AXIS CAPITAL HOLDINGS LTD

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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 September 30, 2014

¨ 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 October 24, 2014 , there were 102,207,438 Common Shares, $0.0125 par value per share, of the registrant outstanding.

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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	72
Item 4.	Controls and Procedures	72
	PART II
	Other Information	73
Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 6.	Exhibits	74
	Signatures	75

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PART I

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 September 30, 2014 (Unaudited) and December 31, 2013	5
Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (Unaudited)	6
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (Unaudited)	7
Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2014 and 2013 (Unaudited)	8
Consolidated Statements of Cash Flows for the nine months ended September 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	33
Note 8 - Earnings Per Common Share	34
Note 9 - Shareholders' Equity	34
Note 10 - Noncontrolling Interests	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

SEPTEMBER 30, 2014 (UNAUDITED) AND DECEMBER 31, 2013

	2014		2013
	(in thousands)
Assets
Investments:
Fixed maturities, available for sale, at fair value (Amortized cost 2014: $12,440,272; 2013: $11,987,146)	$ 12,444,684		$ 11,986,327
Equity securities, available for sale, at fair value (Cost 2014: $583,296; 2013: $566,219)	629,502		701,987
Other investments, at fair value	946,836		1,045,810
Short-term investments, at fair value and amortized cost	114,428		46,212
Total investments	14,135,450		13,780,336
Cash and cash equivalents	1,290,377		923,326
Restricted cash and cash equivalents	117,434		64,550
Accrued interest receivable	91,777		97,132
Insurance and reinsurance premium balances receivable	2,112,906		1,688,957
Reinsurance recoverable on unpaid and paid losses	1,947,529		1,929,988
Deferred acquisition costs	556,723		456,122
Prepaid reinsurance premiums	351,488		330,261
Receivable for investments sold	6,472		1,199
Goodwill and intangible assets	88,740		89,528
Other assets	266,151		273,385
Total assets	$ 20,965,047		$ 19,634,784
Liabilities
Reserve for losses and loss expenses	$ 9,751,903		$ 9,582,140
Unearned premiums	3,142,055		2,683,849
Insurance and reinsurance balances payable	244,815		234,412
Senior notes	1,490,498		995,855
Payable for investments purchased	189,684		21,744
Other liabilities	265,968		248,822
Total liabilities	15,084,923		13,766,822
Shareholders’ equity
Preferred shares	627,843		627,843
Common shares (2014: 175,399; 2013: 174,134 shares issued and 2014: 100,827; 2013: 109,485 shares outstanding)	2,190		2,174
Additional paid-in capital	2,273,110		2,240,125
Accumulated other comprehensive income	22,935		117,825
Retained earnings	5,581,942		5,062,706
Treasury shares, at cost (2014: 74,572; 2013: 64,649 shares)	(2,689,531	)	(2,232,711	)
Total shareholders’ equity attributable to AXIS Capital	5,818,489		5,817,962
Noncontrolling interests	61,635		50,000
Total shareholders’ equity	5,880,124		5,867,962
Total liabilities and shareholders’ equity	$ 20,965,047		$ 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 NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

	Three months ended — 2014		2013		Nine months ended — 2014		2013
	(in thousands, except for per share amounts)
Revenues
Net premiums earned	$ 966,138		$ 945,242		$ 2,912,482		$ 2,765,154
Net investment income	66,562		103,429		264,171		295,450
Other insurance related income	7,702		725		12,468		1,756
Net realized investment gains (losses):
Other-than-temporary impairment (OTTI) losses	(9,431	)	(2,811	)	(12,121	)	(8,836	)
Other realized investment gains (losses)	86,879		(1,897	)	133,450		64,840
Total net realized investment gains (losses)	77,448		(4,708	)	121,329		56,004
Total revenues	1,117,850		1,044,688		3,310,450		3,118,364
Expenses
Net losses and loss expenses	552,064		501,522		1,662,097		1,582,835
Acquisition costs	185,950		173,682		549,848		488,892
General and administrative expenses	152,916		140,699		456,725		431,207
Foreign exchange losses (gains)	(72,292	)	56,860		(58,353	)	11,659
Interest expense and financing costs	20,344		15,260		56,913		46,355
Total expenses	838,982		888,023		2,667,230		2,560,948
Income before income taxes	278,868		156,665		643,220		557,416
Income tax expense (benefit)	(4,098	)	6,030		9,527		11,500
Net income	282,966		150,635		633,693		545,916
Amounts attributable to (from) noncontrolling interests	(6,160	)	—		(3,365	)	—
Net income attributable to AXIS Capital	289,126		150,635		637,058		545,916
Preferred share dividends	10,022		13,514		30,066		30,452
Loss on repurchase of preferred shares	—		—		—		3,081
Net income available to common shareholders	$ 279,104		$ 137,121		$ 606,992		$ 512,383
Per share data
Net income per common share:
Basic net income	$ 2.71		$ 1.23		$ 5.74		$ 4.47
Diluted net income	$ 2.68		$ 1.21		$ 5.68		$ 4.41
Weighted average number of common shares outstanding - basic	102,945		111,676		105,683		114,606
Weighted average number of common shares outstanding - diluted	104,247		113,355		106,953		116,214
Cash dividends declared per common share	$ 0.27		$ 0.25		$ 0.81		$ 0.75

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

	Three months ended — 2014		2013		Nine months ended — 2014		2013
	(in thousands)
Net income	$ 282,966		$ 150,635		$ 633,693		$ 545,916
Other comprehensive income (loss), net of tax:
Available for sale investments:
Unrealized gains (losses) arising during the period	(167,060	)	110,640		24,874		(170,786	)
Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income	(72,670	)	(8,657	)	(116,213	)	(46,571	)
Unrealized gains (losses) arising during the period, net of reclassification adjustment	(239,730	)	101,983		(91,339	)	(217,357	)
Non-credit portion of OTTI losses	—		—		—		—
Foreign currency translation adjustment	(10,000	)	3,635		(3,551	)	(14,892	)
Total other comprehensive income (loss), net of tax	(249,730	)	105,618		(94,890	)	(232,249	)
Comprehensive income	$ 33,236		$ 256,253		$ 538,803		$ 313,667

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 NINE MONTHS ENDED SEPTEMBER 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	16		26
Balance at end of period	2,190		2,172
Additional paid-in capital
Balance at beginning of period	2,240,125		2,179,034
Shares issued - common shares	1,138		3,939
Cost of treasury shares reissued	(11,711	)	(4,085	)
Issue costs on newly issued preferred shares	—		(6,551	)
Reversal of issue costs on repurchase of preferred shares	—		3,081
Stock options exercised	3,898		13,029
Share-based compensation expense	39,660		37,379
Balance at end of period	2,273,110		2,225,826
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 losses arising during the period, net of reclassification adjustment	(91,339	)	(217,357	)
Non-credit portion of OTTI losses	—		—
Balance at end of period	33,606		130,971
Cumulative foreign currency translation adjustments, net of tax:
Balance at beginning of period	(7,120	)	14,294
Foreign currency translation adjustments	(3,551	)	(14,892	)
Balance at end of period	(10,671	)	(598	)
Balance at end of period	22,935		130,373
Retained earnings
Balance at beginning of period	5,062,706		4,497,789
Net income	633,693		545,916
Amounts attributable (to) from noncontrolling interests	3,365		—
Preferred share dividends	(30,066	)	(30,452	)
Loss on repurchase of preferred shares	—		(3,081	)
Common share dividends	(87,756	)	(88,456	)
Balance at end of period	5,581,942		4,921,716
Treasury shares, at cost
Balance at beginning of period	(2,232,711	)	(1,764,673	)
Shares repurchased for treasury	(468,531	)	(359,513	)
Cost of treasury shares reissued	11,711		4,085
Balance at end of period	(2,689,531	)	(2,120,101	)
Total shareholders’ equity attributable to AXIS Capital	5,818,489		5,787,829
Noncontrolling interests	61,635		—
Total shareholders' equity	$ 5,880,124		$ 5,787,829

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

	2014		2013
	(in thousands)
Cash flows from operating activities:
Net income	$ 633,693		$ 545,916
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(121,329	)	(56,004	)
Net realized and unrealized gains on other investments	(45,868	)	(87,406	)
Amortization of fixed maturities	84,412		105,346
Other amortization and depreciation	17,669		16,725
Share-based compensation expense, net of cash payments	45,074		43,454
Changes in:
Accrued interest receivable	5,231		(1,065	)
Reinsurance recoverable balances	(26,419	)	(35,691	)
Deferred acquisition costs	(100,461	)	(115,754	)
Prepaid reinsurance premiums	(22,271	)	(24,604	)
Reserve for loss and loss expenses	184,881		425,785
Unearned premiums	458,058		535,609
Insurance and reinsurance balances, net	(412,603	)	(455,166	)
Other items	35,674		(8,519	)
Net cash provided by operating activities	735,741		888,626
Cash flows from investing activities:
Purchases of:
Fixed maturities	(8,782,175	)	(9,236,509	)
Equity securities	(510,332	)	(191,209	)
Other investments	(60,272	)	(141,253	)
Short-term investments	(562,427	)	(158,049	)
Proceeds from the sale of:
Fixed maturities	7,625,717		7,779,177
Equity securities	597,820		279,468
Other investments	205,112		77,526
Short-term investments	429,679		131,907
Proceeds from redemption of fixed maturities	785,183		1,144,412
Proceeds from redemption of short-term investments	64,071		50,050
Purchase of other assets	(20,306	)	(17,402	)
Change in restricted cash and cash equivalents	(52,884	)	30,288
Net cash used in investing activities	(280,814	)	(251,594	)
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	(468,531	)	(359,513	)
Dividends paid - common shares	(90,092	)	(90,421	)
Dividends paid - preferred shares	(30,066	)	(29,171	)
Proceeds from issuance of common shares	5,052		16,995
Sales of shares to noncontrolling interests	25,000		—
Return of capital to noncontrolling interests	(10,000	)	—
Net cash used in financing activities	(74,293	)	(343,661	)
Effect of exchange rate changes on foreign currency cash and cash equivalents	(13,583	)	(3,635	)
Increase in cash and cash equivalents	367,051		289,736
Cash and cash equivalents - beginning of period	923,326		759,817
Cash and cash equivalents - end of period	$ 1,290,377		$ 1,049,553

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 30, 2014 and the consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the periods ended September 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 .

Recently Issued Accounting Standards Not Yet Adopted

Share-Based Compensation

In June 2014, the Financial Accounting Standards Board ("FASB") issued new guidance for share-based payments where a performance target could be achieved after the requisite service period has ended, requiring that compensation costs be recognized in the period in which it becomes probable that the performance target will be achieved and to represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. As the new guidance was issued to clarify treatment where there was divergence in accounting practice, the adoption of this guidance is not expected to impact our results of operations, financial condition or liquidity.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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:

Three months ended and at September 30,	2014 — Insurance		Reinsurance		Total		2013 — Insurance		Reinsurance		Total
Gross premiums written	$ 555,283		$ 341,531		$ 896,814		$ 574,778		$ 330,019		$ 904,797
Net premiums written	363,571		323,652		687,223		393,627		322,762		716,389
Net premiums earned	461,805		504,333		966,138		448,072		497,170		945,242
Other insurance related income	—		7,702		7,702		725		—		725
Net losses and loss expenses	(289,207	)	(262,857	)	(552,064	)	(216,440	)	(285,082	)	(501,522	)
Acquisition costs	(71,264	)	(114,686	)	(185,950	)	(61,087	)	(112,595	)	(173,682	)
General and administrative expenses	(85,750	)	(36,612	)	(122,362	)	(82,548	)	(35,127	)	(117,675	)
Underwriting income	$ 15,584		$ 97,880		113,464		$ 88,722		$ 64,366		153,088
Corporate expenses					(30,554	)					(23,024	)
Net investment income					66,562						103,429
Net realized investment gains (losses)					77,448						(4,708	)
Foreign exchange (losses) gains					72,292						(56,860	)
Interest expense and financing costs					(20,344	)					(15,260	)
Income before income taxes					$ 278,868						$ 156,665
Net loss and loss expense ratio	62.6	%	52.1	%	57.1	%	48.3	%	57.3	%	53.1	%
Acquisition cost ratio	15.4	%	22.7	%	19.2	%	13.6	%	22.6	%	18.4	%
General and administrative expense ratio	18.6	%	7.3	%	15.9	%	18.5	%	7.2	%	14.8	%
Combined ratio	96.6	%	82.1	%	92.2	%	80.4	%	87.1	%	86.3	%
Goodwill and intangible assets	$ 88,740		$ —		$ 88,740		$ 91,656		$ —		$ 91,656

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEGMENT INFORMATION (CONTINUED)

