UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2006

Commission file number 001-31721

AXIS CAPITAL HOLDINGS LIMITED

(Exact name of registrant as specified in its charter)

Bermuda

 

98-0395986

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

106 Pitts Bay Road, Pembroke HM 08, Bermuda

(Address of principal executive offices and zip code)

(441) 296-2600
(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 o

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

Large accelerated filer x  Accelerated filer o  Non-accelerated filer o

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

As of August 7, 2006 there were 152,055,531 Common Shares, $0.0125 par value per share, of the registrant outstanding.

 




AXIS CAPITAL HOLDINGS LIMITED

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as at June 30, 2006 and December 31, 2005 (Unaudited)

 

 

 

 

 

Consolidated Statements of Operations for the Quarters and Six Months Ended June 30, 2006 and 2005 (Unaudited)

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 30, 2006 and 2005 (Unaudited)

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2006 and 2005 (Unaudited)

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (Unaudited)

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 6.

Exhibits

 

 

ii




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As at June 30, 2006 and December 31, 2005
(Expressed in thousands of U.S. dollars, except share amounts)

 

 

June 30, 2006

 

December 31, 2005

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,615,448

 

$

1,280,990

 

Fixed maturity investments at fair market value (Amortized cost 2006: $6,179,129; 2005: $6,090,998)

 

6,009,431

 

6,012,425

 

Other investments

 

627,721

 

409,504

 

Accrued interest receivable

 

68,381

 

59,784

 

Securities lending collateral

 

909,807

 

998,349

 

Insurance and reinsurance premium balances receivable

 

1,409,988

 

1,026,975

 

Deferred acquisition costs

 

290,627

 

196,388

 

Prepaid reinsurance premiums

 

309,881

 

281,579

 

Reinsurance recoverable balances

 

1,271,452

 

1,455,248

 

Reinsurance recoverable balances on paid losses

 

121,091

 

62,862

 

Intangible assets

 

35,500

 

37,013

 

Other assets

 

129,723

 

104,859

 

Total Assets

 

$

12,799,050

 

$

11,925,976

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for losses and loss expenses

 

$

4,835,161

 

$

4,743,338

 

Unearned premiums

 

2,289,140

 

1,760,467

 

Insurance and reinsurance balances payable

 

333,547

 

314,232

 

Accounts payable and accrued expenses

 

75,393

 

101,179

 

Securities lending payable

 

904,974

 

995,287

 

Net payable for investments purchased

 

43,012

 

76

 

Debt

 

499,100

 

499,046

 

Total Liabilities

 

8,980,327

 

8,413,625

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Share Capital

 

 

 

 

 

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

 

125

 

125

 

Series B Preferred shares (issued and outstanding 2006: 2,500,000; 2005: 2,500,000)

 

31

 

31

 

Common shares (issued and outstanding 2006: 149,809,873; 2005: 148,868,759)

 

1,873

 

1,861

 

Additional paid-in capital

 

2,413,410

 

2,386,200

 

Accumulated other comprehensive loss

 

(166,580

)

(77,798

)

Retained earnings

 

1,569,864

 

1,201,932

 

Total Shareholders’ Equity

 

3,818,723

 

3,512,351

 

 

 

 

 

 

 

Total Liabilities & Shareholders’ Equity

 

$

12,799,050

 

$

11,925,976

 

 

See accompanying notes to Consolidated Financial Statements (Unaudited)

3




AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Quarters and Six Months ended June 30, 2006 and 2005
(Expressed in thousands of U.S. dollars, except share and per share amounts)

 

 

Quarters ended

 

Six Months ended

 

 

 

June 30, 2006

 

June 30, 2005

 

June 30, 2006

 

June 30, 2005

 

Revenues

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

995,380

 

$

767,293

 

$

2,160,120

 

$

1,965,992

 

Premiums ceded

 

(174,648

)

(151,497

)

(347,060

)

(288,125

)

Change in unearned premiums

 

(141,633

)

8,617

 

(500,367

)

(427,864

)

Net premiums earned

 

679,099

 

624,413

 

1,312,693

 

1,250,003

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

91,663

 

58,001

 

185,231

 

110,759

 

Net realized (losses) gains

 

(9,777

)

1,831

 

(20,706

)

438

 

Other insurance related income (loss)

 

438

 

(5,451

)

1,062

 

(5,519

)

Total revenues

 

761,423

 

678,794

 

1,478,280

 

1,355,681

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Net losses and loss expenses

 

371,982

 

322,853

 

730,640

 

667,143

 

Acquisition costs

 

101,832

 

85,471

 

191,536

 

176,772

 

General and administrative expenses

 

57,657

 

56,796

 

113,068

 

111,098

 

Foreign exchange (gains) losses

 

(18,901

)

27,226

 

(28,165

)

50,644

 

Interest expense

 

8,315

 

7,818

 

16,400

 

15,897

 

Total expenses

 

520,885

 

500,164

 

1,023,479

 

1,021,554

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

240,538

 

178,630

 

454,801

 

334,127

 

Income tax expense

 

7,912

 

5,785

 

17,359

 

9,483

 

Net income

 

232,626

 

172,845

 

437,442

 

324,644

 

Preferred share dividends

 

(9,226

)

 

(18,857

)

 

Net income available to common shareholders

 

$

223,400

 

$

172,845

 

$

418,585

 

$

324,644

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and common shares equivalent — basic

 

149,765,181

 

140,566,523

 

149,541,163

 

143,584,354

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and common shares equivalents outstanding — diluted

 

163,325,459

 

153,637,750

 

163,441,641

 

157,013,504

 

 

 

 

 

 

 

 

 

 

 

Net income per common share - basic

 

$

1.49

 

$

1.23

 

$

2.80

 

$

2.26

 

 

 

 

 

 

 

 

 

