report, we present operating income, consolidated underwriting income and underwriting-related general and administrative expenses, which are “non-GAAP financial measures” as defined in Regulation G.
Operating income represents after-tax operational results without consideration of after-tax net realized investment gains (losses) and foreign exchange losses (gains). We also present diluted operating income per common share and operating return on average common equity (“operating ROACE”), which are derived from the non-GAAP operating income measure.
Consolidated underwriting income is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses. Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our individual underwriting operations. While these measures are presented in Item 1, Note 2 to our Consolidated Financial Statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis.
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Operating income, diluted operating income per common share and operating ROACE can be reconciled to the nearest GAAP financial measures as follows:

|  | Three months ended June 30, |  | Six months ended June 30, |
|  | 2014 |  | 2013 |  | 2014 |  | 2013 |
| Net income available to common shareholders | $ | 190,664 |  |  | $ | 72,447 |  |  | $ | 327,890 |  |  | $ | 375,261 |  |
| Net realized investment gains, net of tax(1) | (27,112 | ) |  | (14,604 | ) |  | (31,412 | ) |  | (55,674 | ) |
| Foreign exchange losses (gains), net of tax(2) | 9,191 |  |  | (10,879 | ) |  | 13,333 |  |  | (45,132 | ) |
| Loss on repurchase of preferred shares, net of tax(3) | — |  |  | 3,081 |  |  | — |  |  | 3,081 |  |
| Operating income | $ | 172,743 |  |  | $ | 50,045 |  |  | $ | 309,811 |  |  | $ | 277,536 |  |
| Earnings per common share - diluted | $ | 1.79 |  |  | $ | 0.62 |  |  | $ | 3.03 |  |  | $ | 3.19 |  |
| Net realized investment gains, net of tax | (0.25 | ) |  | (0.13 | ) |  | (0.29 | ) |  | (0.48 | ) |
| Foreign exchange losses (gains), net of tax | 0.09 |  |  | (0.09 | ) |  | 0.12 |  |  | (0.38 | ) |
| Loss on repurchase of preferred shares, net of tax | — |  |  | 0.03 |  |  | — |  |  | 0.03 |  |
| Operating income per common share - diluted | $ | 1.63 |  |  | $ | 0.43 |  |  | $ | 2.86 |  |  | $ | 2.36 |  |
| Weighted average common shares and common share equivalents - diluted(3) | 106,289 |  |  | 116,671 |  |  | 108,329 |  |  | 117,660 |  |
| Average common shareholders’ equity | $ | 5,263,537 |  |  | $ | 5,160,346 |  |  | $ | 5,258,993 |  |  | $ | 5,105,511 |  |
| ROACE (annualized) | 14.5 | % |  | 5.6 | % |  | 12.5 | % |  | 14.7 | % |
| Operating ROACE (annualized) | 13.1 | % |  | 3.9 | % |  | 11.8 | % |  | 10.9 | % |

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

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

(3) | Tax impact in nil.

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

A reconciliation of consolidated underwriting income to income before income taxes (the nearest GAAP financial measure) can be found in Item 1, Note 2 to the Consolidated Financial Statements. Underwriting-related general and administrative expenses are reconciled to general and administrative expenses (the nearest GAAP financial measure) within 'Underwriting Results - Group'.
We present our results of operations in the way we believe will be most meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. This includes the presentation of “operating income”, (in total and on a per share basis), “annualized operating ROACE” (which is based on the “operating income” measure) and "consolidated underwriting income", which incorporates "underwriting-related general and administrative expenses".
Operating Income
Although the investment of premiums to generate income and realized investment gains (or losses) is an integral part of our operations, the determination to realize investment gains (or losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (or losses) is somewhat opportunistic for many companies.
Foreign exchange losses (gains) in our Consolidated Statements of Operations are primarily driven by the impact of foreign exchange rate movements on net insurance related-liabilities. However, this movement is only one element of the overall impact of foreign exchange rate fluctuations on our financial position. In addition, we recognize unrealized foreign exchange losses (gains) on our available-for-sale investments in other comprehensive income and foreign exchange losses (gains) realized upon the sale of these investments in net realized investments gain (losses). These unrealized and realized foreign exchange rate movements generally offset
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a large portion of the foreign exchange losses (gains) reported separately in earnings, thereby minimizing the impact of foreign exchange rate movements on total shareholders' equity. As such, the Statement of Operations foreign exchange losses (gains) in isolation are not a fair representation of the performance of our business.
In this regard, certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (losses) and foreign exchange losses (gains) to understand the profitability of recurring sources of income.
We believe that showing net income available to common shareholders exclusive of net realized gains (losses) and foreign exchange losses (gains) reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons.
Consolidated Underwriting Income/Underwriting-Related General and Administrative Expenses
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our individual underwriting operations, we exclude them from underwriting-related general and administrative expenses and, therefore, consolidated underwriting income. Interest expense and financing costs primarily relate to interest payable on our senior notes and are excluded from consolidated underwriting income for the same reason.
We evaluate our underwriting results separately from the performance of our investment portfolio. As such, we believe it appropriate to exclude net investment income and net realized investment gains (losses) from our underwriting profitability measure.
As noted above, foreign exchange losses (gains) in our Consolidated Statement of Operations primarily relate to our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange rate gains (losses) on our investment portfolio generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) are not a meaningful contributor to our underwriting performance and, therefore, exclude them from consolidated underwriting income.
We believe that presentation of underwriting-related general and administrative expenses and consolidated underwriting income provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Item 7A included in our 2013 Form 10-K. With the exception of the changes in exposure to foreign currency risk presented below, there have been no material changes to this item since December 31, 2013.
Foreign Currency Risk
The table below provides a sensitivity analysis of our total net foreign currency exposures.

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management has performed an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2014. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management has performed an evaluation, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2014. Based upon that evaluation, there were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against us in the ordinary course of insurance or reinsurance operations; estimated amounts payable under such proceedings are included in the reserve for losses and loss expenses in our Consolidated Balance Sheets.
We are not a party to any material legal proceedings arising outside the ordinary course of business.

ITEM 1A. RISK FACTORS

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

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

The following table sets forth information regarding the number of shares we repurchased during the three months ended June 30, 2014:
ISSUER PURCHASES OF EQUITY SECURITIES
Common Shares

Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Announced Plans or Programs(2) |
April 1-30, 2014 | 805,990 |  |  | $45.95 |  | 770,275 |  |  | $550.0 | million |
May 1-31, 2014 | 1,798,986 |  |  | $45.23 |  | 1,752,512 |  |  | $470.7 | million |
June 1-30, 2014 | 452,566 |  |  | $46.34 |  | 447,309 |  |  | $450.0 | million |
Total | 3,057,542 |  |  | 2,970,096 |  |  | $450.0 | million |

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

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

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ITEM 6. EXHIBITS

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

† | Filed herewith.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 30, 2014

AXIS CAPITAL HOLDINGS LIMITED
By: | /S/ ALBERT BENCHIMOL
| Albert Benchimol
| President and Chief Executive Officer
| /S/ JOSEPH HENRY
| Joseph Henry
| Executive Vice President and Chief Financial Officer
| (Principal Financial Officer)

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