Nine months ended and at September 30,	2014 — Insurance		Reinsurance		Total		2013 — Insurance		Reinsurance		Total
Gross premiums written	$ 1,911,102		$ 2,038,377		$ 3,949,479		$ 1,952,548		$ 1,918,537		$ 3,871,085
Net premiums written	1,361,351		1,990,607		3,351,958		1,385,892		1,894,344		3,280,236
Net premiums earned	1,368,683		1,543,799		2,912,482		1,272,297		1,492,857		2,765,154
Other insurance related income	—		12,468		12,468		1,756		—		1,756
Net losses and loss expenses	(859,093	)	(803,004	)	(1,662,097	)	(764,768	)	(818,067	)	(1,582,835	)
Acquisition costs	(207,360	)	(342,488	)	(549,848	)	(177,097	)	(311,795	)	(488,892	)
General and administrative expenses	(257,208	)	(106,987	)	(364,195	)	(257,962	)	(103,411	)	(361,373	)
Underwriting income	$ 45,022		$ 303,788		348,810		$ 74,226		$ 259,584		333,810
Corporate expenses					(92,530	)					(69,834	)
Net investment income					264,171						295,450
Net realized investment gains					121,329						56,004
Foreign exchange (losses) gains					58,353						(11,659	)
Interest expense and financing costs					(56,913	)					(46,355	)
Income before income taxes					$ 643,220						$ 557,416
Net loss and loss expense ratio	62.8	%	52.0	%	57.1	%	60.1	%	54.8	%	57.2	%
Acquisition cost ratio	15.2	%	22.2	%	18.9	%	13.9	%	20.9	%	17.7	%
General and administrative expense ratio	18.7	%	6.9	%	15.6	%	20.3	%	6.9	%	15.6	%
Combined ratio	96.7	%	81.1	%	91.6	%	94.3	%	82.6	%	90.5	%
Goodwill and intangible assets	$ 88,740		$ —		$ 88,740		$ 91,656		$ —		$ 91,656

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 30, 2014
Fixed maturities
U.S. government and agency	$ 1,545,328	$ 1,564	$ (27,424	)	$ 1,519,468	$ —
Non-U.S. government	1,175,260	9,122	(45,460	)	1,138,922	—
Corporate debt	4,240,910	47,065	(37,179	)	4,250,796	—
Agency RMBS (1)	2,103,587	28,931	(11,571	)	2,120,947	—
CMBS (2)	945,134	12,212	(2,829	)	954,517	—
Non-Agency RMBS	75,452	3,531	(588	)	78,395	(888	)
ABS (3)	1,443,932	3,775	(11,842	)	1,435,865	—
Municipals (4)	910,669	36,181	(1,076	)	945,774	—
Total fixed maturities	$ 12,440,272	$ 142,381	$ (137,969	)	$ 12,444,684	$ (888	)
Equity securities
Common stocks	$ 49,426	$ 14,367	$ (648	)	$ 63,145
Exchange-traded funds	420,219	31,506	(1,049	)	450,676
Non-U.S. bond mutual funds	113,651	2,030	—		115,681
Total equity securities	$ 583,296	$ 47,903	$ (1,697	)	$ 629,502
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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 30, 2014
Maturity
Due in one year or less	$ 550,351	$ 549,150	4.5 %
Due after one year through five years	5,250,453	5,266,397	42.3 %
Due after five years through ten years	1,822,740	1,788,151	14.4 %
Due after ten years	248,623	251,262	2.0 %
	7,872,167	7,854,960	63.2 %
Agency RMBS	2,103,587	2,120,947	17.0 %
CMBS	945,134	954,517	7.7 %
Non-Agency RMBS	75,452	78,395	0.6 %
ABS	1,443,932	1,435,865	11.5 %
Total	$ 12,440,272	$ 12,444,684	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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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 — Fair Value	Unrealized Losses		Less than 12 months — Fair Value	Unrealized Losses		Total — Fair Value	Unrealized Losses
At September 30, 2014
Fixed maturities
U.S. government and agency	$ 392,084	$ (23,150	)	$ 864,003	$ (4,274	)	$ 1,256,087	$ (27,424	)
Non-U.S. government	148,526	(25,903	)	395,307	(19,557	)	543,833	(45,460	)
Corporate debt	35,841	(2,608	)	2,006,740	(34,571	)	2,042,581	(37,179	)
Agency RMBS	335,687	(9,617	)	469,445	(1,954	)	805,132	(11,571	)
CMBS	77,827	(1,066	)	310,078	(1,763	)	387,905	(2,829	)
Non-Agency RMBS	8,217	(524	)	3,087	(64	)	11,304	(588	)
ABS	378,668	(8,122	)	640,305	(3,720	)	1,018,973	(11,842	)
Municipals	39,450	(1,047	)	8,226	(29	)	47,676	(1,076	)
Total fixed maturities	$ 1,416,300	$ (72,037	)	$ 4,697,191	$ (65,932	)	$ 6,113,491	$ (137,969	)
Equity securities
Common stocks	$ 1,828	$ (249	)	$ 10,401	$ (399	)	$ 12,229	$ (648	)
Exchange-traded funds	—	—		56,074	(1,049	)	56,074	(1,049	)
Total equity securities	$ 1,828	$ (249	)	$ 66,475	$ (1,448	)	$ 68,303	$ (1,697	)
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	)
Exchange-traded funds	—	—		—	—		—	—
Total equity securities	$ 3,499	$ (398	)	$ 48,828	$ (5,785	)	$ 52,327	$ (6,183	)

Fixed Maturities

At September 30, 2014 , 1,306 fixed maturities ( 2013 : 1,127 ) were in an unrealized loss position of $138 million ( 2013 : $180 million ), of which $14 million ( 2013 : $2 million ) was related to securities below investment grade or not rated.

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INVESTMENTS (CONTINUED)

At September 30, 2014 , 281 ( 2013 : 99 ) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $1,416 million ( 2013 : $272 million ). Following our credit impairment review, we concluded that these securities as well as the remaining securities in an unrealized loss position in the above table were temporarily impaired at September 30, 2014 , and were expected to recover in value as the securities approach maturity. Further, at September 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 September 30, 2014 , 9 securities ( 2013 : 63 ) were in an unrealized loss position of $2 million ( 2013 : $6 million ).

At September 30, 2014 , 2 ( 2013 : 9 ) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $2 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 September 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 September 30, 2014
Long/short equity funds	$ 292,086	31 %	Quarterly, Semi-annually	45-60 days
Multi-strategy funds	315,480	33 %	Quarterly, Semi-annually	60-95 days
Event-driven funds	188,397	20 %	Quarterly, Annually	45-60 days
Leveraged bank loan funds	9,904	1 %	Quarterly	65 days
Direct lending funds	43,836	5 %	n/a	n/a
CLO - Equities	97,133	10 %	n/a	n/a
Total other investments	$ 946,836	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 primarily 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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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 September 30, 2014 , $71 million ( 2013 : $99 million ), representing 9% ( 2013 : 10% ) of our total hedge funds, relate to holdings where we are still within the lockup period. The expiration of these lockup periods range from September 2014 to April 2016.

At September 30, 2014 , $6 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 2015.

At September 30, 2014 , we have $67 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 the fourth quarter of 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 September 30, 2014 , $41 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 the third quarter of 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 September 30, 2014 , the full amount of our commitment was funded 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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INVESTMENTS (CONTINUED)

c) Net Investment Income

Net investment income was derived from the following sources:

	Three months ended September 30, — 2014		2013		Nine months ended September 30, — 2014		2013
Fixed maturities	$ 74,996		$ 74,691		$ 226,475		$ 218,877
Other investments	(3,384	)	32,127		45,868		87,406
Equity securities	2,022		3,871		9,609		8,419
Cash and cash equivalents	2,081		382		9,127		2,915
Short-term investments	141		127		600		1,056
Gross investment income	75,856		111,198		291,679		318,673
Investment expenses	(9,294	)	(7,769	)	(27,508	)	(23,223	)
Net investment income	$ 66,562		$ 103,429		$ 264,171		$ 295,450

d) Net Realized Investment Gains (Losses)

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

	Three months ended September 30, — 2014		2013		Nine months ended September 30, — 2014		2013
Gross realized gains
Fixed maturities and short-term investments	$ 17,638		$ 27,631		$ 78,057		$ 94,617
Equities	81,888		11,985		133,764		48,266
Gross realized gains	99,526		39,616		211,821		142,883
Gross realized losses
Fixed maturities and short-term investments	(8,527	)	(26,454	)	(56,623	)	(73,266	)
Equities	(7,120	)	(2,001	)	(12,104	)	(9,011	)
Gross realized losses	(15,647	)	(28,455	)	(68,727	)	(82,277	)
Net OTTI recognized in earnings	(9,431	)	(2,811	)	(12,121	)	(8,836	)
Change in fair value of investment derivatives (1)	3,000		(13,058	)	(9,644	)	4,234
Net realized investment gains (losses)	$ 77,448		$ (4,708	)	$ 121,329		$ 56,004

(1) Refer to Note 5 – Derivative Instruments

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INVESTMENTS (CONTINUED)

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

	Three months ended September 30, — 2014	2013	Nine months ended September 30, — 2014	2013
Fixed maturities:
Non-U.S. government	$ 3,380	$ 94	$ 5,192	$ 120
Corporate debt	1,031	1,811	1,112	5,761
Non-Agency RMBS	—	57	—	57
ABS	—	—	56	129
Municipals	418	639	418	639
	4,829	2,601	6,778	6,706
Equity Securities
Common stocks	—	207	741	1,607
Exchange-traded funds	4,602	3	4,602	523
	4,602	210	5,343	2,130
Total OTTI recognized in earnings	$ 9,431	$ 2,811	$ 12,121	$ 8,836

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 September 30, — 2014		2013		Nine months ended September 30, — 2014		2013
Balance at beginning of period	$ 1,581		$ 1,699		$ 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	(23	)	(110	)	(36	)	(220	)
Balance at end of period	$ 1,558		$ 1,589		$ 1,558		$ 1,589

e) Reverse Repurchase Agreements

At September 30, 2014 , we held $ 101 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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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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FAIR VALUE MEASUREMENTS (CONTINUED)

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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FAIR VALUE MEASUREMENTS (CONTINUED)

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 September 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 30, 2014
Assets
Fixed maturities
U.S. government and agency	$ 1,390,737	$ 128,731	$ —	$ 1,519,468
Non-U.S. government	—	1,138,922	—	1,138,922
Corporate debt	—	4,250,796	—	4,250,796
Agency RMBS	—	2,120,947	—	2,120,947
CMBS	—	939,897	14,620	954,517
Non-Agency RMBS	—	78,395	—	78,395
ABS	—	1,375,330	60,535	1,435,865
Municipals	—	945,774	—	945,774
	1,390,737	10,978,792	75,155	12,444,684
Equity securities
Common stocks	63,145	—	—	63,145
Exchange-traded funds	450,676	—	—	450,676
Non-U.S. bond mutual funds	—	115,681	—	115,681
	513,821	115,681	—	629,502
Other investments
Hedge funds	—	361,376	444,491	805,867
Direct lending funds	—	—	43,836	43,836
CLO - Equities	—	—	97,133	97,133
	—	361,376	585,460	946,836
Short-term investments	—	114,428	—	114,428
Derivative instruments (see Note 5)	—	16,591	228	16,819
Total Assets	$ 1,904,558	$ 11,586,868	$ 660,843	$ 14,152,269
Liabilities
Derivative instruments (see Note 5)	$ —	$ 10,469	$ 7,646	$ 18,115
Cash settled awards (see Note 7)	—	14,106	—	14,106
Total Liabilities	$ —	$ 24,575	$ 7,646	$ 32,221
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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 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	$ 17,810		Discounted cash flow	Credit spreads	3.4%	3.4%
				Illiquidity discount (1)	5.0%	5.0%
	42,725		Broker-dealer quote	n/a	n/a	n/a
	$ 60,535
Other investments - CLO - Equities	$ 37,420		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	3.2 - 4.4 years	3.9 years
	59,713		Net asset value	n/a	n/a	n/a
	$ 97,133
Derivatives - Weather derivatives, net	$ (7,418	)	Simulation model	Weather curve	33 - 2930 (2)	n/a (3)
				Weather standard deviation	3 - 305 (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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FAIR VALUE MEASUREMENTS (CONTINUED)

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 30, 2014
Fixed maturities
Corporate debt	$ —	$ —	$ —		$ —		$ —		$ —	$ —	$ —		$ —	$ —
Non-Agency RMBS	—	—	—		—		—		—	—	—		—	—
CMBS	3,933	10,795	—		—		(31	)	—	—	(77	)	14,620	—
ABS	30,883	42,039	—		—		882		—	—	(13,269	)	60,535	—
	34,816	52,834	—		—		851		—	—	(13,346	)	75,155	—
Other investments
Hedge funds	476,808	—	(32,255	)	(4,205	)	—		6,000	—	(1,857	)	444,491	(4,344	)
Direct lending funds	33,467	—	—		627		—		10,086	—	(344	)	43,836	627
CLO - Equities	91,106	—	—		5,729		—		6,674	—	(6,376	)	97,133	5,729
	601,381	—	(32,255	)	2,151		—		22,760	—	(8,577	)	585,460	2,012
Other assets
Derivative instruments	—	—	—		228		—		—	—	—		228	228
	—	—	—		228		—		—	—	—		228	228
Total assets	$ 636,197	$ 52,834	$ (32,255	)	$ 2,379		$ 851		$ 22,760	$ —	$ (21,923	)	$ 660,843	$ 2,240
Other liabilities
Derivative instruments	$ 750	$ —	$ —		$ (272	)	$ —		$ 7,587	$ —	$ (419	)	$ 7,646	$ 59
Total liabilities	$ 750	$ —	$ —		$ (272	)	$ —		$ 7,587	$ —	$ (419	)	$ 7,646	$ 59
Nine months ended September 30, 2014
Fixed maturities
Corporate debt	$ —	$ —	$ —		$ —		$ —		$ —	$ —	$ —		$ —	$ —
Non-Agency RMBS	—	—	—		—		—		—	—	—		—	—
CMBS	4,018	10,795	—		—		(74	)	—	—	(119	)	14,620	—
ABS	30,799	42,167	—		—		1,060		—	—	(13,491	)	60,535	—
	34,817	52,962	—		—		986		—	—	(13,610	)	75,155	—
Other investments
Hedge funds	461,055	—	(32,255	)	16,718		—		13,500	—	(14,527	)	444,491	16,579
Direct lending funds	22,134	—	—		1,546		—		20,831	—	(675	)	43,836	1,546
CLO - Equities	73,866	—	—		17,060		—		25,941	—	(19,734	)	97,133	17,060
	557,055	—	(32,255	)	35,324		—		60,272	—	(34,936	)	585,460	35,185
Other assets
Derivative instruments	984	—	—		5,239		—		—	—	(5,995	)	228	228
	984	—	—		5,239		—		—	—	(5,995	)	228	228
Total assets	$ 592,856	$ 52,962	$ (32,255	)	$ 40,563		$ 986		$ 60,272	$ —	$ (54,541	)	$ 660,843	$ 35,413
Other liabilities
Derivative instruments	$ 815	$ —	$ —		$ 624		$ —		$ 8,427	$ —	$ (2,220	)	$ 7,646	$ 59
Total liabilities	$ 815	$ —	$ —		$ 624		$ —		$ 8,427	$ —	$ (2,220	)	$ 7,646	$ 59