 

 

Net income per common share - diluted

 

$

1.37

 

$

1.13

 

$

2.56

 

$

2.07

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.15

 

$

0.15

 

$

0.30

 

$

0.30

 

 

See accompanying notes to Consolidated Financial Statements (Unaudited)

4




AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Quarters and Six Months ended June 30, 2006 and 2005
(Expressed in thousands of U.S. dollars)

 

 

Quarters Ended

 

Six Months Ended

 

 

 

June 30,
2006

 

June 30,
2005

 

June 30,
2006

 

June 30,
2005

 

Net income

 

$

232,626

 

$

172,845

 

$

437,442

 

$

324,644

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

Net actuarial loss on defined benefit retirement plan

 

(384

)

 

(384

)

 

Unrealized (losses) gains on investments arising during the period

 

(13,130

)

50,699

 

(76,816

)

(7,367

)

Adjustment for re-classification of losses realized in income

 

(18,827

)

(1,560

)

(11,581

)

(5,803

)

Comprehensive income

 

$

200,285

 

$

221,984

 

$

348,661

 

$

311,474

 

 

See accompanying notes to Consolidated Financial Statements (Unaudited)

5




AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
For the Six Months ended June 30, 2006 and 2005
(Expressed in thousands of U.S. dollars)

 

 

2006

 

2005

 

Preferred Shares

 

 

 

 

 

Balance at beginning and end of period

 

$

156

 

$

 

Common Shares

 

 

 

 

 

Balance at beginning of period

 

1,861

 

1,910

 

Issued during period

 

12

 

8

 

Repurchased during period

 

 

(160

)

Balance at end of period

 

1,873

 

1,758

 

Additional paid-in capital

 

 

 

 

 

Balance at beginning of period

 

2,386,200

 

2,017,144

 

Shares issued during period, net of costs

 

153

 

(1,691

)

Repurchased during period

 

 

(349,840

)

Stock option exercise

 

14,321

 

2,240

 

Stock option expense

 

1,715

 

2,204

 

Stock compensation expense

 

11,021

 

10,091

 

Balance at end of period

 

2,413,410

 

1,680,148

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

Balance at beginning of period

 

(77,798

)

12,915

 

Change in net actuarial loss on defined benefit retirement plan

 

(384

)

 

Change in unrealized losses on investments

 

(89,896

)

(12,371

)

Change in deferred taxes

 

1,498

 

(799

)

Balance at end of period

 

(166,580

)

(255

)

Retained earnings

 

 

 

 

 

Balance at beginning of period

 

1,201,932

 

1,206,095

 

Preferred shares dividends

 

(18,857

)

 

Common share dividends

 

(50,653

)

(45,794

)

Net income for period

 

437,442

 

324,644

 

Balance at end of period

 

1,569,864

 

1,484,945

 

Total Shareholders’ Equity

 

$

3,818,723

 

$

3,166,596

 

 

See accompanying notes to Consolidated Financial Statements (Unaudited)

6




AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months ended June 30, 2006 and 2005
(Expressed in thousands of U.S. dollars)

 

 

2006

 

2005

 

Cash flows provided by operating activities:

 

 

 

 

 

Net income

 

$

437,442

 

$

324,644

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Net realized losses (gains) on sales of investments

 

20,706

 

(438

)

Change in carrying value of other investments

 

(12,442

)

901

 

Net amortization on fixed maturities

 

15,315

 

13,997

 

Amortization of deferred compensation and option expense

 

12,736

 

12,295

 

Amortization of intangible assets

 

1,513

 

767

 

Amortization of deferred debt expenses

 

226

 

228

 

Accrued interest receivable

 

(8,597

)

(7,084

)

Insurance and reinsurance premium balances receivable

 

(383,013

)

(315,759)

 

Deferred acquisition costs

 

(94,239

)

(52,409

)

Prepaid reinsurance premiums

 

(28,302

)

1,562

 

Reinsurance recoverable balances

 

183,796

 

(51,547

)

Reinsurance recoverable balances on paid losses

 

(58,229

)

(179

)

Other assets

 

(23,926

)

(20,656

)

Reserve for losses and loss expenses

 

91,823

 

525,139

 

Unearned premiums

 

528,673

 

426,302

 

Insurance and reinsurance balances payable

 

19,315

 

3,813

 

Accounts payable and accrued expenses

 

(32,140

)

(5,707

)

Total adjustments

 

233,215

 

531,225

 

Net cash provided by operating activities

 

670,657

 

855,869

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

Purchases of available—for—sale securities

 

(2,606,910

)

(3,115,413

)

Sales and maturities of available—for—sale securities

 

2,531,902

 

2,974,763

 

Purchases of other investments

 

(210,750

)

(163,998

)

Net cash used in investing activities

 

(285,758

)

(304,648

)

Cash flows provided by (used in) financing activities:

 

 

 

 

 

Common share dividends

 

(45,574

)

(40,802

)

Preferred shares dividends

 

(19,353

)

 

Repurchase of shares, net

 

 

(350,000

)

Issuance of shares, net

 

14,486

 

556

 

Net cash used in financing activities

 

(50,441

)

(390,246

)

Increase in cash and cash equivalents

 

334,458

 

160,975

 

Cash and cash equivalents — beginning of period

 

1,280,990

 

632,329

 

Cash and cash equivalents — end of period

 

$

1,615,448

 

$

793,304

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Income taxes paid

 

$

31,223

 

$

22,555

 

Interest paid

 

$

14,375

 

$

15,677

 

 

See accompanying notes to Consolidated Financial Statements (Unaudited)

7




AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Expressed in thousands of U.S. dollars, except share and per share amounts)

1.             Basis of Preparation and Consolidation

These unaudited consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”) and its subsidiaries (together, the “Company”) and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the 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 unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company’s consolidated financial statements include the reserve for losses and loss expenses, premium estimates for business written on a line slip or proportional basis, and reinsurance recoverable balances. The terms “FAS” and “FASB” used in these notes refer to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2006.

