AXIS Capital Reports Fourth Quarter Operating Income of $159 Million, or $1.41 Per Diluted Common Share

AXIS Capital Holdings Limited (“AXIS Capital”) (NYSE: AXS) today reported a net income available to common shareholders for the fourth quarter of 2013 of $172 million, or $1.52 per diluted common share, compared with a net loss of $19 million, or $0.16 per diluted common share, for the fourth quarter of 2012. Net income available to common shareholders for the full year 2013 was $684 million, or $5.93 per diluted common share, compared with $495 million, or $4.00 per diluted common share, for 2012.

Our operating income¹ for the fourth quarter of 2013 was $159 million, or $1.41 per diluted common share, compared with an operating loss of $28 million, or $0.23 per diluted common share, for the fourth quarter of 2012. For the full year 2013, AXIS Capital reported operating income of $633 million, or $5.49 per diluted common share, compared with operating income of $422 million, or $3.41 per diluted common share, for 2012.

¹ Operating income (loss) and operating return on average common equity are “non-GAAP financial measures” as defined in Regulation G. A reconciliation of operating income (loss) to net income (loss) available to common shareholders (the nearest GAAP financial measure) and the calculation of operating return on average common equity are provided in this release, as is a discussion of the rationale for the presentation of these items.

Full Year Highlights²

• Gross premiums written increased 13% to $4.7 billion, with growth of $308 million, or 17% in our reinsurance segment and $250 million, or 11%, in our insurance segment;
• Net premiums written increased 18% to $3.9 billion and net premiums earned increased 9% to $3.7 billion;
• Combined ratio of 91.0% (including 5.3 points related to 2013 natural catastrophe and weather-related losses), compared with 96.2% (including 12.7 points related to 2012 natural catastrophe and weather-related events);
• Net favorable prior year reserve development of $219 million (benefiting the combined ratio by 5.9 points), compared to $245 million (benefiting the combined ratio by 7.1 points);
• Net investment income increased 7% to $409 million;
• Pre-tax total return on cash and investments of 1.6%, compared to 5.4%;
• Net income available to common shareholders of $684 million and return on average common equity of 13.1%, compared to $495 million and 9.7%;
• Operating income of $633 million, representing an operating return on average common equity of 12.1%, compared to operating income of $422 million, representing an operating return on average common equity of 8.2%;
• Net cash flows from operations of $1.1 billion, comparable to $1.1 billion in 2012;
• Share repurchases total of $472 million for the year;
• Diluted book value per common share of $45.80, a 7% increase from December 31, 2012; and
• Growth in diluted book value per share, adjusted for dividends declared during the year, of $3.85 per common share.

Fourth Quarter Highlights²

• Gross premiums written increased 10% to $826 million;
• Net premiums written increased 25% to $648 million and net premiums earned increased 10% to $942 million;
• No significant natural catastrophe or weather-related losses;
• Net favorable prior year reserve development of $43 million (benefiting the combined ratio by 4.6 points) compared to $65 million (benefiting the combined ratio by 7.5 points);
• Net investment income increased 31% to $114 million;
• Net cash flows from operations of $184 million, compared to $233 million;
• Share repurchases totaled $113 million in the quarter. During the quarter, we announced that effective January 1, 2014, the share repurchase authorization program was increased to $750 million of the Company's common shares effective through December 31, 2015; and
• Quarterly common share dividend declared increased 8% to $0.27 per share.

²All comparisons are with the same period of the prior year, unless otherwise stated.

Commenting on the fourth quarter 2013 financial results, Albert Benchimol, President and CEO of AXIS Capital said "AXIS had a good fourth quarter and a good year. Financially, it was a year of solid progress. Despite mixed markets, we increased our net written premiums by 18% for the year while delivering an operating ROE of 12.1%. Notwithstanding a difficult interest rate environment, we grew diluted book value per share 7% for the year. We rewarded investors by again returning effectively all of our operating profits through dividends and buybacks, and we raised our dividend for the ninth consecutive year. With total assets of $20 billion and total capital of $6.8 billion, we have never been stronger.