(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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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 September 30, 2013
Fixed maturities
Corporate debt	$ —	$ —	$ —		$ —		$ —		$ —	$ —		$ —		$ —	$ —
Non-Agency RMBS	—	—	—		—		—		—	—		—		—	—
CMBS	11,785	—	(6,915	)	—		(96	)	—	—		(714	)	4,060	—
ABS	54,125	34,700	—		—		1,048		—	—		(20,368	)	69,505	—
	65,910	34,700	(6,915	)	—		952		—	—		(21,082	)	73,565	—
Other investments
Hedge funds	444,220	—	—		13,233		—		—	—		(19,156	)	438,297	13,233
Direct lending funds	4,232	—	—		75		—		8,708	—		—		13,015	75
CLO - Equities	53,044	—	—		6,580		—		23,312	—		(12,736	)	70,200	6,580
	501,496	—	—		19,888		—		32,020	—		(31,892	)	521,512	19,888
Other assets
Derivative instruments	—	—	—		—		—		—	—		—		—	—
	—	—	—		—		—		—	—		—		—	—
Total assets	$ 567,406	$ 34,700	$ (6,915	)	$ 19,888		$ 952		$ 32,020	$ —		$ (52,974	)	$ 595,077	$ 19,888
Other liabilities
Derivative instruments	$ —	$ —	$ —		$ —		$ —		$ —	$ —		$ —		$ —	$ —
Total liabilities	$ —	$ —	$ —		$ —		$ —		$ —	$ —		$ —		$ —	$ —
Nine months ended September 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	(6,915	)	—		(243	)	—	—		(1,460	)	4,060	—
ABS	63,975	34,700	(213,212	)	(112	)	2,029		212,889	(10,190	)	(20,574	)	69,505	—
	70,931	43,082	(221,350	)	1,438		1,921		212,889	(13,290	)	(22,056	)	73,565	—
Other investments
Hedge funds	359,996	29,953	—		38,723		—		50,000	—		(40,375	)	438,297	38,723
Direct lending funds	—	—	—		75		—		12,940	—		—		13,015	75
CLO - Equities	62,435	—	—		21,605		—		23,312	—		(37,152	)	70,200	21,605
	422,431	29,953	—		60,403		—		86,252	—		(77,527	)	521,512	60,403
Other assets
Derivative instruments	—	—	—		—		—		—	—		—		—	—
	—	—	—		—		—		—	—		—		—	—
Total assets	$ 493,362	$ 73,035	$ (221,350	)	$ 61,841		$ 1,921		$ 299,141	$ (13,290	)	$ (99,583	)	$ 595,077	$ 60,403
Other liabilities
Derivative instruments	$ —	$ —	$ —		$ —		$ —		$ —	$ —		$ —		$ —	$ —
Total liabilities	$ —	$ —	$ —		$ —		$ —		$ —	$ —		$ —		$ —	$ —

(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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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

The transfers to Level 3 from Level 2 made during the three and nine months ended September 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 nine months ended September 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 for certain fixed maturities.

Transfers out of Level 3 into Level 2

The transfers to Level 2 from Level 3 made during the three and nine months ended September 30, 2014 related to certain hedge funds where we have the ability to liquidate holdings at the reported NAV in the near term due to the expiry of lockup provisions. The transfers to Level 2 from Level 3 made during the three and nine months ended September 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 September 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 September 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 $1,593 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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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.

	September 30, 2014 — Derivative Notional Amount	Derivative Asset Fair Value (1)	Derivative Liability Fair Value (1)	December 31, 2013 — Derivative Notional Amount	Derivative Asset Fair Value (1)	Derivative Liability Fair Value (1)
Derivatives not designated as hedging instruments
Relating to investment portfolio:
Foreign exchange forward contracts	$ 167,105	$ 5,175	$ 11	$ 254,023	$ 1,214	$ 1,032
Interest rate swaps	346,250	—	624	281,250	873	—
Relating to underwriting portfolio:
Foreign exchange forward contracts	616,539	316	9,834	390,663	4,737	120
Weather-related contracts	53,017	228	7,646	24,451	984	815
Commodity contracts	$ 100,850	11,100	—	$ —	—	—
Total derivatives		$ 16,819	$ 18,115		$ 7,808	$ 1,967

(1) Asset and liability derivatives are classified within other assets and other liabilities in 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.

	September 30, 2014 — Gross Amounts	Gross Amounts Offset		Net Amounts (1)	December 31, 2013 — Gross Amounts	Gross Amounts Offset		Net Amounts (1)
Derivative assets	$ 25,823	$ (9,004	)	$ 16,819	$ 9,796	$ (1,988	)	$ 7,808
Derivative liabilities	$ 27,119	$ (9,004	)	$ 18,115	$ 3,955	$ (1,988	)	$ 1,967

(1) Net asset and liability derivatives are classified within other assets and other liabilities in 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 foreign currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.

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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 September 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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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 September 30,				Nine months ended September 30,
		2014		2013		2014		2013
Derivatives not designated as hedging instruments
Relating to investment portfolio:
Foreign exchange forward contracts	Net realized investment gains (losses)	$ 7,034		$ (7,802	)	$ 3,350		$ 9,222
Interest rate swaps	Net realized investment gains (losses)	(4,034	)	(5,256	)	(12,994	)	(4,988	)
Relating to underwriting portfolio:
Foreign exchange forward contracts	Foreign exchange losses (gains)	(21,915	)	(2,697	)	(8,784	)	(4,895	)
Weather-related contracts	Other insurance related income	668		—		4,730		—
Commodity contracts	Other insurance related income	7,530		—		9,243		—
Total		$ (10,717	)	$ (15,755	)	$ (4,455	)	$ (661	)

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:

Nine months ended September 30, — Gross reserve for losses and loss expenses, beginning of period	2014 — $ 9,582,140		2013 — $ 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	1,855,482		1,759,483
Prior years	(193,385	)	(176,648	)
	1,662,097		1,582,835
Net paid losses and loss expenses related to:
Current year	(202,364	)	(168,564	)
Prior years	(1,165,215	)	(1,028,401	)
	(1,367,579	)	(1,196,965	)
Foreign exchange and other	(139,313	)	(17,265	)
Net reserve for unpaid losses and loss expenses, end of period	7,837,233		7,601,719
Reinsurance recoverable on unpaid losses, end of period	1,914,670		1,882,797
Gross reserve for losses and loss expenses, end of period	$ 9,751,903		$ 9,484,516

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 30, — 2014	2013	Nine months ended September 30, — 2014	2013
Insurance	$ 9,488	$ 34,065	$ 54,059	$ 46,355
Reinsurance	55,050	45,970	139,326	130,293
Total	$ 64,538	$ 80,035	$ 193,385	$ 176,648

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 professional and liability reinsurance lines in the three and nine months ended September 30, 2014 and 2013 also contributed and was partially offset by unfavorable prior year reserve development in the liability insurance lines.

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 $61 million and $57 million of the total net favorable prior year reserve development for the three months ended September 30, 2014 and 2013 , respectively. For the nine months ended September 30, 2014 and 2013 , these short-tail lines contributed $162 million and $119 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 $26 million in the three months ended September 30, 2013 and $12 million and $64 million in the nine months ended September 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 2005 through 2008 accident years.

Our medium-tail business consists primarily of professional insurance and reinsurance lines and credit and surety reinsurance business. Our professional lines reinsurance business contributed further net favorable prior year reserve development of $10 million in both the three months ended September 30, 2014 and 2013 and $22 million and $20 million in the nine months ended September 30, 2014 and 2013, 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 2010 and prior. As our loss experience has generally been better than expected, this resulted in the recognition of favorable development.

In the three months ended September 30, 2014 we recorded adverse prior year reserve development of $14 million in our insurance liability lines relating primarily to an increase in loss estimates for two specific claims. Our credit and surety line recorded an adverse development of $15 million in the three months ended September 30, 2013 primarily reflecting recent claim developments on certain European bond exposures.

The frequency and severity of natural catastrophe and weather activity was high in recent years and our September 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.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SHARE-BASED COMPENSATION

For the three months ended September 30, 2014 , we incurred share-based compensation costs of $18 million ( 2013 : $14 million ) and recorded associated tax benefits of $4 million ( 2013 : $3 million ). For the nine months ended September 30, 2014 , we incurred share-based compensation costs of $54 million (2013: $45 million ) and recorded tax benefits thereon of $10 million (2013: $8 million ).

The fair value of shares vested during the nine months ended September 30, 2014 was $66 million ( 2013 : $68 million ). At September 30, 2014 there were $130 million of unrecognized share-based compensation costs, which are expected to be recognized over the weighted average period of 2.4 years .

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 nine months ended September 30, 2014 :

	Performance-based Stock Awards — Number of Restricted Stock	Weighted Average Grant Date Fair Value	Service-based Stock Awards — 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	1,038		44.42
Vested	—	—	(1,440	)	33.82
Forfeited	—	—	(193	)	36.77
Nonvested restricted stock - end of period	351	$ 37.41	2,835		$ 38.54

Cash-settled awards

During 2014 we also granted 1,003,226 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 980,389 restricted stock units are service based. At September 30, 2014, the corresponding liability for cash-settled units, included in other liabilities on the Consolidated Balance Sheet, was $14 million (2013: $6 million ).

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

EARNINGS PER COMMON SHARE

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

	Three months ended September 30, — 2014		2013	Nine months ended September 30, — 2014		2013
Basic earnings per common share
Net income	$ 282,966		$ 150,635	$ 633,693		$ 545,916
Less: noncontrolling interests	(6,160	)	—	(3,365	)	—
Less: preferred shares dividends	10,022		13,514	30,066		30,452
Less: loss on repurchase of preferred shares	—		—	—		3,081
Net income available to common shareholders	279,104		137,121	606,992		512,383
Weighted average common shares outstanding - basic	102,945		111,676	105,683		114,606
Basic earnings per common share	$ 2.71		$ 1.23	$ 5.74		$ 4.47
Diluted earnings per common share
Net income available to common shareholders	$ 279,104		$ 137,121	$ 606,992		$ 512,383
Weighted average common shares outstanding - basic	102,945		111,676	105,683		114,606
Stock compensation plans	1,302		1,679	1,270		1,608
Weighted average common shares outstanding - diluted	104,247		113,355	106,953		116,214
Diluted earnings per common share	$ 2.68		$ 1.21	$ 5.68		$ 4.41
Anti-dilutive shares excluded from the dilutive computation	3		54	376		334

SHAREHOLDERS' EQUITY

The following table presents our common shares issued and outstanding:

	Three months ended September 30, — 2014		2013		Nine months ended September 30, — 2014		2013
Shares issued, balance at beginning of period	175,315		173,906		174,134		171,867
Shares issued	84		71		1,265		2,110
Total shares issued at end of period	175,399		173,977		175,399		173,977
Treasury shares, balance at beginning of period	(71,409	)	(62,318	)	(64,649	)	(53,947	)
Shares repurchased	(3,169	)	(11	)	(10,263	)	(8,502	)
Shares reissued from treasury	6		3		340		123
Total treasury shares at end of period	(74,572	)	(62,326	)	(74,572	)	(62,326	)
Total shares outstanding	100,827		111,651		100,827		111,651

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SHAREHOLDERS' EQUITY (CONTINUED)

Treasury Shares

The following table presents our share repurchases:

	Three months ended September 30, — 2014	2013	Nine months ended September 30, — 2014	2013
In the open market:
Total shares	3,159	—	9,838	5,048
Total cost	$ 150,000	$ —	$ 450,000	$ 225,000
Average price per share (1)	$ 47.49	$ —	$ 45.74	$ 44.57
From employees:
Total shares	10	11	425	454
Total cost	$ 449	$ 489	$ 18,532	$ 18,413
Average price per share (1)	$ 45.39	$ 44.12	$ 43.65	$ 40.56
From founding shareholder: (2)
Total shares	—	—	—	3,000
Total cost	$ —	$ —	$ —	$ 116,100
Average price per share (1)	$ —	$ —	$ —	$ 38.70
Total shares repurchased:
Total shares	3,169	11	10,263	8,502
Total cost	$ 150,449	$ 489	$ 468,532	$ 359,513
Average price per share (1)	$ 47.48	$ 44.12	$ 45.65	$ 42.29

(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.