2.             New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”  FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.”  Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods.

FIN 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation.  The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year.  The company is currently evaluating the potential impact of FIN 48 on its financial statements.

3.             Segment Information

The Company evaluates the performance of its insurance and reinsurance segments based on underwriting results. The Company writes business that has loss experience generally characterized as low frequency and high severity.  This may result in volatility in both the Company’s and an individual segment’s operating results and cash flows. The Company does not allocate its assets by segment as it evaluates the underwriting results of each segment separately from the results of its investment portfolio.

8




Insurance

The Company’s insurance segment provides insurance coverage on a worldwide basis and is divided into two sub-segments: global insurance and U.S. insurance.

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

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

Reinsurance

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

The following tables summarize the underwriting results, income before income taxes, ratios and the reserves for losses and loss expenses for the Company’s reportable operating segments and sub-segments for the quarters and six months ended June 30, 2006 and 2005.

9




Quarter ended June 30, 2006

 

 

Global
Insurance

 

U.S.
Insurance

 

Total
Insurance

 

Reinsurance

 

Corporate

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

313,235

 

$

316,370

 

$

629,605

 

$

365,775

 

$

 

$

995,380

 

Net premiums written

 

278,370

 

176,656

 

455,026

 

365,706

 

 

820,732

 

Net premiums earned

 

180,568

 

143,003

 

323,571

 

355,528

 

 

679,099

 

Other insurance related income

 

 

438

 

438

 

 

 

438

 

Net losses and loss expenses

 

(68,883

)

(78,902

)

(147,785

)

(224,197

)

 

(371,982

)

Acquisition costs

 

(23,753

)

(15,001

)

(38,754

)

(63,078

)

 

(101,832

)

General and administrative expenses

 

(11,304

)

(23,569

)

(34,873

)

(11,501

)

 

(46,374

)

Underwriting income

 

76,628

 

25,969

 

102,597

 

56,752

 

 

159,349

 

Corporate expenses

 

 

 

 

 

 

 

 

 

(11,283

)

(11,283

)

Net investment income

 

 

 

 

 

 

 

 

 

91,663

 

91,663

 

Realized losses on investments

 

 

 

 

 

 

 

 

 

(9,777

)

(9,777

)

Foreign exchange gains

 

 

 

 

 

 

 

 

 

18,901

 

18,901

 

Interest expense

 

 

 

 

 

 

 

 

 

(8,315

)

(8,315

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

$

240,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss expense ratio

 

38.1

%

55.2

%

45.7

%

63.1

%

 

 

54.8

%

Acquisition cost ratio

 

13.2

%

10.5

%

12.0

%

17.7

%

 

 

15.0

%

General and administrative expense ratio

 

6.3

%

16.5

%

10.8

%

3.2

%

1.7

%

8.5

%

Combined ratio

 

57.6

%

82.2

%

68.5

%

84.0

%

 

 

78.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for losses and loss expenses

 

$

1,494,526

 

$

1,534,406

 

$

3,028,932

 

$

1,806,229

 

n/a

 

$

4,835,161

 

 

10




Quarter ended June 30, 2005

 

 

Global
Insurance

 

U.S.
Insurance

 

Total
Insurance

 

Reinsurance

 

Corporate

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

227,512

 

$

285,470

 

$

512,982

 

$

254,311

 

 

$

767,293

 

Net premiums written

 

214,005

 

151,098

 

365,103

 

250,693

 

 

615,796

 

Net premiums earned

 

204,717

 

108,321

 

313,038

 

311,375

 

 

624,413

 

Other insurance related income

 

(5,627

)

326

 

(5,301

)

(150

)

 

(5,451

)

Net losses and loss expenses

 

(78,039

)

(70,658

)

(148,697

)

(174,156

)

 

(322,853

)

Acquisition costs

 

(26,455

)

(3,695

)

(30,150

)

(55,321

)

 

(85,471

)

General and administrative expenses

 

(9,632

)

(20,777

)

(30,409

)

(12,330

)

 

(42,739

)

Underwriting income

 

84,964

 

13,517

 

98,481

 

69,418

 

 

167,899

 

Corporate expenses

 

 

 

 

 

 

 

 

 

(14,057

)

(14,057

)

Net investment income

 

 

 

 

 

 

 

 

 

58,001

 

58,001

 

Realized gains on investments

 

 

 

 

 

 

 

 

 

1,831

 

1,831

 

Foreign exchange losses

 

 

 

 

 

 

 

 

 

(27,226

)

(27,226

)

Interest expense

 

 

 

 

 

 

 

 

 

(7,818

)

(7,818

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

$

178,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss expense ratio

 

38.1

%

65.2

%

47.5

%

55.9

%

 

 

51.7

%

Acquisition cost ratio

 

12.9

%

3.4

%

9.6

%

17.8

%

 

 

13.7

%

General and administrative expense ratio

 

4.7

%

19.2

%

9.7

%

4.0

%

2.2

%

9.1

%

Combined ratio

 

55.7

%

87.8

%

66.8

%

77.7

%

 

 

74.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for losses and loss expenses

 

$

951,874

 

$

930,807

 

$

1,882,681

 

$

1,047,018

 

n/a

 

$

2,929,699

 

 

11




Six months ended June 30, 2006

 

 

Global
Insurance

 

U.S.
Insurance

 

Total
Insurance

 

Reinsurance

 

Corporate

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

523,033

 

$

543,622

 

$

1,066,655

 

$

1,093,465

 

$

 

$

2,160,120

 

Net premiums written

 

435,556

 

294,620

 

730,176

 

1,082,884

 