"2013 was also a year of gratifying achievement in numerous entrepreneurial initiatives. Among our milestone accomplishments this year was our establishment of a presence at Lloyd’s. We reentered the retail primary casualty markets and wholesale small-account excess casualty in the U.S. We expanded existing specialties - such as our highly successful professional, energy and marine lines - into new geographies, notably Asia and Australia. We continued to build AXIS Accident & Health from a start-up into a meaningful participant in the niche markets of travel, accident and specialty health. Within AXIS Re, we established a weather and commodities operation and a third party capital management business. Meanwhile, our expansion in the agriculture sector quickly proved its worth in 2013.

"Our efforts to deliver diversifying growth and increase the balance in our existing businesses are directly tied to our goal of reducing portfolio volatility and enhancing risk adjusted profitability. This is reflected in our combined ratio of 91% for the year despite a high incidence of claims in our property and U.S. D&O books within our insurance segment. While there is still much work to do, I am confident our focus on portfolio optimization will ultimately deliver even stronger performance.

"Much has been made of the inflection point in pricing and increased competition in reinsurance. However, this remains a business of relationships and risk selection, and AXIS remains well-positioned to access, write and retain profitable business. We are pleased with the established specialties we have in both our insurance and reinsurance businesses. With these and the associated flexibility afforded us, we expect to continue to improve returns in 2014 as we make further progress in our various strategic initiatives."

Segment Highlights

Insurance Segment

Our insurance segment reported gross premiums written of $607 million in the quarter, up 5% from the fourth quarter of 2012. Growth was largely associated with the continued expansion of our accident & health business and new initiatives in our professional lines business outside the U.S. In addition, new business and improvements in the U.S. excess and surplus umbrella market benefited our liability line.

For the full year, gross premiums written were $2.6 billion, with the 11% annual growth primarily attributable to the lines of business that also drove the quarterly growth, with the accident & health business contributing 43% of the year-on-year increase.

Net premiums written were up 24% for the fourth quarter and 19% for the year. Growth rates exceed those for gross premiums written due to reductions in premiums ceded for certain lines of business and growth in the accident & health line, where we do not buy significant reinsurance. Net premiums earned increased 18% and 11%, for the quarter and the year, respectively. The growth in gross premiums written, most notably in our accident & health line of business, and the reductions in premiums ceded drove the increases.

Our insurance segment reported underwriting income of $11 million for the current quarter, compared to an underwriting loss of $46 million for the fourth quarter of 2012. The current quarter’s underwriting results reflected a combined ratio of 97.8%, compared with 112.2% in the prior year quarter. The segment’s current accident year loss ratio decreased from 88.9% in the fourth quarter of 2012 to 64.3% this quarter, driven primarily by the impact of natural catastrophe and weather-related losses. Current quarter's results reflect a benign quarter for natural catastrophe and weather-related losses. Comparatively the fourth quarter of 2012 result includes aggregate pre-tax net losses (inclusive of premiums to reinstate reinsurance protection) of $165 million, or 41.5 points, primarily reflecting losses related to Storm Sandy. Excluding the impact of these losses, the fourth quarter current accident year loss ratio increased from 47.4% in 2012 to 65.2% in 2013, driven by a number of factors. Most notable were the impact of an increase in property and professional lines loss experience, associated strengthening of the professional lines' current year loss ratio and, to a lesser extent, a change in the business mix. The strengthening in our professional lines was largely driven by the loss experience in our D&O business written in the United States.

Net favorable prior year reserve development was $4 million, or 0.9 points, this quarter compared with $40 million, or 10.5 points, in the fourth quarter of 2012. Current quarter reflects favorable claims development across most lines of business offset by adverse claims development on the U.S. D&O business following fourth quarter loss experience and an associated strengthening of the underlying loss ratios for the 2011 and 2012 accident years.

The increase in the segment's acquisition cost ratio for the quarter was driven by the impact of the aforementioned reductions in premiums ceded during 2013 and the impact of reinstatement premium commissions received following Storm Sandy in 2012. The increase in fourth quarter general and administrative expenses reflects the continued build-out of the segment's global platform over the past year.

For the full year, underwriting income was $85 million compared with $65 million in 2012. Growth in net premiums earned and a reduction in natural catastrophe and weather-related loss events more than offset the decrease in favorable prior year reserve development and the increase in the current accident year loss ratio.