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.

Following the formation of Ventures Re, third party investors purchased $50 million of Class A non-voting redeemable preferred share capital issued by this entity. The Ventures Re Class A preferred shares are redeemable at the sole discretion of Ventures Re's Board of Directors. During the third quarter of 2014, $10 million was returned to the Ventures Re Class A preferred share capital holders as part of a reduction of Ventures Re's share premium account.

During the third quarter of 2014, third party investors purchased $25 million of Class B non-voting redeemable preferred share capital issued by Ventures Re. The Venture Re Class B preferred shares are redeemable at the sole discretion of Ventures Re's Board of Directors.

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.

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NONCONTROLLING INTERESTS (CONTINUED)

At September 30, 2014 , total assets of Ventures Re were $103 million (2013: $50 million ), consisting primarily of cash and cash equivalents and insurance receivables. Total liabilities were $41 million (2013: $ nil ) consisting primarily of loss reserves and 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.

The reconciliation of the beginning and ending balance of the noncontrolling interests in Ventures Re for the nine months ended September 30, 2014 was as follows:

	Total
	2014
Balance at January 1, 2014	$ 50,000
Increase from issuance of preferred equity to noncontrolling interests	25,000
Decrease from return of capital to noncontrolling interests	(10,000	)
Amounts attributable to (from) noncontrolling interests	(3,365	)
Balance at September 30, 2014	$ 61,635

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 September 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 September 30, 2014 , we incurred interest expense of $20 million ( 2013 : $15 million ) and for the nine months ended September 30, 2014 we incurred $55 million (2013: $44 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").

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

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.

We are party to a $750 million letter of credit facility (the "LOC Facility") in addition to the Credit Facility. At September 30, 2014 , letters of credit outstanding under the the LOC Facility and the Credit Facility totaled $429 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 September 30, 2014 .

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 September 30, 2014 , we have outstanding reinsurance purchase commitments of $93 million relating to these annual and multi-year agreements.

Refer ' Note 3 - Investments' for information on commitments related to our investment portfolio.

OTHER COMPREHENSIVE INCOME (LOSS)

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

	2014 — Before Tax Amount		Tax (Expense) Benefit		Net of Tax Amount		2013 — Before Tax Amount		Tax (Expense) Benefit		Net of Tax Amount
Three months ended September 30,
Available for sale investments:
Unrealized gains (losses) arising during the period	$ (176,278	)	$ 9,218		$ (167,060	)	$ 118,821		$ (8,181	)	$ 110,640
Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income	(74,306	)	1,636		(72,670	)	(8,215	)	(442	)	(8,657	)
Unrealized gains (losses) arising during the period, net of reclassification adjustment	(250,584	)	10,854		(239,730	)	110,606		(8,623	)	101,983
Non-credit portion of OTTI losses	—		—		—		—		—		—
Foreign currency translation adjustment	(10,000	)	—		(10,000	)	3,635		—		3,635
Total other comprehensive income (loss), net of tax	$ (260,584	)	$ 10,854		$ (249,730	)	$ 114,241		$ (8,623	)	$ 105,618
Nine months ended September 30,
Available for sale investments:
Unrealized gains (losses) arising during the period	$ 37,858		$ (12,984	)	$ 24,874		$ (188,808	)	$ 18,022		$ (170,786	)
Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income	(130,634	)	14,421		(116,213	)	(51,166	)	4,595		(46,571	)
Unrealized losses arising during the period, net of reclassification adjustment	(92,776	)	1,437		(91,339	)	(239,974	)	22,617		(217,357	)
Non-credit portion of OTTI losses	—		—		—		—		—		—
Foreign currency translation adjustment	(3,551	)	—		(3,551	)	(14,892	)	—		(14,892	)
Total other comprehensive loss, net of tax	$ (96,327	)	$ 1,437		$ (94,890	)	$ (254,866	)	$ 22,617		$ (232,249	)

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AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 30,				Nine months ended September 30,
		2014		2013		2014		2013
Unrealized appreciation on available for sale investments
	Other realized investment gains (losses)	$ 83,737		$ 11,026		$ 142,755		$ 60,002
	OTTI losses	(9,431	)	(2,811	)	(12,121	)	(8,836	)
	Total before tax	74,306		8,215		130,634		51,166
	Income tax expense (benefit)	(1,636	)	442		(14,421	)	(4,595	)
	Net of tax	$ 72,670		$ 8,657		$ 116,213		$ 46,571

(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 Financial Condition and Results of Operations 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
Third Quarter 2014 Financial Highlights	40
Executive Summary	41
Underwriting Results – Group	46
Results by Segment: For the three and nine months ended September 30, 2014 and 2013	54
i) Insurance Segment	54
ii) Reinsurance Segment	57
Other Expenses (Revenues), Net	60
Net Investment Income and Net Realized Investment Gains (Losses)	61
Cash and Investments	64
Liquidity and Capital Resources	66
Critical Accounting Estimates	68
New Accounting Standards	69
Off-Balance Sheet and Special Purpose Entity Arrangements	69
Non-GAAP Financial Measures	69

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THIRD QUARTER 2014 FINANCIAL HIGHLIGHTS

Third Quarter 2014 Consolidated Results of Operations

• Net income available to common shareholders of $279 million , or $2.71 per common share and $2.68 per diluted common share

• Operating income of $133 million , or $1.27 per diluted common share (1)

• Gross premiums written of $897 million

• Net premiums written of $687 million

• Net premiums earned of $966 million

• Net favorable prior year reserve development of $65 million

• Estimated natural catastrophe and weather-related pre-tax net losses of $22 million, primarily related to weather events in North America.

• Underwriting income of $113 million and combined ratio of 92.2%

• Net investment income of $67 million

• Net realized investment gains of $77 million

Third Quarter 2014 Consolidated Financial Condition

• Total cash and investments of $15.5 billion ; fixed maturities, cash and short-term securities comprise 90% of total cash and investments and have an average credit rating of AA-

• Total assets of $21.0 billion

• Reserve for losses and loss expenses of $9.8 billion and reinsurance recoverable of $1.9 billion

• Total debt of $1.5 billion and the debt to total capital ratio was 20.4%

• Repurchased 3.2 million common shares for a total cost of $150 million ; at October 31, 2014 the remaining authorization under the repurchase program approved by our Board of Directors was $300 million

• Common shareholders’ equity of $5.2 billion and diluted book value per common share of $49.88

(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 nine 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 September 30, — 2014		% Change	2013		Nine months ended September 30, — 2014		% Change	2013
Underwriting income:
Insurance	$ 15,584		(82%)	$ 88,722		$ 45,022		(39%)	$ 74,226
Reinsurance	97,880		52%	64,366		303,788		17%	259,584
Net investment income	66,562		(36%)	103,429		264,171		(11%)	295,450
Net realized investment gains (losses)	77,448		nm	(4,708	)	121,329		117%	56,004
Other revenues (expenses), net	25,492		nm	(101,174	)	(100,617	)	(28%)	(139,348	)
Net income	282,966		88%	150,635		633,693		16%	545,916
Amounts attributable (to) from noncontrolling interests	6,160		nm	—		3,365		nm	—
Preferred share dividends	(10,022	)	(26%)	(13,514	)	(30,066	)	(1%)	(30,452	)
Loss on repurchase of preferred shares	—		—%	—		—		nm	(3,081	)
Net income available to common shareholders	$ 279,104		104%	$ 137,121		$ 606,992		18%	$ 512,383
Operating income	$ 132,770		(32%)	$ 196,677		$ 442,581		(7%)	$ 474,215

nm – not meaningful

Underwriting Results

Total underwriting income in the three months ended September 30, 2014 was $113 million , a decrease of $40 million compared to $153 million in the three months ended September 30, 2013 . The decrease in underwriting income was primarily driven by an increase in the current accident year loss ratio, after adjusting for the impact of the natural catastrophe and weather-related events, driven by an increase in loss reserves in our reinsurance agriculture business, changes in the business mix across both of our segments and an increase in the loss ratios in the insurance property lines which were impacted by an increased level of mid-size and attritional losses in recent periods. The decrease in the underwriting income was also impacted by a $15 million decrease in net favorable prior year reserve development. These increases were partially offset by a decrease in losses relating to natural catastrophe and weather-related events of $29 million.

The insurance segment underwriting income decreased by $73 million in the three months ended September 30, 2014, compared to the three months ended September 30, 2013. The reduction was primarily due to an increase in the current accident year loss ratio, reflecting an increase of $19 million in the natural catastrophe and weather-related losses incurred, an increase in the loss ratios in the property lines which were impacted by an increased level of of mid-size and attritional losses in recent periods and a change in the business mix. A reduction in net favorable prior year reserve development of $25 million also contributed to the decrease in the underwriting income.

The reinsurance segment underwriting income increased by $34 million in the three months ended September 30, 2014 compared to the three months ended September 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 of $48 million and a decrease in attritional losses, most notably in the credit and surety lines, which were partially offset by an increase in agriculture loss reserves and business mix changes. An increase in net favorable prior year reserve development of $9 million also contributed to the increase in the underwriting income.

In the nine months ended September 30, 2014, total underwriting income increased by $15 million to $349 million, compared to $334 million for the nine months ended September 30, 2013. The increase in underwriting income was primarily driven by a reduction in losses incurred as the result of natural catastrophe and weather-related events and an increase in net favorable prior year reserve development. These increases were partially offset by an increase in the current accident year loss ratio, after adjusting for the impact of the natural catastrophe and weather-related events, and an increase in the acquisition costs across both segments.

Underwriting income for our insurance segment decreased by $29 million to $45 million in the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, primarily driven by an increase in the current accident year loss ratio,

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after adjusting for natural catastrophe and weather-related losses, due to an increase in the loss ratios in the property and professional lines which were impacted by an increased level of of mid-size and attritional losses in recent periods, and a change in the business mix. The decrease in underwriting income was also impacted by an increase in acquisition costs and was partially offset by a $42 million decrease in natural catastrophe and weather-related losses and an $8 million increase in net favorable prior year reserve development.

Our reinsurance segment underwriting income improved by $44 million to $304 million in the nine months ended September 30, 2014 compared to the same period in 2013. The improvement was primarily due to a decrease in the current accident year loss ratio, driven by a decrease in the level of natural catastrophe and weather-related losses which was partially offset by an increase in the loss reserves for the agriculture lines of business and a change in the business mix. The improvement was partially offset by an increase in the segment's acquisition costs.

Net Investment Income

Net investment income was $67 million in the three months ended September 30, 2014, a decrease of $36 million from $103 million in the three months ended September 30, 2013. The decrease was primarily driven by our other investments; these investments produced a $3 million loss this quarter, compared to $32 million of income in the third quarter of 2013. Net investment income for the nine months ended September 30, 2014 was $264 million, a decrease of $31 million compared to the same period in 2013. The decrease was mainly attributable to income from other investments. Income from other investments decreased in both periods as a result of a decrease in income from hedge funds. Income from hedge funds is impacted by the performance of the global equity markets which declined during the three months ended September 30, 2014.

Net Realized Investment Gains (Losses)

During the three and nine months ended September 30, 2014, we realized gains of $75 million and $122 million respectively, on the sale of equities. These gains reflect the strong performance of the global equity markets during the second half of 2013 and the first half of 2014. The proceeds were used to fund additional allocations to exchange-traded funds ("ETF's"). Other-than-temporary impairment ("OTTI") charges were $7 million and $3 million higher, respectively, in the three and nine month periods ended September 30, 2014, respectively. Net realized investment gains (losses) also included net gains of $3 million and losses of $10 million relating to the change in fair value of investment derivatives during the three and nine month periods of 2014, respectively, reflecting net gains on foreign exchange forward contracts used to manage foreign currency risk on the investment portfolio, offset by losses relating to interest rate swaps used to hedge interest rate risk for certain parts of our fixed maturity portfolio.

Other Revenues (Expenses), Net

Foreign exchange gains for the three months and nine months ended September 30, 2014 were $72 million and $58 million respectively, compared to foreign exchange losses of $57 million and $12 million for the three and nine months ended September 30, 2013, respectively, and reflected the re-measurement into U.S. Dollars of our foreign denominated net insurance related liabilities.

Excluding the movements in foreign exchange, other expenses increased by $2 million and $31 million in the three and nine months ended September 30, 2014 respectively. The increase was impacted by growth in corporate expenses which was driven by an increase in personnel expenses, professional fees 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 and was partially offset by lower income tax expense which was impacted by the geographical distribution of our net income.

Amounts Attributable (to) from Noncontrolling Interests

Amounts attributable (to) from noncontrolling interests related to amounts for the three month and nine months ended September 30, 2014, attributable from the third party investors in Ventures Re. Refer Item 1, Note 10 to our Consolidated Financial Statements for additional information.

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Preferred Share Dividends

The decrease in preferred share dividends in the three months ended September 30, 2014 compared to the three months ended September 30, 2013 related to the accrual during the third quarter of 2013 of dividends relating to the preferred shares Series D issuance which were due for payment during the fourth quarter of 2013.