 

1,813,060

 

Net premiums earned

 

365,767

 

280,517

 

646,284

 

666,409

 

 

1,312,693

 

Other insurance related income

 

 

1,062

 

1,062

 

 

 

1,062

 

Net losses and loss expenses

 

(149,322

)

(154,633

)

(303,955

)

(426,685

)

 

(730,640

)

Acquisition costs

 

(51,142

)

(25,068

)

(76,210

)

(115,326

)

 

(191,536

)

Corporate general and administrative expenses

 

(21,172

)

(46,756

)

(67,928

)

(22,215

)

 

(90,143

)

Underwriting income

 

144,131

 

55,122

 

199,253

 

102,183

 

 

301,436

 

Corporate expenses

 

 

 

 

 

 

 

 

 

(22,925

)

(22,925

)

Net investment income

 

 

 

 

 

 

 

 

 

185,231

 

185,231

 

Realized losses on investments

 

 

 

 

 

 

 

 

 

(20,706

)

(20,706

)

Foreign exchange gains

 

 

 

 

 

 

 

 

 

28,165

 

28,165

 

Interest expense

 

 

 

 

 

 

 

 

 

(16,400

)

(16,400

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

$

454,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss expense ratio

 

40.8

%

55.1

%

47.0

%

64.0

%

 

 

55.7

%

Acquisition cost ratio

 

14.0

%

8.9

%

11.8

%

17.3

%

 

 

14.6

%

General and administrative expense ratio

 

5.8

%

16.7

%

10.5

%

3.3

%

1.7

%

8.6

%

Combined ratio

 

60.6

%

80.7

%

69.3

%

84.6

%

 

 

78.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for losses and loss expenses

 

$

1,494,526

 

$

1,534,406

 

$

3,028,932

 

$

1,806,229

 

n/a

 

$

4,835,161

 

 

12




Six months ended June 30, 2005

 

 

Global
Insurance

 

U.S.
Insurance

 

Total
Insurance

 

Reinsurance

 

Corporate

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

479,835

 

$

462,396

 

$

942,231

 

$

1,023,761

 

 

$

1,965,992

 

Net premiums written

 

417,435

 

242,330

 

659,765

 

1,018,102

 

 

1,677,867

 

Net premiums earned

 

421,575

 

214,822

 

636,397

 

613,606

 

 

1,250,003

 

Other insurance related income

 

(5,865

)

346

 

(5,519

)

 

 

(5,519

)

Net losses and loss expenses

 

(143,934

)

(142,376

)

(286,310

)

(380,833

)

 

(667,143

)

Acquisition costs

 

(59,537

)

(6,739

)

(66,276

)

(110,496

)

 

(176,772

)

General and administrative expenses

 

(19,484

)

(41,088

)

(60,572

)

(24,631

)

 

(85,203

)

Underwriting income

 

192,755

 

24,965

 

217,720

 

97,646

 

 

315,366

 

Corporate expenses

 

 

 

 

 

 

 

 

 

(25,895

)

(25,895

)

Net investment income

 

 

 

 

 

 

 

 

 

110,759

 

110,759

 

Realized gains losses on investments

 

 

 

 

 

 

 

 

 

438

 

438

 

Foreign exchange losses

 

 

 

 

 

 

 

 

 

(50,644

)

(50,644

)

Interest expense

 

 

 

 

 

 

 

 

 

(15,897

)

(15,897

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

$

334,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and loss expense ratio

 

34.1

%

66.3

%

45.0

%

62.1

%

 

 

53.4

%

Acquisition cost ratio

 

14.1

%

3.1

%

10.4

%

18.0

%

 

 

14.1

%

General and administrative expense ratio

 

4.6

%

19.1

%

9.5

%

4.0

%

2.1

%

8.9

%

Combined ratio

 

52.8

%

88.5

%

64.9

%

84.1

%

 

 

76.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve for losses and loss expenses

 

$

951,874

 

$

930,807

 

$

1,882,681

 

$

1,047,018

 

n/a

 

$

2,929,699

 

 

4.             Benefit plans

(a)           Employee Benefit Plans

1)            Retirement Plans

The Company provides retirement benefits to eligible employees through various plans sponsored by the Company.

(i)            Defined contribution plans

The Company has several defined contribution plans that are managed externally pursuant to which employees and the Company contribute on a monthly basis. During the quarter ended June 30, 2006, pension expenses totaled $2,014 (June 30, 2005: $1,434). During the six months ended June 30, 2006, pension expenses totaled $3,621 (June 30, 2005: $2,925).

(ii)           Defined benefit plans

Effective January 1, 2004, the Company implemented supplemental retirement plans (“SERPs”) for two executives. The SERP for Mr. Charman requires the Company to make annual payments to Mr. Charman upon his retirement for a period of 20 years. The benefits vest over a period of two years commencing in 2006.

13




Commencing at age 56, Mr. Charman is entitled to an annual payment of $750 compounded by 3% annually for each year commencing from inception. The SERP for Mr. Butt requires the Company to make annual payments to Mr. Butt upon his retirement for a period of 10 years. The benefits vest over a period of two years commencing in 2006. Commencing at age 66, Mr. Butt is entitled to an annual payment of $250 compounded by 3% annually for each year commencing from inception. If either Mr. Charman or Mr. Butt dies, is permanently disabled or a change of control of the Company occurs, the remaining benefits under his plan are payable by the Company in a lump sum. The benefits received under the SERPs will be reduced by the benefits received by the executives under the Company’s Bermuda retirement plan.  The measurement date of the plan was January 1, 2005. The plan was fully funded in January 2006.

Effective May 12, 2006, the SERP for Mr. Butt was amended to delay by one year the timing of retirement benefits to be paid to Mr. Butt and to increase the amount of retirement benefits by $100 for the first five years of retirement.