Reinsurance Segment

For the fourth quarter, which is generally not a significant premium renewal period for our reinsurance segment, we reported gross premiums written of $219 million in 2013, compared to $172 million written in the corresponding quarter of 2012. The increase was driven by new business in professional lines. For the full year, our reinsurance segment reported gross premiums written of $2.1 billion, an increase of 17% from $1.8 billion written during 2012. Growth was evident across almost all lines of business, with the agriculture initiative contributing 37% of our total $308 million increase. Strong growth was also noted in the professional and property lines reflecting new business opportunities.

Underwriting income in our reinsurance segment was $84 million in the fourth quarter of 2013 compared to a loss of $28 million in the fourth quarter of 2012. The current accident year loss ratios were 62.0% and 84.4% in the fourth quarter of 2013 and 2012, respectively. The improvement in the loss ratio is primarily driven by the levels of natural catastrophe and weather-related losses with no significant catastrophe or weather loss events incurred during the fourth quarter of 2013. In contrast, the comparative quarter's loss ratio includes aggregate pre-tax net catastrophe and weather losses (net of reinstatement premiums) of $138 million, or 30.3 points, primarily driven by losses related to Storm Sandy. Exclusive of these amounts, the primary drivers of the increase in the fourth quarter current accident year loss ratio from 54.1% in 2012 to 62.1% in 2013, were an increase in losses incurred in the agriculture and property lines and, to a lesser extent, changes in the business mix.

Net favorable prior period reserve development was $39 million, or 7.9 points, this quarter compared with $24 million, or 5.2 points, in the fourth quarter of 2012.

For the full year, our reinsurance segment reported underwriting income of $343 million, compared to $198 million for 2012. The significant decrease in the level of natural catastrophe and weather-related activity was the primary driver of this variance. Additionally, an increase in the favorable prior year loss reserve development as well as growth in the levels of business written also contributed.

Investments

Net investment income of $114 million for the quarter represented a $27 million increase from the fourth quarter of 2012 and a $10 million increase from the third quarter of 2013, with the variances primarily driven by the market value of our alternative investments ("other investments"). These investments generated $41 million of income in the fourth quarter of 2013, compared to income of $32 million and $15 million in the third quarter of 2013 and fourth quarter of 2012, respectively.

For the full year, net investment income increased by $28 million, or 7%, in 2013. A $41 million increase in income from our other investments more than offset an $11 million reduction from fixed maturities due to lower reinvestment yields, notwithstanding higher investment balances.

Net realized investment gains for the quarter were $20 million, compared to $5 million of net realized investment losses in the third quarter of 2013 and $32 million of net realized investment gains in the fourth quarter of 2012.

Capitalization / Shareholders’ Equity

Our total capital³ at December 31, 2013 was $6.8 billion, including $1.0 billion of long-term debt and $0.6 billion of preferred equity, comparable to $6.8 billion at December 31, 2012.

Diluted book value per common share, calculated on a treasury stock basis, increased by 3% to $45.80 in the fourth quarter, primarily driven by our operating income. On a year-to-date basis, diluted book value per common share increased by $2.83, or 7%, driven by operating income, which was offset by the decline in the fair value of our available-for-sale fixed maturity portfolio, following an upward shift in sovereign yield curves, and common share dividends.

During the quarter we repurchased 2.3 million common shares at an average price of $48.43 per share, for a total cost of $113 million. For the year, our share repurchases totaled 10.8 million common shares, which represents 9% of our shares outstanding at the beginning of the year, at an average price of $43.61 per share for a total cost of $472 million. As of February 4, 2014 we had $750 million of remaining authorization for common share repurchases through December 31, 2015.

³ Total capital represents the sum of total shareholders' equity attributable to AXIS Capital and our senior notes.

Conference Call

We will host a conference call on Wednesday, February 5, 2014 at 9:00 AM (Eastern) to discuss the fourth quarter and year-end financial results and related matters. The teleconference can be accessed by dialing (888) 317-6003 (U.S. callers) or (412) 317-6061 (international callers) approximately ten minutes in advance of the call and entering the code 7-9-5-6-5-5-2. A live, listen-only webcast of the call will also be available via the Investor Information section of the Company’s website at www.axiscapital.com. A replay of the teleconference will be available for three weeks by dialing (877) 344-7529 (U.S. callers) or (412) 317-0088 (international callers) and entering the code 1-0-0-3-9-1-4-1. The webcast will be archived in the Investor Information section of our website.