Outlook

Insurance markets, which had seen positive price movements in recent periods, have seen a general slowdown or leveling off of market conditions with downward pressures on rates noted in certain lines of business. However, despite the slowdown in pricing, there remain good fundamentals and opportunities for profitable growth in many lines of business with access to the business and risk selection becoming increasingly important differentiators in the market. We continue to observe better opportunities in the U.S., especially in the casualty lines where pricing remains strong, compared to international markets.

In reinsurance markets, continued excess capacity driven by strong balance sheets of established market participants, increased interest from alternative capital investors and consolidation of reinsurance buying continue to pressure reinsurance pricing across most territories and lines of business, with softening in terms and conditions also observed. The market is evolving with innovative solutions, such as multi-year arrangements, in great demand. While the outlook is for continuing competitive global reinsurance market conditions we believe that that highly-rated, global, multi-line reinsurers with technical strength, excellent service and strong relationships are best placed to mitigate the worst effects of a highly competitive market and for taking advantage of market opportunities as they arise.

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 September 30, — 2014	2013	Nine months ended and at September 30, — 2014	2013
ROACE (annualized) (1)	21.2 %	10.9 %	15.6 %	13.1 %
Operating ROACE (annualized) (2)	10.1 %	15.6 %	11.4 %	12.1 %
DBV per common share (3)	$ 49.88	$ 44.60	$ 49.88	$ 44.60
Cash dividends declared per common share	$ 0.27	$ 0.25	$ 0.81	$ 0.75
Increase in diluted book value per common share adjusted for dividends	$ 0.46	$ 2.18	$ 4.89	$ 2.38

(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 September 30, 2014 compared to the three months ended September 30, 2013 was driven by the increase in foreign exchange gains, which were impacted by the strengthening of the U.S. Dollar during the quarter, and an increase in net realized investment gains which were partially offset by a decrease in underwriting and net investment income. The increase in ROACE for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 reflected increases in foreign exchange gains, net realized investment gains and underwriting income which were partially offset by a decrease in net investment income and an increase in corporate expenses. As operating ROACE excludes the impact of net realized investment gains and foreign exchange gains, operating ROACE for the three and nine months ended September 30, 2014 decreased compared to the three and nine months ended September 30, 2013.

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Diluted Book Value per Common Share

Our DBV per common share increase of 12% from $44.60 at September 30, 2013 to $49.88 at September 30, 2014 primarily reflected the generation of $779 million in net income available to common shareholders over the past twelve months. This increase was partially offset by the decrease in unrealized gains on investments, included in accumulated other comprehensive income, due to movements in foreign exchange, sales of equities and widening of credit spreads, and 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 and nine months ended September 30, 2014, the diluted book value per common share adjusted for dividends grew by $0.46 and $4.89, or 1% and 11%, respectively, driven primarily by our diluted net income per share of $2.68 and $5.68, respectively, which were partially offset by decreases in unrealized gains on investments included in other comprehensive income.

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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 September 30, — 2014	% Change	2013		Nine months ended September 30, — 2014	% Change	2013
Revenues:
Gross premiums written	$ 896,814	(1%)	$ 904,797		$ 3,949,479	2%	$ 3,871,085
Net premiums written	687,223	(4%)	716,389		3,351,958	2%	3,280,236
Net premiums earned	966,138	2%	945,242		2,912,482	5%	2,765,154
Other insurance related income	7,702	nm	725		12,468	nm	1,756
Expenses:
Current year net losses and loss expenses	(616,602	)	(581,557	)	(1,855,482	)	(1,759,483	)
Prior year reserve development	64,538		80,035		193,385		176,648
Acquisition costs	(185,950	)	(173,682	)	(549,848	)	(488,892	)
Underwriting-related general and administrative
expenses (1)	(122,362	)	(117,675	)	(364,195	)	(361,373	)
Underwriting income (2)(3)	$ 113,464	(26%)	$ 153,088		$ 348,810	4%	$ 333,810
General and administrative expenses (1)	$ 152,916		$ 140,699		$ 456,725		$ 431,207
Income before income taxes (2)	$ 278,868		$ 156,665		$ 643,220		$ 557,416

nm – not meaningful

(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 $30,554 and $23,024 for the three months ended September 30, 2014 and 2013 , respectively, and $92,530 and $69,834 for the nine months ended September 30, 2014 and 2013, respectively; 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.

(3) AXIS Capital cedes certain of its reinsurance business to AXIS Ventures Reinsurance Limited ("Ventures Re"), the Company's third-party capital vehicle, on a fully collateralized basis. The collateral has been provided by third party investors. Ventures Re is a variable interest entity and AXIS Capital has been determined to be its primary beneficiary. Following this determination Ventures Re is consolidated in the Consolidated Financial Statements of AXIS Capital and the net impact of the cessions has been included in amounts attributable to (from) noncontrolling interests. For the three and nine months ended September 30, 2014 amounts attributable from noncontrolling interests were $6,160 and $3,365 respectively. For the three and nine months ended September 30, 2013 amounts attributable from noncontrolling interests were $nil. Refer to Item 1, Note 10 to the Consolidated Financial Statements for more information.

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UNDERWRITING REVENUES

Premiums Written:

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

	Gross Premiums Written
	Three months ended September 30,			Nine months ended September 30,
	2014	% Change	2013	2014	% Change	2013
Insurance	$ 555,283	(3%)	$ 574,778	$ 1,911,102	(2%)	$ 1,952,548
Reinsurance	341,531	3%	330,019	2,038,377	6%	1,918,537
Total	$ 896,814	(1%)	$ 904,797	$ 3,949,479	2%	$ 3,871,085
% ceded
Insurance	35%	3 pts	32%	29%	0 pts	29%
Reinsurance	5%	3 pts	2%	2%	1 pts	1%
Total	23%	2 pts	21%	15%	0 pts	15%
	Net Premiums Written
	Three months ended September 30,			Nine months ended September 30,
	2014	% Change	2013	2014	% Change	2013
Insurance	$ 363,571	(8%)	$ 393,627	$ 1,361,351	(2%)	$ 1,385,892
Reinsurance	323,652	—%	322,762	1,990,607	5%	1,894,344
Total	$ 687,223	(4%)	$ 716,389	$ 3,351,958	2%	$ 3,280,236

Gross premiums written in the three months ended September 30, 2014 decreased by $8 million or 1% compared to the three months ended September 30, 2013, and the reduction was due to decreases in our insurance segment which were partially offset by growth in our reinsurance segment.

Our insurance segment's gross written premiums decreased by $19 million in the three months ended September 30, 2014, compared to the same period of 2013. The decrease was driven by the accident and health lines, primarily due to timing differences and a decrease in professional lines driven by the continued reshaping of our U.S. D&O portfolio. These decreases were partially offset by our aviation lines, which benefitted primarily from timing of certain renewals and new business.

The increase in our reinsurance segment of $12 million in the three months ended September 30, 2014, compared to the same period of 2013 was primarily driven by liability lines which were partially offset by decreases in the agriculture, professional and property lines. Gross premiums written during the third quarter were impacted by an increased level of contracts written on a multi-year basis with the liability lines increase primarily reflecting new multi-year treaty business growth. The decreases in the agriculture lines were driven by negative premium adjustments on certain 2014 contracts reflecting updated information from cedants. The decrease in professional lines was primarily due to non-renewals and reduced participations reflecting competitive market conditions. The decrease in property was due to negative premium adjustments resulting from updated information from cedants and treaty restructurings.

Gross premiums written in the nine months ended September 30, 2014 increased by $78 million or 2% compared to the nine months ended September 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 $120 million in the nine months ended September 30, 2014 compared to the same period of 2013 was significantly impacted by the number of treaties written on a multi-year basis in the liability, property, catastrophe and motor lines, and included an increase in the written premium that related to future underwriting years of $118 million. After adjusting for the impact of the multi-year contracts gross written premiums was comparable to the same period of 2013 with increases in

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liability, motor and agriculture lines offset by decreases in property and catastrophe. The liability increase was impacted by increased participations and an increase in favorable premium adjustments compared to 2013. The motor lines increase is primarily driven by increased participations on renewals while the agriculture increase reflects our growth initiatives in this line of business. The decreases in property and catastrophe were primarily due to non-renewals and reduced participations on treaties reflecting competitive market conditions.

The insurance segment decrease of $41 million in the nine months ended September 30, 2014, compared to the same period of 2013, was driven by property, with the decrease reflective of competitive market conditions, and 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, increases in aviation driven by timing of renewals and new business and increases in accident and health primarily reflecting higher insurance renewal premiums and continued strong new business production.

In the three months ended September 30, 2014 the ceded gross written premium ratio has increased by 2% compared to the quarter ended September 30, 2013 driven by an increase in the insurance segment, primarily due to additional reinsurance cessions on our professional lines and business mix changes, and an increase in the reinsurance segment, which reflected additional retrocessional covers primarily in the catastrophe and property lines.

In the first nine months of 2014, premiums ceded ratio has stayed consistent at 15% of gross premiums written, compared to the same period of 2013. Changes in our reinsurance purchasing program in the insurance segment 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 were offset by additional reinsurance cessions on our professional lines during the third quarter of 2014 and business mix changes, as well as 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 September 30, — 2014		2013		% Change	Nine months ended September 30, — 2014		2013		% Change
Insurance	$ 461,805	48 %	$ 448,072	47 %	3%	$ 1,368,683	47 %	$ 1,272,297	46 %	8%
Reinsurance	504,333	52 %	497,170	53 %	1%	1,543,799	53 %	1,492,857	54 %	3%
Total	$ 966,138	100 %	$ 945,242	100 %	2%	$ 2,912,482	100 %	$ 2,765,154	100 %	5%

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 both segments was primarily driven by growth in written premiums during recent quarters. In our insurance segment the increase reflects the expansion in the accident and health lines, an increase in our liability lines in recent periods and increases in professional lines business written in prior periods as well as the positive impact of the reductions in the ceded reinsurance programs implemented during 2013. These increases were partially offset by decreases in our property premiums written in recent periods. The reinsurance segment increase primarily reflected growth in our liability, motor and professional books of business. This growth was partially offset by decreases in catastrophe and property lines of business.

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UNDERWRITING EXPENSES

The following table provides a breakdown of our combined ratio:

	Three months ended September 30, — 2014		% Point Change	2013		Nine months ended September 30, — 2014		% Point Change	2013
Current accident year loss ratio	63.8	%	2.3	61.5	%	63.7	%	0.1	63.6	%
Prior year reserve development	(6.7	%)	1.7	(8.4	%)	(6.6	%)	(0.2)	(6.4	%)
Acquisition cost ratio	19.2	%	0.8	18.4	%	18.9	%	1.2	17.7	%
General and administrative expense ratio (1)	15.9	%	1.1	14.8	%	15.6	%	—	15.6	%
Combined ratio	92.2	%	5.9	86.3	%	91.6	%	1.1	90.5	%

(1) The general and administrative expense ratio includes corporate expenses not allocated to reportable segments of 3.2% and 2.4% for the three months ended September 30, 2014 and 2013 , respectively and 3.2% and 2.5% for the nine months ended September 30, 2014 and 2013, respectively. These costs are further discussed in the ‘ Other Expenses, Net ’ section.

Current Accident Year Loss Ratio

The increase in the current accident year loss ratio in the three months ended September 30, 2014 of 2.3 points compared to the same period in 2013, was primarily attributable to an increase in the reinsurance agriculture loss reserves following a significant drop in agriculture commodity prices during the quarter. In addition, a change in the business mix with a shift towards less volatile lines of business that attract a higher loss ratio also contributed to the increase. This was partially offset by a decrease in the losses related to natural catastrophe and weather-related events. During the third quarter of 2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $22 million primarily related to weather losses in North America. Comparatively during the third quarter of 2013, we recognized aggregate natural catastrophe and weather-related pre-tax net losses (net of related reinstatement premiums) of $51 million relating to worldwide weather-related loss events.

The current accident year loss ratio in the nine months ended September 30, 2014 of 63.7% was comparable to 63.6% reported in the nine months ended September 30, 2013. Changes in the business mix, an increase in the insurance property and professional lines loss ratios reflecting a higher level of loss activity in recent periods and the increase in the reinsurance agriculture loss reserves were the primary drivers of the increase for the current accident year loss ratio in the nine months ended September 30, 2014. This was offset by a decrease in the level of aggregate natural catastrophe and weather-related losses. During the nine months ended September 30, 2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $72 million primarily related to weather losses in North America. Comparatively during the first nine months of 2013, we recognized aggregate pre-tax natural catastrophe and weather-related net losses (net of related reinstatement premiums) of $203 million, primarily driven by worldwide flooding and weather-related events.

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 September 30, — 2014	2013	Nine months ended September 30, — 2014	2013
Insurance	$ 9,488	$ 34,065	$ 54,059	$ 46,355
Reinsurance	55,050	45,970	139,326	130,293
Total	$ 64,538	$ 80,035	$ 193,385	$ 176,648

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Overview

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 $61 million and $57 million of the total net favorable prior year reserve development for the three months ended September 30, 2014 , and 2013 , respectively. For the nine months ended September 30, 2014 and 2013 , these short-tail lines contributed $162 million and $119 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 the nine months ended September 30, 2014, included $29 million of favorable development across both segments relating to natural catastrophe and weather-related losses incurred during 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 of $26 million was recognized in the three months ended September 30, 2013 and $12 million and $64 million in the nine months ended September 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 2005 through 2008 accident years.