The following table shows the components of pension expense for the quarters and six months ended June 30, 2006 and 2005 and the amounts included in the Company’s Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 for the Company’s SERPs:

 

 

Quarters ended

 

Six Months ended

 

 

 

June 30,
2006

 

June 30,
2005

 

June 30,
2006

 

June 30,
2005

 

Components of pension expense

 

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

$

568

 

$

537

 

$

1,136

 

$

1,073

 

Interest cost

 

185

 

171

 

369

 

342

 

Expected return on plan assets

 

(179

)

 

(358

)

 

Pension expense

 

$

574

 

$

708

 

$

1,147

 

$

1,415

 

 

The weighted-average assumptions used to determine net periodic pension cost and benefit obligations were:

 

Quarters ended

 

Six Months ended

 

 

 

June 30, 2006

 

June 30, 2005

 

June 30, 2006

 

June 30, 2005

 

Discount rate

 

5.8

%

6.0

%

5.8

%

6.0

%

Expected return on plan assets

 

5.8

%

6.0

%

5.8

%

6.0

%

 

 

June 30,
2006

 

December 31,
2005

 

Changes in plan assets

 

 

 

 

 

Fair value of plan assets at beginning of period

 

$

 

$

 

Expected return on plan assets

 

358

 

 

Employer contribution

 

12,840

 

 

Fair value of plan assets at end of period

 

$

13,198

 

$

 

 

14




 

 

June 30,
2006

 

December 31,
2005

 

Components of benefit obligation

 

 

 

 

 

Benefit obligation at beginning of period

 

$

12,439

 

$

11,371

 

Interest cost

 

369

 

683

 

Amendments

 

379

 

385

 

Benefit obligation at end of period

 

$

13,187

 

$

12,439

 

 

 

 

 

 

 

Reconciliation of Funded Status

 

 

 

 

 

Funded Status

 

$

 

$

(12,439

)

Unrecognized loss

 

385

 

385

 

Unrecognized prior service cost

 

5,289

 

6,436

 

Prepaid (accrued) benefit cost

 

$

5,674

 

$

(5,618

)

 

2)            Long Term Equity Compensation Plan

The Company has adopted a Long-Term Equity Compensation Plan (“LTEC”) that provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, performance share and performance unit awards and share purchase rights. The maximum number of common shares with respect to which awards may be granted under the plan is 14,855,192, of which 1,200,000 are available for issuance pursuant to share purchase rights and of which 13,655,192 are available for issuance under all other awards. The plan is administered by the Compensation Committee of the Board of Directors.

Effective January 1, 2006, the Company adopted, prospectively, the fair value recognition provisions of FAS No. 123 (revised) “Share-Based Payments (“FAS No. 123 (R)”) for all stock options and restricted shares that were outstanding on January 1, 2006 that are granted or subsequently modified or cancelled. Compensation expense for stock options and for restricted stock awards granted to employees is recorded over the vesting period using the fair value method, net of estimated forfeitures. For awards that have a graded vesting schedule, the Company recognizes compensation expense on a straight-line basis over the vesting period for each separate vesting portion of the award as if the award was, in-substance, multiple awards. The Company has not issued awards subject to performance and market conditions.

The compensation cost recognized in the six months of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with FAS No. 123 (R).  Prior periods have not been restated to reflect the adoption of the new standard.  The adoption of FAS No. 123 (R) did not have a significant impact on net income and basic and diluted earnings per share for the three months ended June 30, 2006.

On January 1, 2003, the Company adopted FAS No. 123 by applying the prospective method permitted under FAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Prior to 2003, the Company followed Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock compensation. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to all of its stock-based compensation prior to January 1, 2003.

15




 

 

 

Quarters Ended

 

Six Months Ended

 

 

 

June 30,
2006

 

June 30,
2005

 

June 30,
2006

 

June 30,
2005

 

Net income available to common shareholders, as reported

 

$

223,400

 

$

172,845

 

$

418,585

 

$

324,644

 

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

 

5,505

 

5,448

 

10,724

 

10,505

 

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

 

(5,505

)

(5,626

)

(10,724

)

(10,862

)

Pro-forma net income available to common shareholders

 

$

223,400

 

$

172,667

 

$

418,585

 

$

324,287

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic—as reported

 

$

1.49

 

$

1.23

 

$

2.80

 

$

2.26

 

 

 

 

 

 

 

 

 

 

 

Basic—pro-forma

 

$

1.49

 

$

1.23

 

$

2.80

 

$

2.26

 

 

 

 

 

 

 

 

 

 

 

Diluted—as reported

 

$

1.37

 

$

1.13

 

$

2.56

 

$

2.07

 

 

 

 

 

 

 

 

 

 

 

Diluted—pro-forma

 

$

1.37

 

$

1.12

 

$

2.56

 

$

2.07

 

 

(i)            Options

Options granted under the plan generally expire 10 years after the date of grant and generally vest ratably on an annual basis over three years from the date of grant. Exercise prices are established at the fair value of the Company’s common shares at the date of grant. Upon exercise, new shares are issued by the Company.