In addition, a financial supplement relating to our financial results for the quarter ended December 31, 2013 is available in the Investor Information section of our website.

AXIS Capital is a Bermuda-based global provider of specialty lines insurance and treaty reinsurance with total shareholders’ equity attributable to AXIS Capital at December 31, 2013 of $5.8 billion and locations in Bermuda, the United States, Europe, Singapore, Canada, Australia and Latin America. Its operating subsidiaries have been assigned a rating of “A+” (“Strong”) by Standard & Poor’s and “A+” (“Superior”) by A.M. Best. AXIS Capital and AXIS Specialty Finance LLC have been assigned senior unsecured debt ratings of A- (stable) by Standard & Poor’s and Baa1 (stable) by Moody’s Investors Service. For more information about AXIS Capital, visit our website at www.axiscapital.com.

AXIS CAPITAL HOLDINGS LIMITED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2013 (UNAUDITED) AND DECEMBER 31, 2012
			2013				2012
			(in thousands)
Assets
Investments:
Fixed maturities, available for sale, at fair value			$	11,986,327			$	11,928,049
Equity securities, available for sale, at fair value			701,987				666,548
Other investments, at fair value			1,045,810				843,437
Short-term investments, at fair value and amortized cost			46,212				108,860
Total investments			13,780,336				13,546,894
Cash and cash equivalents			923,326				759,817
Restricted cash and cash equivalents			64,550				90,733
Accrued interest receivable			97,132				97,220
Insurance and reinsurance premium balances receivable			1,688,957				1,474,821
Reinsurance recoverable on unpaid and paid losses			1,929,988				1,863,819
Deferred acquisition costs			456,122				389,248
Prepaid reinsurance premiums			330,261				315,676
Receivable for investments sold			1,199				1,254
Goodwill and intangible assets			89,528				97,493
Other assets			273,385				215,369
	Total assets		$	19,634,784			$	18,852,344
Liabilities
Reserve for losses and loss expenses			$	9,582,140			$	9,058,731
Unearned premiums			2,683,849				2,454,692
Insurance and reinsurance balances payable			234,412				270,739
Senior notes			995,855				995,245
Payable for investments purchased			21,744				64,553
Other liabilities			248,822				228,623
	Total liabilities		13,766,822				13,072,583
Shareholders' equity
Preferred shares - Series A, B, C and D			627,843				502,843
Common shares			2,174				2,146
Additional paid-in capital			2,240,125				2,179,034
Accumulated other comprehensive income			117,825				362,622
Retained earnings			5,062,706				4,497,789
Treasury shares, at cost			(2,232,711		)		(1,764,673		)
Total shareholders' equity attributable to AXIS Capital			5,817,962				5,779,761
Noncontrolling Interests			50,000				—
Total shareholders' equity			5,867,962				5,779,761
	Total liabilities and shareholders' equity		$	19,634,784			$	18,852,344