Our medium-tail business consists primarily of professional insurance and reinsurance lines and credit and surety reinsurance business. Our professional lines reinsurance business contributed further net favorable prior year reserve development of $10 million in both the three months ended September 30, 2014, and 2013 and $22 million and $20 million in the nine months ended September 30, 2014 , and 2013, 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 2010 and prior. As our loss experience has generally been better than expected, this resulted in the recognition of favorable development.

In the three months ended September 30, 2014, we recorded adverse prior year reserve development of $14 million in our insurance liability lines relating primarily to an increase in loss estimates for two specific claims. Our credit and surety line recorded an adverse development of $15 million in the three months ended September 30, 2013 primarily reflecting recent claim developments on certain European bond exposures.

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 September 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 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 September 30, — 2014		2013		Nine months ended September 30, — 2014		2013
Property and other	$ 19,543		$ 21,661		$ 49,019		$ 35,625
Marine	1,108		9,362		5,752		33,232
Aviation	2,807		326		8,454		6,083
Credit and political risk	(33	)	5,638		3,960		5,619
Professional lines	212		(2,830	)	444		(18,939	)
Liability	(14,149	)	(92	)	(13,570	)	(15,265	)
Total	$ 9,488		$ 34,065		$ 54,059		$ 46,355

In the three months ended September 30, 2014 , we recognized $9 million of net favorable prior year reserve development, the principal components of which were:

• $20 million of net favorable prior year reserve development on property and other business, related to the 2012 and prior accident years and driven by better than expected loss emergence.

• $14 million of net adverse prior year reserve development on liability business, related to specific claims impacting accident years 2008 and 2009.

In the three months ended September 30, 2013 , we recognized $34 million of net favorable prior year reserve development, the principal components of which were:

• $22 million of net favorable prior year reserve development on property and other business, largely related to the 2010 through 2012 accident years and driven by better than expected loss emergence.

• $9 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.

In the nine months ended September 30, 2014 , we recognized $54 million of net favorable prior year reserve development, the principal components of which were:

• $49 million of net favorable prior year reserve development on property and other business, related to the 2012 and prior accident years and driven by better than expected loss emergence.

• $8 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.

• $14 million of net adverse prior year reserve development on liability business, related to specific claims impacting accident years 2008 and 2009.

In the nine months ended September 30, 2013 , we recognized $46 million of net favorable prior year reserve development, the principal components of which were:

• $36 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.

• $33 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.

• $19 million of net adverse prior year reserve development on professional lines, emanating from the 2008 and 2009 accident years and driven by developments on certain global financial crisis-related claims. The impact of these developments was

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partially muted by the recognition of favorable experience for business not impacted by the global financial crisis. In addition, management increased reserves for the 2012 accident year to reflect adverse claim development on the U.S. Commercial D&O class.

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

Reinsurance Segment:

	Three months ended September 30, — 2014	2013		Nine months ended September 30, — 2014		2013
Property and other	$ 37,346	$ 25,171		$ 98,759		$ 44,026
Credit and surety	290	(15,484	)	(503	)	6,481
Professional lines	9,754	10,078		21,619		19,836
Motor	7,580	77		7,251		(4,273	)
Liability	80	26,128		12,200		64,223
Total	$ 55,050	$ 45,970		$ 139,326		$ 130,293

In the three months ended September 30, 2014 , we recognized $55 million of net favorable prior year reserve development, the principal components of which were:

• $37 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.

• $10 million of net favorable prior year reserve development on professional lines business, primarily related to the 2004 through 2007 accident years, for reasons discussed in the overview.

• $8 million of net favorable prior year reserve development on motor business, largely related to accident years 2005 and prior, driven by an better than expected loss emergence on certain European exposures.

In the three months ended September 30, 2013 , we recognized $46 million of net favorable prior year reserve development, the principal components of which were:

• $26 million of net favorable prior year reserve development on liability reinsurance business for the reasons discussed in the overview.

• $25 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.

• $15 million of net adverse prior year reserve development on credit and surety reinsurance business, relating to multiple accident years, primarily relating to recent developments on certain European bond exposures.

In the nine months ended September 30, 2014 , we recognized $139 million of net favorable prior year reserve development, the principal components of which were:

• $99 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 $26 million of favorable reserve development relating to natural catastrophe and weather-related losses incurred during 2013. In addition, the net development included $11 million of adverse development on agriculture reserves relating to loss experience on events occurring late in the 2013 accident year.

• $22 million of net favorable prior year reserve development on professional lines business, primarily related to the 2004 through 2007 accident years, for reasons discussed in the overview.

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• $12 million of net favorable prior year reserve development on liability business 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 the 2009 through 2013 accident years.

In the nine months ended September 30, 2013 , we recognized $130 million of net favorable prior year reserve development, the principal components of which were:

• $64 million of net favorable prior year reserve development on liability reinsurance business for the reasons discussed in the overview.

• $44 million of net favorable prior year reserve development on property and other business, largely driven by better than expected loss emergence on the 2008 and 2012 accident years.

• $20 million of net favorable prior year reserve development on professional lines reinsurance business, primarily related to the 2007 through 2009 accident years and driven by better than expected loss emergence.

Acquisition Cost Ratio: The acquisition cost ratio for the three and nine months ended September 30, 2014 , increased to 19.2% and 18.9% , respectively, compared to 18.4% and 17.7% in the three and nine months ended September 30, 2013 , respectively. Increases in the insurance segment primarily related to business mix changes and reductions in commissions received following changes in our ceded reinsurance programs impacting both periods. The increase for the nine months ended was also impacted by the reinsurance segment, which was primarily driven by higher acquisition costs paid on certain lines of business as well as variances in accruals for loss-sensitive features in underlying contracts.

General and Administrative Expense Ratio: The general and administrative expense ratio for the three months ended September 30, 2014 increased to 15.9% from 14.8% and was consistent at 15.6% for the nine months ended September 30, 2014, and 2013. The increase quarter over quarter was primarily driven by personnel costs, professional fees and other related expenses associated with the continued build-out of the Company's global platforms. The increase in costs for the nine months ended September 30, 2014, for the same reasons as the quarterly result, was offset by growth in the net earned premiums resulting in a consistent expense ratio compared to the same period in 2013.

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RESULTS BY SEGMENT

INSURANCE SEGMENT

Results from our insurance segment were as follows:

	Three months ended September 30, — 2014		% Change	2013		Nine months ended September 30, — 2014		% Change	2013
Revenues:
Gross premiums written	$ 555,283		(3%)	$ 574,778		$ 1,911,102		(2%)	$ 1,952,548
Net premiums written	363,571		(8%)	393,627		1,361,351		(2%)	1,385,892
Net premiums earned	461,805		3%	448,072		1,368,683		8%	1,272,297
Other insurance related income	—		nm	725		—		nm	1,756
Expenses:
Current year net losses and loss expenses	(298,695	)		(250,505	)	(913,152	)		(811,123	)
Prior year reserve development	9,488			34,065		54,059			46,355
Acquisition costs	(71,264	)		(61,087	)	(207,360	)		(177,097	)
General and administrative expenses	(85,750	)		(82,548	)	(257,208	)		(257,962	)
Underwriting income	$ 15,584		(82%)	$ 88,722		$ 45,022		(39%)	$ 74,226
Ratios:			% Point Change					% Point Change
Current year loss ratio	64.7	%	8.8	55.9	%	66.7	%	2.9	63.8	%
Prior year reserve development	(2.1	%)	5.5	(7.6	%)	(3.9	%)	(0.2)	(3.7	%)
Acquisition cost ratio	15.4	%	1.8	13.6	%	15.2	%	1.3	13.9	%
General and administrative expense ratio	18.6	%	0.1	18.5	%	18.7	%	(1.6)	20.3	%
Combined ratio	96.6	%	16.2	80.4	%	96.7	%	2.4	94.3	%

nm- not meaningful

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Gross Premiums Written:

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

	Three months ended September 30, — 2014		2013		% Change	Nine months ended September 30, — 2014		2013		% Change
Property	$ 143,236	27 %	$ 147,485	26 %	(3%)	$ 490,953	26 %	$ 527,650	28 %	(7%)
Marine	41,529	7 %	38,406	7 %	8%	212,084	11 %	206,345	11 %	3%
Terrorism	11,055	2 %	10,418	2 %	6%	27,511	1 %	28,109	1 %	(2%)
Aviation	17,735	3 %	4,379	1 %	305%	31,020	2 %	20,076	1 %	55%
Credit and Political Risk	3,782	1 %	7,099	1 %	(47%)	29,268	2 %	36,639	2 %	(20%)
Professional lines	196,576	35 %	208,174	36 %	(6%)	594,835	31 %	630,547	32 %	(6%)
Liability	94,833	17 %	100,018	17 %	(5%)	275,842	14 %	262,780	13 %	5%
Accident and Health	46,537	8 %	58,799	10 %	(21%)	249,589	13 %	240,402	12 %	4%
Total	$ 555,283	100 %	$ 574,778	100 %	(3%)	$ 1,911,102	100 %	$ 1,952,548	100 %	(2%)

Gross premiums written decreased by $19 million in the three months ended September 30, 2014 compared to the same period of 2013. The accident and health line decreased as a result of decreased reinsurance premiums written due primarily to timing differences. The decreases in professional lines were driven by the continued reshaping of our D&O business written in the United States. Partially offsetting these decreases was growth in the the aviation line of business, due to timing of certain policy renewals and new business.

In the nine months ended September 30, 2014 gross premiums written decreased by $41 million compared to the same period of 2013. Decreases in the property lines were driven by continuing competitive market conditions and decreases in the professional lines were driven by the same factors as the quarterly result. These decreases were partially offset by growth in 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 lines primarily reflecting higher renewal insurance premiums and new business production.

Premiums Ceded: In the three months ended September 30, 2014 , premiums ceded were $192 million , or 35% of gross premiums written, compared to $181 million , or 32% of gross premiums written, in the same period of 2013. The increase in premium ceded between the two periods related primarily to increased reinsurance protection purchased primarily in our professional lines of business and changes in the business mix.

In the nine months ended September 30, 2014, premiums ceded were $550 million compared to $567 million in the comparative period of 2013. The ceded ratio has remained consistent between the comparative periods at 29% of gross premiums written. The changes in our reinsurance purchasing program in the insurance segment 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 were offset by additional reinsurance cessions on our professional lines during the third quarter of 2014 and business mix changes.

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Net Premiums Earned:

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

	Three months ended September 30, — 2014		2013		% Change	Nine months ended September 30, — 2014		2013		% Change
Property	$ 111,700	25 %	$ 123,715	27 %	(10%)	$ 335,279	24 %	$ 343,785	28 %	(2%)
Marine	46,710	10 %	45,428	10 %	3%	135,239	10 %	133,126	10 %	2%
Terrorism	9,395	2 %	9,327	2 %	1%	26,312	2 %	30,722	2 %	(14%)
Aviation	10,149	2 %	10,823	2 %	(6%)	30,174	2 %	36,575	3 %	(18%)
Credit and Political Risk	15,338	3 %	17,453	4 %	(12%)	48,032	4 %	52,880	4 %	(9%)
Professional lines	158,222	34 %	150,350	34 %	5%	474,489	35 %	430,371	34 %	10%
Liability	37,041	8 %	29,549	7 %	25%	108,171	8 %	76,910	6 %	41%
Accident and Health	73,250	16 %	61,427	14 %	19%	210,987	15 %	167,928	13 %	26%
Total	$ 461,805	100 %	$ 448,072	100 %	3%	$ 1,368,683	100 %	$ 1,272,297	100 %	8%

Net premiums earned increased by $14 million to $462 million in the three months ended September 30, 2014 , compared to $448 million in the three months ended September 30, 2013 , and was driven by the expansion in the accident and health lines, increases in our liability lines in recent periods and increases in professional lines business written in prior periods as well as the positive impact of the reductions in the ceded reinsurance programs implemented during 2013. These increases were partially offset by decreased premiums written in recent periods in our property line of business. The year to date increase of $96 million in the nine months ended September 30, 2014 , compared to the nine months ended September 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 September 30, — 2014		% Point Change	2013		Nine months ended September 30, — 2014		% Point Change	2013
Current accident year	64.7	%	8.8	55.9	%	66.7	%	2.9	63.8	%
Prior year reserve development	(2.1	%)	5.5	(7.6	%)	(3.9	%)	(0.2)	(3.7	%)
Loss ratio	62.6	%	14.3	48.3	%	62.8	%	2.7	60.1	%

Current Accident Year Loss Ratio:

The current accident year loss ratio increased to 64.7% in the three months ended September 30, 2014, from 55.9% in the three months ended September 30, 2013. During the third quarter of 2014, we recognized aggregate natural catastrophe and weather-related pre-tax net losses of $19 million, primarily related to weather losses in North America. Comparatively, during the third quarter of 2013 we did not recognize any significant losses from natural catastrophe and weather-related events. The increase in the insurance segment's current accident year loss ratio for the quarter was also impacted by a higher underlying loss ratio for the property classes of business reflecting an increased level of mid-size and attritional losses in recent periods, and a change in the business mix with a shift towards less volatile lines of business that attract a higher loss ratio.