During the quarter ended June 30, 2006, the Company expensed $1,220 (quarter ended June 30, 2005: $1,058) related to the grant of options and realized a tax benefit of $262 (quarter ended June 30, 2005: $176). During the six months ended June 30, 2006, the Company expensed $1,637 (six months ended June 30, 2005: $2,113) related to the grant of options and realized a tax benefit of $830 (six months ended June 30, 2005: $354). At June 30, 2006, there was $2,378 of unrecognized compensation cost related to options which is expected to be recognized over the weighted average period of 1 year.  The total intrinsic value of options exercised during the six months ended June 30, 2006 was $9,086 (year ended December 31, 2005: $10,258) and the Company received proceeds of $14,013 (year ended December 31, 2005: $8,585). The total intrinsic value of options vested at June 30, 2006, was $52,060 (year ended December 31, 2005: $69,886). The fair value of options granted during 2006 was $213 (year ended December 31, 2005: $6,413). The grants in 2006 reflect modifications to grants made in prior years to an employee pursuant to a severance agreement filed in an 8-K with the SEC on February 23, 2006.  The earlier grants were deemed cancelled and new grants issued at the new terms.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2006: risk free interest rates of 4.6% (2005: 4.2%), expected life of 0.3 years (2005: 7.0 years), a dividend yield of 1.7% (2005: 2.5%) and an expected volatility of 20% (2005: 22%). The Company has elected to use the simplified method of calculating the expected life of the options, which is the average of the vesting period and the expiry period.

16




The following is a summary of stock options granted under the LTEC and related activity:

 

Six months ended
June 30, 2006

 

Year ended
December 31, 2005

 

 

 

Number of
Options

 

Weighted
Average
Exercise
Price

 

Number
of
Options

 

Weighted
Average
Exercise
Price

 

Outstanding—beginning of period

 

6,054,464

 

$

18.99

 

5,622,181

 

$

16.38

 

Granted

 

45,000

 

26.90

 

1,269,834

 

28.01

 

Exercised

 

(749,782

)

18.70

 

(653,881

)

13.13

 

Forfeited

 

(57,833

)

27.32

 

(183,670

)

25.92

 

Outstanding—end of period

 

5,291,849

 

$

19.01

 

6,054,464

 

$

18.99

 

 

The following table summarizes information about the Company’s stock options for options granted under the LTEC and outstanding as of June 30, 2006:

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise prices

 

Number of
Options

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Life

 

Number
of
Options

 

Weighted
Average
Exercise
Price

 

$12.50-$13.75

 

2,603,847

 

$

12.55

 

5.59

 

2,603,847

 

$

12.55

 

$13.76-$15.00

 

671,000

 

14.50

 

6.45

 

671,000

 

14.50

 

$15.01-$16.25

 

53,334

 

16.25

 

6.92

 

53,334

 

16.25

 

$16.26-$25.65

 

59,000

 

25.54

 

7.33

 

39,334

 

25.54

 

$25.66-$29.62

 

1,904,668

 

$

28.82

 

7.89

 

981,886

 

$

29.10

 

 

In addition, the Company receives a tax deduction for certain stock option exercises in the period of exercise. In accordance with FAS No. 123 (R), the consolidated statement of cash flows for the six months ended June 30, 2006 includes excess tax benefits of $627 on exercise of stock options as a financing cash flow.

(ii)           Restricted Stock

The fair value of restricted share grants is determined using the closing price of the Company’s shares on the New York Stock Exchange on the day prior to the grant, with grants generally vesting three years after the date of grant or upon the employee’s earlier retirement, death, permanent disability or a change in control of the Company. Restricted shares are entitled to vote and to receive dividends but may not be transferred during the period of restriction and are forfeited if the employee’s employment terminates prior to vesting. Compensation cost equivalent to the estimated fair market value at the date of grant for the number of shares expected to fully vest is amortized over a three-year vesting period. As of June 30, 2006, there was $40,084 of unrecognized compensation cost related to these awards which is expected to be recognized over the weighted average period of 2 years.  The total fair value of shares vested during the six months ended June 30, 2006 was $2,387 (year ended 2005: $25,699). During the quarter ended June 30, 2006, the Company expensed $5,283 (quarter ended June 30, 2005: $5,040) in respect of restricted stock, and recorded tax benefits thereon of $942 (quarter ended June 30, 2005: $577). During the six months ended June 30, 2006, the Company expensed $10,871 (six months ended June 30, 2005: $9,925) in respect of restricted stock, and recorded tax benefits thereon of $1,809 (six months ended June 30, 2005: $1,412).

17




The following is a summary of restricted stock granted under the LTEC and related activity:

 

June 30, 2006

 

December 31, 2005

 

 

 

Number of
Shares

 

Weighted
Average
Grant-Date
Fair Value

 

Number
of
Shares

 

Weighted
Average
Grant-Date
Fair Value

 

Nonvested —beginning of period

 

1,175,750

 

$

28.40

 

2,126,700

 

$

17.36

 

Granted

 

1,273,500

 

31.01

 

898,750

 

28.35

 

Vested

 

(86,000

)

27.75

 

(1,723,300

)

14.91

 

Forfeited

 

(77,250

)

25.42

 

(126,400

)

26.18

 

Nonvested—end of period

 

2,286,000

 

$

29.98

 

1,175,750

 

$

28.40

 

 

The grants in 2006 include modifications to grants made in prior years to an employee pursuant to a severance agreement filed in an 8-K with the SEC on February 23, 2006. The earlier grants were deemed cancelled and new grants issued at the new terms.

(b)           Director Benefit Plans

(1)           2004 Directors Long-Term Equity Compensation Plan

The Company has adopted a Directors Long-Term Equity Compensation Plan (“DLTECP”) that provides for the grant of non-qualified stock options and stock awards (restricted and unrestricted) to non-employee directors of the Company. The maximum number of common shares with respect to which awards may be granted under the plan is 1,200,000. The plan is administered by the Compensation Committee of the Board of Directors.

(i)            Options

Options granted under the plan generally expire 10 years after the date of grant and generally vest ratably on an annual basis over three years from the date of grant. Exercise prices are established at the fair value of the Company’s common shares at the date of grant. Upon exercise, new shares are issued by the Company.