AXIS CAPITAL HOLDINGS LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTERS AND YEARS ENDED DECEMBER 31, 2013 AND 2012
		Three months ended								Years ended
		2013				2012				2013				2012
		(Unaudited)								(Unaudited)
		(in thousands, except per share amounts)
Revenues
Net premiums earned		$	941,911			$	856,049			$	3,707,065			$	3,415,463
Net investment income		113,863				86,847				409,312				380,957
Net realized investment gains		19,558				31,771				75,564				127,469
Other insurance related income		2,668				791				4,424				2,676
Total revenues		1,078,000				975,458				4,196,365				3,926,565
Expenses
Net losses and loss expenses		551,360				675,047				2,134,195				2,096,028
Acquisition costs		175,299				144,063				664,191				627,653
General and administrative expenses		144,183				141,386				575,390				560,981
Foreign exchange losses		14,484				21,300				26,143				29,512
Interest expense and financing costs		15,625				15,498				61,979				61,863
Total expenses		900,951				997,294				3,461,898				3,376,037
Income (loss) before income taxes		177,049				(21,836		)		734,467				550,528
Income tax expense (benefit)		(4,497		)		(12,026		)		7,002				3,287
Net income (loss)		181,546				(9,810		)		727,465				547,241
Preferred shares dividends		10,022				8,741				40,474				38,228
Loss on repurchase of preferred shares		—				—				3,081				14,009
Net income (loss) available to common shareholders		$	171,524			$	(18,551	)		$	683,910			$	495,004
Per share data
Net income (loss) per common share:
Basic net income (loss)		$	1.55			$	(0.16	)		$	6.02			$	4.05
Diluted net income (loss)		$	1.52			$	(0.16	)		$	5.93			$	4.00
Weighted average number of common shares outstanding - basic		110,757				117,918				113,636				122,148
Weighted average number of common shares outstanding - diluted		112,702				117,918				115,328				123,654
Cash dividends declared per common share		$	0.27			$	0.25			$	1.02			$	0.97

AXIS CAPITAL HOLDINGS LIMITED CONSOLIDATED SEGMENTAL DATA FOR THE QUARTERS ENDED DECEMBER 31, 2013 (UNAUDITED) AND 2012
		2013												2012
		Insurance				Reinsurance				Total				Insurance				Reinsurance				Total
		(in thousands)
Gross premiums written		$	606,591			$	219,366			$	825,957			$	580,116			$	172,298			$	752,414
Net premiums written		427,647				220,318				647,965				345,802				172,294				518,096
Net premiums earned		450,465				491,446				941,911				382,885				473,164				856,049
Other insurance related income		681				1,987				2,668				791				—				791
Net losses and loss expenses		(285,634		)		(265,726		)		(551,360		)		(300,094		)		(374,953		)		(675,047		)
Acquisition costs		(65,266		)		(110,033		)		(175,299		)		(48,024		)		(96,039		)		(144,063		)
Underwriting-related general and
administrative expenses4		(89,722		)		(34,039		)		(123,761		)		(81,591		)		(30,430		)		(112,021		)
Underwriting income (loss)4		$	10,524			$	83,635			94,159				$	(46,033	)		$	(28,258	)		(74,291		)
Corporate expenses										(20,422		)										(29,365		)
Net investment income										113,863												86,847
Net realized investment gains										19,558												31,771
Foreign exchange losses										(14,484		)										(21,300		)
Interest expense and financing costs										(15,625		)										(15,498		)
Income (loss) before income taxes										$	177,049											$	(21,836	)
Net loss and loss expense ratio		63.4		%		54.1		%		58.5		%		78.4		%		79.2		%		78.9		%
Acquisition cost ratio		14.5		%		22.4		%		18.6		%		12.5		%		20.3		%		16.8		%
General and administrative
expense ratio		19.9		%		6.9		%		15.4		%		21.3		%		6.5		%		16.5		%
Combined ratio		97.8		%		83.4		%		92.5		%		112.2		%		106.0		%		112.2		%

⁴Underwriting-related general and administrative expenses and consolidated underwriting income (loss) are "non-GAAP financial measures", as defined in SEC Regulation G. Reconciliations of these amounts to the nearest GAAP financial measures (total general and administrative expenses and income (loss) before income taxes, respectively) are provided in this release, as are discussions of the rationale for the presentation of these items.