In the nine months ended September 30, 2014, the current accident year loss ratio increased to 66.7% from 63.8% in the nine months ended September 30, 2013. The increase was primarily driven by the higher loss ratios in the property lines and the change in the business mix discussed in the quarterly result as well as 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 professional lines increase primarily related to business written during 2013 which continued to be earned during 2014. These increases were partially offset by a reduction in the natural catastrophe and weather related pre-tax losses which were $55 million in

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the nine months ended September 30, 2014, compared to $97 million (inclusive of related premiums to reinstate our reinsurance protection) for the comparative period in 2013.

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 nine months ended September 30, 2014, compared to the same periods in 2013, primarily due to a change in the business mix and reductions in commissions received following changes in our ceded reinsurance programs implemented during 2013.

General and Administrative Expense Ratio: The insurance segment's general and administrative expense ratio was comparable in the three months ended September 30, 2014, and 2013, and decreased in the nine months ended September 30, 2014, compared to the same period in 2013. The decrease was primarily due to a reduction in the allocation of certain corporate expenses and the growth in net premiums earned, partially offset by growth in personnel expenses and costs associated with new initiatives as we build out our global platform.

REINSURANCE SEGMENT

Results from our reinsurance segment were as follows:

	Three months ended September 30, — 2014		% Change	2013		Nine months ended September 30, — 2014		% Change	2013
Revenues:
Gross premiums written	$ 341,531		3%	$ 330,019		$ 2,038,377		6%	$ 1,918,537
Net premiums written	323,652		—%	322,762		1,990,607		5%	1,894,344
Net premiums earned	504,333		1%	497,170		1,543,799		3%	1,492,857
Other insurance related income	7,702		nm	—		12,468		nm	—
Expenses:
Current year net losses and loss expenses	(317,907	)		(331,052	)	(942,330	)		(948,360	)
Prior year reserve development	55,050			45,970		139,326			130,293
Acquisition costs	(114,686	)		(112,595	)	(342,488	)		(311,795	)
General and administrative expenses	(36,612	)		(35,127	)	(106,987	)		(103,411	)
Underwriting income (1)	$ 97,880		52%	$ 64,366		$ 303,788		17%	$ 259,584
Ratios:			% Point Change					% Point Change
Current year loss ratio	63.0	%	(3.6)	66.6	%	61.0	%	(2.5)	63.5	%
Prior year reserve development	(10.9	%)	(1.6)	(9.3	%)	(9.0	%)	(0.3)	(8.7	%)
Acquisition cost ratio	22.7	%	0.1	22.6	%	22.2	%	1.3	20.9	%
General and administrative expense ratio	7.3	%	0.1	7.2	%	6.9	%	—	6.9	%
Combined ratio	82.1	%	(5.0)	87.1	%	81.1	%	(1.5)	82.6	%

nm – not meaningful

(1) AXIS Capital cedes certain of its reinsurance business to AXIS Ventures Reinsurance Limited ("Ventures Re"), the Company's third-party capital vehicle, on a fully collateralized basis. The collateral has been provided by third party investors. Ventures Re is a variable interest entity and AXIS Capital has been determined to be its primary beneficiary. Following this determination Ventures Re is consolidated in the Consolidated Financial Statements of AXIS Capital and the net impact of the cessions has been included in amounts attributable to (from) noncontrolling interest. For the three and nine months ended September 30, 2014 amounts attributable from noncontrolling interests were $6,160 and $3,365 respectively. For the three and nine months ended September 30, 2013, amounts attributable from noncontrolling interests were $nil. Refer to Item 1, Note 10 to the Consolidated Financial Statements for more information.

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Gross Premiums Written:

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

	Three months ended September 30, — 2014				2013		% Change	Nine months ended September 30, — 2014		2013		% Change
Catastrophe	$ 71,319		20	%	$ 71,851	21 %	(1%)	$ 359,824	19 %	$ 378,115	20 %	(5%)
Property	45,030		13	%	58,294	18 %	(23%)	345,677	17 %	343,626	18 %	1%
Professional lines	51,007		15	%	66,017	20 %	(23%)	224,028	11 %	213,978	11 %	5%
Credit and Surety	23,933		7	%	29,487	9 %	(19%)	252,761	12 %	258,122	13 %	(2%)
Motor	9,445		3	%	4,286	1 %	120%	286,141	14 %	245,834	13 %	16%
Liability	145,488		43	%	75,100	23 %	94%	330,698	16 %	253,555	13 %	30%
Agriculture	(10,206	)	(3	%)	8,659	3 %	nm	169,624	8 %	143,995	8 %	18%
Engineering	2,579		1	%	12,462	4 %	(79%)	47,861	2 %	59,115	3 %	(19%)
Other	2,936		1	%	3,863	1 %	(24%)	21,763	1 %	22,197	1 %	(2%)
Total	$ 341,531		100	%	$ 330,019	100 %	3%	$ 2,038,377	100 %	$ 1,918,537	100 %	6%

nm – not meaningful

Gross premiums written increased by $12 million and $120 million in the three and nine months ended September 30, 2014 , respectively, compared to the same periods of 2013 . The increase in the gross premiums written in the three months ended September 30, 2014, was primarily driven by an increase in our liability business, driven by new multi-year treaty business and was partially offset by decreases in agriculture, professional and property lines. The decreases in the agriculture lines were driven by negative premium adjustments on certain 2014 contracts reflecting updated information from cedants. The decrease in professional lines was primarily due to non-renewals and decreased participations reflecting competitive market conditions. The decrease in property was due to negative premium adjustments resulting from updated information from cedants and treaty restructurings.

The increase in the gross premiums written in the nine months ended September 30, 2014 compared to the same period of 2013 was significantly impacted by a number of treaties written on a multi-year basis in the liability, property, catastrophe and motor lines and included written premium that related to future underwriting years of $131 million (in the same period of 2013 the comparative total was $13 million). After adjusting for the impact of the multi-year contracts gross premiums written were comparable to the same period of 2013 with increases in liability, motor and agriculture lines offset by decreases in property and catastrophe. The liability increase was driven by increased participations and an increase in favorable premium adjustments compared to 2013. The motor lines increase is primarily driven by increased participations on renewals while the agriculture increase reflected our growth initiatives in this line of business. The decreases in property and catastrophe were primarily due to non-renewals and reduced participations on treaties reflecting competitive market conditions.

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Net Premiums Earned:

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

	Three months ended September 30, — 2014		2013		% Change	Nine months ended September 30, — 2014		2013		% Change
Catastrophe	$ 82,415	15 %	$ 97,605	20 %	(16%)	$ 246,314	16 %	$ 289,361	21 %	(15%)
Property	74,387	15 %	86,033	17 %	(14%)	238,309	15 %	259,243	17 %	(8%)
Professional lines	84,764	17 %	77,083	16 %	10%	257,884	17 %	223,129	15 %	16%
Credit and Surety	69,140	14 %	73,620	15 %	(6%)	198,424	13 %	211,764	14 %	(6%)
Motor	64,502	13 %	51,178	10 %	26%	200,535	13 %	169,845	11 %	18%
Liability	75,406	15 %	51,783	10 %	46%	213,869	14 %	170,531	11 %	25%
Agriculture	34,389	7 %	36,735	7 %	(6%)	127,463	8 %	105,504	7 %	21%
Engineering	14,152	3 %	18,052	4 %	(22%)	45,271	3 %	49,185	3 %	(8%)
Other	5,178	1 %	5,081	1 %	2%	15,730	1 %	14,295	1 %	10%
Total	$ 504,333	100 %	$ 497,170	100 %	1%	$ 1,543,799	100 %	$ 1,492,857	100 %	3%

Net premiums earned increased by $7 million and $51 million in the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013 . The increases reflected growth in the business written in recent periods in the liability, professional and motor lines. This growth was partially offset by decreases in catastrophe and property lines.

Other Insurance Related Income:

Other insurance related income primarily included fair value adjustments of $8 million and $9 million to the economic hedges purchased to protect our agriculture line of business against fluctuations in commodity prices in the three and nine months ended September 30, 2014, respectively, compared to $nil in the same periods of 2013. The remainder of other insurance related income primarily related to the net results of our weather and commodity business.

Loss Ratio:

The table below shows the components of our loss ratio:

	Three months ended September 30, — 2014		% Point Change	2013		Nine months ended September 30, — 2014		% Point Change	2013
Current accident year	63.0	%	(3.6)	66.6	%	61.0	%	(2.5)	63.5	%
Prior year reserve development	(10.9	%)	(1.6)	(9.3	%)	(9.0	%)	(0.3)	(8.7	%)
Loss ratio	52.1	%	(5.2)	57.3	%	52.0	%	(2.8)	54.8	%

Current Accident Year Loss Ratio:

The current accident year loss ratio decreased to 63.0% and 61.0% in the three and nine months ended September 30, 2014 , respectively, from 66.6% and 63.5% in the three and nine months ended September 30, 2013 , respectively. The decreases for both periods were driven by a reduced level of natural catastrophe and weather-related losses.

In the three months ended September 30, 2014 , natural catastrophe and weather-related pre-tax net losses were an insignificant amount. Comparatively, during the three months ended September 30, 2013, we recognized $51 million (net of reinstatement premiums) of pre-tax net losses emanating from worldwide weather-related loss events.

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We recognized aggregate natural catastrophe and weather-related pre-tax net losses of $17 million in the nine months ended September 30, 2014, primarily related to weather events in North America. Comparatively, in the nine months ended September 30, 2013 , we recognized $106 million of pre-tax net losses (net of related reinstatement premiums) driven by worldwide weather-related loss events.

After adjusting for the impact of natural catastrophe and weather-related losses the current accident year loss ratio increased in both the three and nine months ended September 30, 2014, primarily due to an increase in the agriculture loss reserves following a significant drop in commodity prices during the third quarter. Business mix changes also contributed to the increase in the segment's loss ratio, which was partially offset by a reduction in attritional losses, most notably in the credit and surety lines of business.

Refer ‘ Prior Year Reserve Development ’ for further details.

Acquisition Cost Ratio:

The reinsurance segment's acquisition cost ratio was comparable in the three months ended September 30, 2014 , to the three months ended September 30, 2013 , and was impacted by higher acquisition costs paid on certain lines of business which were largely offset by variances in the accruals for loss-sensitive features.

The reinsurance segment's acquisition cost ratio increased in the nine months ended September 30, 2014 , compared to the same period in 2013 , primarily due to higher acquisition costs paid on certain lines of business. The increase in the nine months ended September 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 nine months ended 2013; however, these features had a lesser impact on the nine months ended 2014.

OTHER EXPENSES (REVENUES), NET

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

	Three months ended September 30, — 2014		% Change	2013	Nine months ended September 30, — 2014		% Change	2013
Corporate expenses	$ 30,554		33%	$ 23,024	$ 92,530		32%	$ 69,834
Foreign exchange losses (gains)	(72,292	)	nm	56,860	(58,353	)	nm	11,659
Interest expense and financing costs	20,344		33%	15,260	56,913		23%	46,355
Income tax expense (benefit)	(4,098	)	nm	6,030	9,527		(17%)	11,500
Total	$ (25,492	)	nm	$ 101,174	$ 100,617		(28%)	$ 139,348

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 3.2% for both the three and nine months ended September 30, 2014 , compared to 2.4% and 2.5% respectively, for the same periods in 2013 . The increase in corporate expenses primarily related to increased personnel costs as we expand our business globally, professional and information technology costs related to operational excellence initiatives 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 our net insurance related liabilities. The foreign exchange gains for the three and nine months ended September 30, 2014 were primarily driven by depreciation of the euro and Sterling against the U.S. Dollar. Comparatively, for the three months ended September 30, 2013 , appreciation of Sterling and the euro against the U.S. dollar was the primary driver of the loss. For the nine months ended September 30, 2013 , appreciation of the euro and Sterling was the primary driver of the loss, partially offset by depreciation in the Australian Dollar.

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Interest Expense and Financing Costs: Interest expense and financing costs primarily related to interest due on our senior notes and had 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 income before tax, was (1.5%) and 1.5% in the three and nine months ended September 30, 2014 , respectively, compared to 3.8% and 2.1% in the three and nine months ended September 30, 2013 , respectively. 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 in the three and nine months ended September 30, 2014, however the magnitude of underwriting losses borne by our operations in the United States drove the recognition of an income tax benefit in the three months ended September 30, 2014, and the decrease in tax expense in the nine months ended September 30, 2014.

NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES)

Net Investment Income

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

	Three months ended September 30, — 2014		% Change	2013		Nine months ended September 30, — 2014		% Change	2013
Fixed maturities	$ 74,996		—%	$ 74,691		$ 226,475		3%	$ 218,877
Other investments	(3,384	)	nm	32,127		45,868		(48%)	87,406
Equity securities	2,022		(48%)	3,871		9,609		14%	8,419
Cash and cash equivalents	2,081		445%	382		9,127		213%	2,915
Short-term investments	141		11%	127		600		(43%)	1,056
Gross investment income	75,856		(32%)	111,198		291,679		(8%)	318,673
Investment expense	(9,294	)	20%	(7,769	)	(27,508	)	18%	(23,223	)
Net investment income	$ 66,562		(36%)	$ 103,429		$ 264,171		(11%)	$ 295,450
Pre-tax yield: (1)
Fixed maturities	2.4	%		2.5	%	2.4	%		2.5	%

nm – not meaningful

(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

The increase in year-to-date investment income from fixed maturities was primarily due to larger average investment balances, this was partially offset by a small decrease in pre-tax yields.

Equities

The decrease in dividend income (net of withholding taxes) in the current quarter is mainly due to smaller average holdings as a result of sales of common stocks during the quarter.

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Other Investments

The following table provides a breakdown of total net investment income from other investments:

	Three months ended September 30, — 2014		2013	Nine months ended September 30, — 2014	2013
Hedge funds	$ (9,113	)	$ 25,547	$ 28,808	$ 65,801
CLO - Equities	5,729		6,580	17,060	21,605
Total net investment income from other investments	$ (3,384	)	$ 32,127	$ 45,868	$ 87,406
Pre-tax return on other investments (1)	(0.3	%)	3.3 %	4.6 %	9.2 %

(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 decreased in the three and nine months ended September 30, 2014, compared to the same periods in 2013, primarily due to a decline in the performance of the global equity markets which translated into lower valuations on our hedge funds.

Net Realized Investment Gains (Losses)

The following table provides a breakdown of net realized investment gains (losses):

	Three months ended September 30, — 2014		2013		Nine months ended September 30, — 2014		2013
On sale of investments:
Fixed maturities and short-term investments	$ 9,111		$ 1,177		$ 21,434		$ 21,350
Equity securities	74,768		9,984		121,660		39,256
	83,879		11,161		143,094		60,606
OTTI charges recognized in earnings	(9,431	)	(2,811	)	(12,121	)	(8,836	)
Change in fair value of investment derivatives	3,000		(13,058	)	(9,644	)	4,234
Net realized investment gains (losses)	$ 77,448		$ (4,708	)	$ 121,329		$ 56,004

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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 during the first half of 2014.

Improvements in global equity markets during 2013 and the first half of 2014 enabled us to realize net gains on sales of our equity securities (primarily common stock) during the quarter and year-to-date. Proceeds from these sales were reallocated to exchange-traded funds ("ETF's").

OTTI charges

For the three and nine months ended September 30, 2014, OTTI charges were driven by impairments on non-U.S. denominated securities as a result of the decline in the euro and sterling exchange rates and ETF's where we no longer assert that we have intent to hold the securities until full recovery of cost as it likely that these investments will be reallocated to other asset classes.

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 $7 million of net gains which related primarily to securities denominated in euro and sterling.

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 $4 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 September 30, — 2014		2013		Nine months ended September 30, — 2014		2013
Net investment income	$ 66,562		$ 103,429		$ 264,171		$ 295,450
Net realized investments gains (losses)	77,448		(4,708	)	121,329		56,004
Change in net unrealized gains/losses	(250,583	)	110,606		(92,776	)	(239,975	)
Total	$ (106,573	)	$ 209,327		$ 292,724		$ 111,479
Average cash and investments (1)	$ 15,622,534		$ 14,563,987		$ 15,339,759		$ 14,584,146
Total return on average cash and investments, pre-tax ( 2)	(0.7	%)	1.4	%	1.9	%	0.8	%

(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 nine months ended September 30, 2014, would be (0.1%) and 2.4%, respectively (2013: 1.2% and 0.8%, respectively).

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CASH AND INVESTMENTS

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

	September 30, 2014 — Amortized Cost or Cost	Fair Value	December 31, 2013 — Amortized Cost or Cost	Fair Value
Fixed maturities	$ 12,440,272	$ 12,444,684	$ 11,987,146	$ 11,986,327
Equities	583,296	629,502	566,219	701,987
Other investments	723,199	946,836	839,177	1,045,810
Short-term investments	114,428	114,428	46,212	46,212
Total investments	$ 13,861,195	$ 14,135,450	$ 13,438,754	$ 13,780,336
Cash and cash equivalents (1)	$ 1,407,811	$ 1,407,811	$ 987,876	$ 987,876

(1) Includes restricted cash and cash equivalents of $117 million and $65 million in 2014 and 2013 , respectively.

The amortized cost/cost of our total investments increased by $422 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 $355 million increase in the fair value of our total investments was also driven by the investment of the financing and operating cash flows partially offset by a decrease in the net unrealized gains (losses) during the year.

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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:

	September 30, 2014 — Fair Value	% of Total	December 31, 2013 — Fair Value	% of Total
Fixed maturities:
U.S. government and agency	$ 1,519,468	12 %	$ 1,388,698	11 %
Non-U.S. government	1,138,922	9 %	1,176,382	10 %
Corporate debt	4,250,796	34 %	3,608,238	30 %
Agency RMBS	2,120,947	17 %	2,448,827	20 %
CMBS	954,517	8 %	797,414	7 %
Non-Agency RMBS	78,395	1 %	67,567	1 %
ABS	1,435,865	12 %	953,451	8 %
Municipals (1)	945,774	7 %	1,545,750	13 %
Total	$ 12,444,684	100 %	$ 11,986,327	100 %
Credit ratings:
U.S. government and agency	$ 1,519,468	12 %	$ 1,388,698	11 %
AAA (2)	4,413,251	36 %	4,160,744	35 %
AA	1,536,180	12 %	1,795,291	15 %
A	2,381,731	19 %	2,220,263	19 %
BBB	1,587,994	13 %	1,468,669	12 %
Below BBB (3)	1,006,060	8 %	952,662	8 %
Total	$ 12,444,684	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.

Primarily 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 September 30, 2014, our fixed maturities had a weighted average credit rating of AA- (2013: AA-) and an average duration of 3.1 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 $14 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 $4 million September 30, 2014.

Equities

During the year, net unrealized gains on equities decreased from $136 million at December 31, 2013 to $46 million at September 30, 2014. The decline was primarily due to sales resulting in net realized gains of $122 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:

	September 30, 2014		December 31, 2013
Hedge funds
Long/short equity funds	$ 292,086	31 %	$ 425,444	41 %
Multi-strategy funds	315,480	33 %	285,155	27 %
Event-driven funds	188,397	20 %	190,458	18 %
Leveraged bank loan funds	9,904	1 %	48,753	5 %
Total hedge funds	805,867	85 %	949,810	91 %
Direct lending funds	43,836	5 %	22,134	2 %
Total hedge and direct lending funds	849,703	90 %	971,944	93 %
CLO - Equities	97,133	10 %	73,866	7 %
Total other investments	$ 946,836	100 %	$ 1,045,810	100 %

The $144 million decrease in the fair value of our total hedge funds in 2014 was driven by $173 million of net redemptions offset by $29 million of price appreciation as our hedge funds benefited from the performance of the global equity and credit markets during the first half of 2014.

We have made total commitments of $110 million to managers of direct lending funds. To date, $43 million of our total commitment has been called.

In addition to our existing portfolio of direct investments in CLO-Equities, we made total commitments of $60 million to a CLO fund, all of which has been called to date.

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 nine months ended September 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:

	September 30, 2014	December 31, 2013
Senior notes	$ 1,490,498	$ 995,855
Preferred shares	627,843	627,843
Common equity	5,190,646	5,190,119
Shareholders’ equity attributable to AXIS Capital	5,818,489	5,817,962
Total capital	$ 7,308,987	$ 6,813,817
Ratio of debt to total capital	20.4 %	14.6 %
Ratio of debt and preferred equity to total capital	29.0 %	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 September 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.

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

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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.

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 nine months ended September 30, 2014 , our common equity increased by $1 million . The following table reconciles our opening and closing common equity positions:

Nine months ended September 30,	2014
Common equity - opening	$ 5,190,119
Net income attributable to AXIS Capital	637,058
Shares repurchased for treasury	(468,531	)
Change in unrealized appreciation on available for sale investments, net of tax	(91,339	)
Common share dividends	(87,756	)
Preferred share dividends	(30,066	)
Share-based compensation expense recognized in equity	39,660
Foreign currency translation adjustment	(3,551	)
Shares issued and stock options exercised	5,052
Common equity - closing	$ 5,190,646

During the nine months ended September 30, 2014 , we repurchased 10 million common shares for a total of $469 million (including $450 million pursuant to our Board-authorized share repurchase program and $19 million relating to shares purchased in connection with the vesting of restricted stock awards granted under our 2007 Long-Term Equity Compensation Plan). At October 31, 2014 , the remaining authorization under the common share repurchase program approved by our Board of Directors was $300 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.

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;

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• 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.

NEW ACCOUNTING STANDARDS

At October 31, 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 September 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.

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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.

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 September 30, — 2014		2013	Nine months ended September 30, — 2014		2013
Net income available to common shareholders	$ 279,104		$ 137,121	$ 606,992		$ 512,383
Net realized investment (gains) losses, net of tax (1)	(75,966	)	4,368	(107,377	)	(51,306	)
Foreign exchange losses (gains), net of tax (2)	(70,368	)	55,188	(57,034	)	10,057
Loss on repurchase of preferred shares, net of tax (3)	—		—	—		3,081
Operating income	$ 132,770		$ 196,677	$ 442,581		$ 474,215
Earnings per common share - diluted	$ 2.68		$ 1.21	$ 5.68		$ 4.41
Net realized investment (gains) losses, net of tax	(0.73	)	0.04	(1.00	)	(0.45	)
Foreign exchange losses (gains), net of tax	(0.68	)	0.49	(0.54	)	0.09
Loss on repurchase of preferred shares, net of tax	—		—	—		0.03
Operating income per common share - diluted	$ 1.27		$ 1.74	$ 4.14		$ 4.08
Weighted average common shares and common share equivalents - diluted (4)	104,247		113,355	106,953		116,214
Average common shareholders’ equity	$ 5,259,257		$ 5,047,045	$ 5,190,383		$ 5,218,452
ROACE (annualized)	21.2	%	10.9 %	15.6	%	13.1	%
Operating ROACE (annualized)	10.1	%	15.6 %	11.4	%	12.1	%

(1) Tax cost (benefit) of $1,482 and ($340) for the three months ended September 30, 2014 and 2013 , respectively, and $13,952 and $4,698 for the nine months ended September 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 cost (benefit) of $1,924 and ( $1,672 ) for the three months ended September 30, 2014 and 2013 , respectively, and $1,319 and ( $1,602 ) for the nine months ended September 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

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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 gains (or losses) 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 gains (or losses) on our available-for-sale investments in other comprehensive income and foreign exchange gains (or losses) realized upon the sale of these investments in net realized investments gains (or losses). These unrealized and realized foreign exchange rate movements generally offset a large portion of the foreign exchange gains (or losses) 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 gains (or losses) 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 (or losses) and foreign exchange gains (or losses) to understand the profitability of recurring sources of income.

We believe that showing net income available to common shareholders exclusive of net realized gains (or losses) and foreign exchange gains (or losses) 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 (or losses) from our underwriting profitability measure.

As noted above, foreign exchange gains (or losses) 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 (or losses) on our investment portfolio generally offset a large portion of the foreign exchange gains (or losses) arising from our underwriting portfolio. As a result, we believe that foreign exchange gains (or losses) 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 September 30, 2014
Net managed assets (liabilities), excluding derivatives	$ 26,559		$ (160,117	)	$ 73,125		$ (44,778	)	$ (141,978	)	$ 44,164		$ (14,020	)	$ (217,045	)
Foreign currency derivatives, net	(26,214	)	162,006		(71,824	)	58,720		134,631		(21,429	)	(3,967	)	231,923
Net managed foreign currency exposure	345		1,889		1,301		13,942		(7,347	)	22,735		(17,987	)	14,878
Other net foreign currency exposure	3,082		—		92		63,013		903		34		262,488		329,612
Total net foreign currency exposure	$ 3,427		$ 1,889		$ 1,393		$ 76,955		$ (6,444	)	$ 22,769		$ 244,501		$ 344,490
Net foreign currency exposure as a percentage of total shareholders’ equity	0.1	%	—	%	—	%	1.3	%	(0.1	%)	0.4	%	4.2	%	5.9	%
Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement (1)	$ 343		$ 189		$ 139		$ 7,696		$ (644	)	$ 2,277		$ 24,450		$ 34,450

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

Total Net Foreign Currency Exposure

At September 30 2014, our total net foreign currency exposure was $344 million net long, driven by other net foreign currency exposures which include assets managed by specific investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy. Our emerging market debt portfolio is the primary contributor to this group of assets.

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 September 30, 2014 . Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 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 September 30, 2014 . Based upon that evaluation, there were no changes in our internal control over financial reporting that occurred during the three months ended September 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 September 30, 2014 :

ISSUER PURCHASES OF EQUITY SECURITIES

Common Shares

Period — July 1-31, 2014	Total Number of Shares Purchased — 4,716	$44.60	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) — —	$450.0	million
August 1-31, 2014	1,556,594	$46.87	1,553,061	$377.2	million
September 1-30, 2014	1,607,227	$48.08	1,605,577	$300.0	million
Total	3,168,537		3,158,638	$300.0	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).
10.1	Separation Agreement entered into between John Gressier and AXIS Specialty Europe SE dated August 5, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 7, 2014).
†*10.2	2015 Directors Annual Compensation Program.
†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 September 30, 2014 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iv) Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2014 and 2013; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

† Filed herewith.

Exhibit 10.2 represents a management contract, compensatory plan or arrangement in which directors and/or executive officers are eligible to participate.

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: October 31, 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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