During the quarter ended June 30, 2006, the Company expensed $53 (quarter ended June 30, 2005: $43) related to the grant of options. During the six months ended June 30, 2006, the Company expensed $78 (six months ended June 30, 2005: $91) related to the grant of options. At June 30, 2006, there was $105 of unrecognized compensation cost related to options which is expected to be recognized over the weighted average period of 1 year. The total intrinsic value of options exercised during the six months ended June 30, 2006 was $94 (December 31, 2005: $nil) and the Company received proceeds of $318 (year ended December 31, 2005: $nil) and realized a tax benefit of $nil (year ended December 31, 2005: $nil). The total intrinsic value of options vested at June 30, 2006, was $345 (December 31, 2005: $343). There were no option grants during the six months ended June 30, 2006, and the fair value of options granted during 2005 was $257. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2005: risk free interest rates of 4.2%, expected life of 7 years, a dividend yield of 2.5% and an expected volatility of 22%. The Company has elected to use the simplified method of calculating the expected life of the options, which is the average of the vesting period and the expiry period.

18




The following is a summary of stock options granted under the DLTECP and related activity:

 

Six Months ended
June 30, 2006

 

Year ended
December 31, 2005

 

 

 

Number of
Options

 

Weighted
Average
Exercise
Price

 

Number
of
Options

 

Weighted
Average
Exercise
Price

 

Outstanding—beginning of period

 

120,000

 

$

25.19

 

72,000

 

$

23.68

 

Granted

 

-

 

-

 

48,000

 

27.45

 

Exercised

 

(13,332

)

23.84

 

 

 

Outstanding—end of period

 

106,668

 

$

25.36

 

120,000

 

$

25.19

 

 

The following table summarizes information about the Company’s stock options granted under the DLTECP and for options outstanding as of June 30, 2006:

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise prices

 

Number of
Options

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Life

 

Number
of
Options

 

Weighted
Average
Exercise
Price

 

$15.01-$16.25

 

26,667

 

$

16.25

 

6.59

 

26,667

 

$

16.25

 

$25.66-$29.62

 

80,001

 

$

28.39

 

8.16

 

34,668

 

$

28.79

 

 

(ii)           Restricted Stock

The fair value of restricted share grants is determined using the closing price of the Company’s shares on the New York Stock Exchange on the day prior to the grant, with grants generally vesting six months after the date of grant or upon the director’s earlier retirement, death, permanent disability or a change in control of the Company. Restricted shares are entitled to vote and to receive dividends but may not be transferred during the period of restriction and are forfeited if the director resigns prior to vesting. Compensation cost equivalent to the estimated fair market value at the date of grant for the number of shares expected to fully vest is amortized over a six-month vesting period.  As of June 30, 2006, there was $17 of unrecognized compensation cost related to these awards. The total fair value of shares vested during the quarter ended June 30, 2006 was $nil (year ended December 31, 2005: $120). During the quarter ended June 30, 2006, the Company expensed $80 (quarter ended June 30, 2005: $60) in respect of restricted stock, and recorded no tax benefits. During the six months ended June 30, 2006, the Company expensed $150 (quarter ended June 30, 2005: $117) in respect of restricted stock, and recorded no tax benefits.

19




The following is a summary of restricted stock granted under the DLTECP and related activity:

 

Six months ended
June 30, 2006

 

Year ended
December 31, 2005

 

 

 

Number
of
Shares

 

Weighted
Average Grant
Date
Fair Value

 

Number
of
Shares

 

Weighted
Average Grant
Date
Fair Value

 

Nonvested —beginning of period

 

 

$

 

 

$

 

Granted

 

5,590

 

31.31

 

4,368

 

27.45

 

Vested

 

 

 

(4,368

)

27.45

 

Nonvested—end of period

 

5,590

 

$

31.31

 

 

$

 

 

In addition, directors may elect to receive their fees in common shares rather than cash.  As at June 30, 2006, 43,912 (December 31, 2005: 40,235) common shares had been granted under the plan in lieu of fees.  All awards are made at the fair market value of the common shares at the time of the grant.

(ii)           2004 Directors Deferred Compensation Plan

The Company has an unfunded nonqualified deferred compensation plan that allows participating directors to elect (i) the amount, if any, of cash or stock as fees for services to be deferred and (ii) the form in which payment is to be made. Directors who choose to defer fees otherwise payable in shares are credited a number of phantom stock units equal in amount to the number of shares of stock deferred. In the event a cash dividend is declared on the stock, the portion of the participant’s deferral account denominated in phantom share units is credited with additional phantom share units (or portions thereof). Directors who choose to defer fees otherwise payable in cash are credited with interest on their cash deferral at a rate for the year of deferral that is 100 basis points above the 12-month LIBOR rate for deposits of U.S. dollars. Generally, benefits are paid upon termination of service as a director. As at June 30, 2006, 35,657 (December 31, 2005: 31,411) phantom share units had been issued under the plan in lieu of fees, and 10,001 (December 31, 2005: 6,657) had been issued in lieu of restricted shares.

20




5.             Investments

The following table summarizes the fixed maturity investments in an unrealized loss position at June 30, 2006 and December 31, 2005 and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:

As at June 30, 2006:

 

 

12 months or greater

 

Less than 12 months

 

Total

 

 

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

U.S. government and agency securities

 

$

381,466

 

$

(13,849

)

$

977,323

 

$

(28,052

)

$

1,358,789

 

$

(41,901

)

Non - U.S. government securities

 

1,431

 

(79

)

156,344

 

(3,455

)

157,775

 

(3,534

)

Corporate securities

 

310,266

 

(10,447

)

632,369

 

(19,418

)

942,635

 

(29,865

)

Mortgage-backed securities

 

444,446

 

(20,916

)

1,971,394

 

(68,350

)

2,415,840

 

(89,266

)

Asset-backed securities

 

134,803

 

(3,052

)

173,566

 

(2,162

)

308,369

 

(5,214

)

Municipals

 

67,790

 

(2,388

)

264,550

 

(5,855

)

332,340

 

(8,243

)

Total

 

$

1,340,202

 

$

(50,731

)

$

4,175,546

 

$

(127,292

)

$

5,515,748

 

$

(178,023

)

 

As at December 31, 2005:

 

 

12 months or greater

 

Less than 12 months

 

Total

 

 

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

U.S. government and agency securities

 

$

527,787

 

$

(10,823

)

$

746,012

 

$

(9,406

)

$

1,273,799

 

$

(20,229

)

Non - U.S. government securities

 

-

 

-

 

115,871

 

(6,196

)

115,871

 

(6,196

)

Corporate securities

 

258,287

 

(6,361

)

813,927

 

(14,314

)

1,072,214

 

(20,675

)

Mortgage-backed securities

 

309,808

 

(8,980

)

1,674,865

 

(27,262

)

1,984,673

 

(36,242

)

Asset-backed securities

 

107,636

 

(2,198

)

85,714

 

(1,217

)

193,350

 

(3,415

)

Municipals

 

55,720

 

(1,476

)

157,116

 

(1,356

)

212,836

 

(2,832

)

Total

 

$

1,259,238

 

$

(29,838

)

$

3,593,505

 

$

(59,751

)

$

4,852,743

 

$

(89,589

)

 

As of June 30, 2006, there were approximately 2,320 securities (2005: 2,113) in an unrealized loss position with a fair market value of $5,515.7 (2005: $4,852.7). Of these securities, there are 752 securities (2005: 517) that have been in an unrealized loss position for 12 months or greater with a fair market value of $1,340.2 (2005: $1,259.2). The unrealized losses from these securities were not a result of credit, collateral or structural issues. As of June 30, 2006, thirteen (2005: none) of these securities were considered to be other than temporarily impaired resulting in an impairment charge of $0.6 million for the six months ended June 30, 2006.

6.             Debt and Financing Arrangements

a)             Senior Notes

On November 15, 2004, the Company issued $500.0 million of senior unsecured debt (“Senior Notes”) at an issue price of 99.785%, generating net proceeds of $495.7 million. The Senior Notes bear interest at a rate of 5.75%, payable semi-annually in arrears on June 1 and December 1 of each year. Unless previously redeemed, the Senior Notes will mature on December 1, 2014. The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price, however, the Company has no current intentions of calling the Senior Notes. The Senior Notes indenture contains various covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. The Company was in compliance with all the

21




covenants contained in the Senior Notes indenture at June 30, 2006. The market value of the Senior Notes at June 30, 2006 was $469.2 million (December 31, 2005: $498.5 million).

Interest expense includes interest payable, amortization of the offering discount and amortization of debt offering expenses. The offering discount and debt offering expenses are amortized over the period of time during which the Senior Notes are outstanding. For the quarters ended June 30, 2006 and 2005, the Company incurred interest expense for the Senior Notes of $7.3 million. For the six months ended June 30, 2006 and 2005, the company incurred interest expense for the Senior Notes of $14.6 million.

b)             Credit Facilities

As at June 30, 2006, the Company had a $1.5 billion credit facility agreement with a syndicate of lenders. The credit agreement is an unsecured five-year facility that allows the Company and its operating subsidiaries to issue letters of credit up to the full amount of the facility and to borrow up to $500.0 million for general corporate purposes, with total usage not to exceed $1.5 billion. The credit agreement contains various loan covenants, including limitations on the incurrence of future indebtedness, future liens, fundamental changes, investments and certain transactions with affiliates. The facility also requires that the Company maintain 1) a minimum consolidated net worth of $2.0 billion plus (A) 25% of consolidated net income (if positive) of AXIS Capital for each semi-annual fiscal period ending on or after December 31, 2005 plus (B) an amount equal to 25% of the net cash proceeds received by AXIS Capital from the issuance of its capital stock during each such semi-annual fiscal period and 2) a maximum debt to total capitalization ratio of 0.35:1.0. The Company was in compliance with all covenants contained in the credit agreement at June 30, 2006. As at June 30, 2006, the Company had letters of credit of $608.1 million (December 31, 2005: $685.1 million) outstanding. There was no debt outstanding under the credit facility as at June 30, 2006 or December 31, 2005.

7.             Earnings Per Common Share

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

 

 

Quarters ended

 

Six months ended

 

 

 

June 30,
2006

 

June 30,
2005

 

June 30,
2006

 

June 30,
2005

 

Basic earnings per common share

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

223,400

 

$

172,845

 

$

418,585

 

$

324,644

 

Weighted average common shares outstanding

 

149,765,181

 

140,566,523

 

149,541,163

 

143,584,354

 

Basic earnings per common share - basic

 

$

1.49

 

$

1.23

 

$

2.80

 

$

2.26

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

223,400

 

$

172,845

 

$

418,585

 

$

324,644

 

Weighted average common shares outstanding

 

149,765,181

 

140,566,523

 

149,541,163

 

143,584,354

 

Share equivalents

 

 

 

 

 

 

 

 

 

Warrants

 

11,006,209

 

10,485,432

 

11,320,152

 

10,656,522

 

Options

 

1,780,378

 

2,143,648

 

1,906,398

 

2,202,168

 

Restricted stock

 

773,691

 

442,147

 

673,928

 

570,460

 

Weighted average common shares and common share equivalents outstanding — diluted

 

163,325,459

 

153,637,750

 

163,441,641

 

157,013,504

 

Diluted earnings per common share

 

$

1.37

 

$

1.13

 

$

2.56

 

$

2.07

 

 

22




Share equivalents that will result in the issuance of common shares of 1,620,168, 1,763,959, 3,615,618, 1,735,875 were outstanding for the quarters and six months ended June 30, 2006 and 2005, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.

8.             Commitments and Contingencies

a)             Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments and reinsu