AXIS CAPITAL HOLDINGS LIMITED CONSOLIDATED SEGMENTAL DATA FOR THE YEARS ENDED DECEMBER 31, 2013 (UNAUDITED) AND 2012
		2013												2012
		Insurance				Reinsurance				Total				Insurance				Reinsurance				Total
		(in thousands)
Gross premiums written		$	2,559,138			$	2,137,903			$	4,697,041			$	2,309,481			$	1,830,162			$	4,139,643
Net premiums written		1,813,538				2,114,662				3,928,200				1,522,245				1,815,211				3,337,456
Net premiums earned		1,722,762				1,984,303				3,707,065				1,558,058				1,857,405				3,415,463
Other insurance related income		2,436				1,988				4,424				2,676				—				2,676
Net losses and loss expenses		(1,050,402		)		(1,083,793		)		(2,134,195		)		(953,564		)		(1,142,464		)		(2,096,028		)
Acquisition costs		(242,363		)		(421,828		)		(664,191		)		(226,859		)		(400,794		)		(627,653		)
Underwriting-related general and
administrative expenses		(347,684		)		(137,450		)		(485,134		)		(314,834		)		(116,487		)		(431,321		)
Underwriting income		$	84,749			$	343,220			427,969				$	65,477			$	197,660			263,137
Corporate expenses										(90,256		)										(129,660		)
Net investment income										409,312												380,957
Net realized investment gains										75,564												127,469
Foreign exchange losses										(26,143		)										(29,512		)
Interest expense and financing costs										(61,979		)										(61,863		)
Income before income taxes										$	734,467											$	550,528
Net loss and loss expense ratio		61.0		%		54.6		%		57.6		%		61.2		%		61.5		%		61.4		%
Acquisition cost ratio		14.1		%		21.3		%		17.9		%		14.6		%		21.6		%		18.4		%
General and administrative
expense ratio		20.1		%		6.9		%		15.5		%		20.2		%		6.3		%		16.4		%
Combined ratio		95.2		%		82.8		%		91.0		%		96.0		%		89.4		%		96.2		%

AXIS CAPITAL HOLDINGS LIMITED NON-GAAP FINANCIAL MEASURE RECONCILIATION (UNAUDITED) OPERATING INCOME (LOSS), OPERATING RETURN ON AVERAGE COMMON EQUITY AND UNDERWRITING-RELATED GENERAL AND ADMINISTRATIVE EXPENSES FOR THE QUARTERS AND YEARS ENDED DECEMBER 31, 2013 AND 2012
		Three months ended								Years ended
		2013				2012				2013				2012
		(in thousands, except per share amounts)
Net income (loss) available to common shareholders		$	171,524			$	(18,551	)		$	683,910			$	495,004
Net realized investment gains, net of tax(1)		(26,295		)		(29,550		)		(77,603		)		(115,854		)
Foreign exchange losses, net of tax(2)		13,627				20,416				23,684				28,364
Loss on repurchase of preferred shares, net of tax(3)		—				—				3,081				14,009
Operating income (loss)		$	158,856			$	(27,685	)		$	633,072			$	421,523
Earnings (loss) per common share - diluted		$	1.52			$	(0.16	)		$	5.93			$	4.00
Net realized investment gains, net of tax		(0.23		)		(0.25		)		(0.68		)		(0.94		)
Foreign exchange losses, net of tax		0.12				0.18				0.21				0.24
Loss on repurchase of preferred shares, net of tax		—				—				0.03				0.11
Operating income (loss) per common share - diluted		$	1.41			$	(0.23	)		$	5.49			$	3.41
Weighted average common shares and common share equivalents - diluted		112,702				117,918				115,328				123,654
Average common shareholders' equity		$	5,175,053			$	5,315,172			$	5,233,519			$	5,110,449
Annualized return on average common equity		13.3		%		(1.4		)%		13.1		%		9.7		%
Annualized operating return on average common equity		12.3		%		(2.1		)%		12.1		%		8.2		%

(1) Tax cost (benefit) of ($6,737) and $2,221 for the quarters ended December 31, 2013 and 2012, respectively, and ($2,039) and $11,615 for 2013 and 2012, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(2) Tax benefit of $857 and $884 for the quarters ended December 31, 2013 and 2012, respectively, and $2,459 and $1,148 for 2013 and 2012, 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 is nil.

In addition to underwriting-related general and administrative expenses, our total general and administrative expenses of $144,183 and $141,386 for the quarters ended December 31, 2013 and 2012, respectively, and $575,390 and $560,981 for 2013 and 2012, respectively, include corporate expenses.

Cautionary Note Regarding Forward-Looking Statements

This release contains forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements contained in this release include our expectations regarding market conditions and information regarding our estimates of losses related to natural disasters. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause actual events or results to be materially different from our expectations include (1) the occurrence and magnitude of natural and man-made disasters, (2) actual claims exceeding our loss reserves, (3) general economic, capital, and credit market conditions, (4) the failure of any of the loss limitation methods we employ, (5) the effects of emerging claims, coverage and regulatory issues, including uncertainty related to coverage definitions, limits, terms and conditions, (6) the failure of our cedants to adequately evaluate risks, (7) inability to obtain additional capital on favorable terms, or at all, (8) the loss of one or more key executives, (9) a decline in our ratings with rating agencies, (10) the loss of business provided to us by our major brokers, (11) changes in accounting policies or practices, (12) the use of industry catastrophe models and changes to these models, (13) changes in governmental regulations, (14) increased competition, (15) changes in the political environment of certain countries in which we operate or underwrite business, (16) fluctuations in interest rates, credit spreads, equity prices and/or currency values, and (17) the other factors set forth in our most recent report on Form 10-K, Form 10-Q and other documents on file with the Securities and Exchange Commission. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

In this release, we present operating income (loss), consolidated underwriting income (loss) and underwriting-related general and administrative expenses, which are “non-GAAP financial measures” as defined in Regulation G.

Operating income (loss) represents after-tax operational results without consideration of after-tax net realized investment gains (losses), foreign exchange losses (gains) and losses on the repurchase of preferred shares. We also present diluted operating earnings (loss) per share and operating return on average common equity ("operating ROACE"), which are derived from the non-GAAP operating income (loss) measure. Reconciliations of operating income (loss), diluted operating earnings (loss) per share and operating ROACE to the nearest GAAP financial measures (based on net income (loss) available to common shareholders) are included above.

Consolidated underwriting income (loss) 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 the Segment Information footnote to our Consolidated Financial Statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. A reconciliation of consolidated underwriting income (loss) to income before income taxes (the nearest GAAP financial measure) is included in the 'Consolidated Segmental Data' section of this release. Our total general and administrative expenses (the nearest GAAP financial measure to underwriting-related general and administrative expenses) also includes corporate expenses; the two components are separately presented in the 'Consolidated Segmental Data' section of this release.

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 (loss)” (in total and on a per share basis), “annualized operating return on average common equity” (which is based on the “operating income (loss)” measure) and "consolidated underwriting income (loss)", which incorporates "underwriting-related general and administrative expenses".

Operating Income (Loss)

Although the investment of premiums to generate income and realized investment gains (or losses) is an integral part of our operations, the determination to realize investment gains (or losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (or losses) is somewhat opportunistic for many companies.

Foreign exchange losses (gains) in our Consolidated Statements of Operations are primarily driven by the impact of foreign exchange rate movements on net insurance-related liabilities. However, this movement is only one element of the overall impact of foreign exchange rate fluctuations on our financial position. In addition, we recognize unrealized foreign exchange losses (gains) on our available-for-sale investments in other comprehensive income and foreign exchange losses (gains) realized upon the sale of these investments in net realized investment gains (losses). These unrealized and realized foreign exchange movements generally offset a large portion of the foreign exchange losses (gains) reported separately in earnings, thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As such, the Statement of Operations foreign exchange losses (gains) in isolation are not a fair representation of the performance of our business.

Losses on repurchase of preferred shares arise from capital transactions and, therefore, are not reflective of underlying business performance.

In this regard, certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (losses), foreign exchange losses (gains) and losses on repurchase of preferred shares to understand the profitability of recurring sources of income.

We believe that showing net income available to common shareholders exclusive of net realized gains (losses), foreign exchange losses (gains) and losses on repurchase of preferred shares 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 (Loss)/Underwriting-Related General and Administrative Expenses

Corporate expenses include holding company costs necessary to support our worldwide (re)insurance 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 (loss). Interest expense and financing costs primarily relate to interest payable on our senior notes and are excluded from consolidated underwriting income (loss) for the same reason.

We evaluate our underwriting results separately from the performance of our investment portfolio. As such, we believe it appropriate to exclude net investment income and net realized investment gains (losses) from our underwriting profitability measure.

As noted above, foreign exchange losses (gains) in our Consolidated Statement of Operations primarily relate to our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange rate gains (losses) on our investment portfolio generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) are not a meaningful contributor to our underwriting performance and, therefore, exclude them from consolidated underwriting income (loss).

We believe that presentation of underwriting-related general and administrative expenses and consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities.