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,March 31, 20172018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31721
AXIS CAPITAL HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(State or other jurisdiction of incorporation or organization)
98-0395986
(I.R.S. Employer Identification No.)
92 Pitts Bay Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 496-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,website, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer”filer", “accelerated filer”"accelerated filer", “smaller"smaller reporting company”company", and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act. |
| |
Large accelerated filer x | Accelerated filer ¨ |
Non-accelerated filer ¨ (do not check if a smaller reporting company) | Smaller reporting company ¨ |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 31, 2017,At May 1 2018, there were 83,158,96283,518,960 Common Shares, $0.0125 par value per share, of the registrant outstanding.
AXIS CAPITAL HOLDINGS LIMITED
INDEX TO FORM 10-Q
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| PART I | |
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| PART II | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 5. | | |
Item 6. | | |
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PART I | FINANCIAL INFORMATION |
This quarterly reportQuarterly Report on Form 10-Q contains forward-looking statements within the meaning of section 27A of the United States federal securities laws.Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. 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”"may”, “should”"should”, “could”"could", “anticipate”"anticipate", “estimate”"estimate", “expect”"expect", “plan”"plan", “believe”"believe", “predict”"predict", “potential”"potential", and “intend”"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 the performance of our business, our financial results, our liquidity and capital resources and the outcome of our strategic initiatives, our expectations regarding estimated synergies and the success of the integration of acquired entities, our expectations regarding the estimated benefits and synergies relating to the Company's transformation program, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity securities 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 cyclical nature of the re(insurance) business leading to periods with excess underwriting capacity and unfavorable premium rates,
the occurrence and magnitude of natural and man-made disasters,
losses from war, terrorism and political unrest or other unanticipated losses,
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,
our inability to purchase reinsurance or collect amounts due to us,
the breach by third parties in our program business of their obligations to us,
difficulties with technology and/or data security,
the failure of our policyholders and intermediaries to pay premiums,
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 and credit risk due to our reliance on brokers,
changes in accounting policies or practices,
the use of industry catastrophe models and changes to these models,
changes in governmental regulations and potential government intervention in our industry,
failure to comply with certain laws and regulations relating to sanctions and foreign corrupt practices,
increased competition,
changes in the political environment of certain countries in which we operate or underwrite business including the United Kingdom's expected withdrawal from the European Union,
fluctuations in interest rates, credit spreads, equity securities prices and/or currency values,
the failure to successfully integrate acquired businesses or realize the expected synergies resulting from such acquisitions,
the failure to realize the expected benefits or synergies relating to the Company's transformation program,
changes in tax laws, and
the other mattersfactors including but not limited to those set forth under Item 1A, ‘Risk Factors’'Risk Factors' and Item 7, ‘Management’s'Management’s Discussion and Analysis of Financial Condition and Results of Operations’Operations' included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Balance Sheets at September 30, 2017March 31, 2018 (Unaudited) and December 31, 20162017 | |
Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited) | |
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited) | |
Consolidated Statements of Changes in Shareholders' Equity for the ninethree months ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited) | |
Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited) | |
Notes to Consolidated Financial Statements (Unaudited) | |
Note 1 - Basis of Presentation and Significant Accounting Policies | |
Note 2 - Business CombinationsSegment Information | |
Note 3 - Segment InformationInvestments | |
Note 4 - InvestmentsFair Value Measurements | |
Note 5 - Fair Value MeasurementsDerivative Instruments | |
Note 6 - Derivative Instruments | |
Note 7 - Reserve for Losses and Loss Expenses | |
Note 87 - Earnings Per Common Share | |
Note 98 - Share-Based Compensation | |
Note 10 - Shareholders' Equity | |
Note 119 - Shareholders' Equity | |
Note 10 - Debt and Financing Arrangements | |
Note 1211 - Commitments and Contingencies | |
Note 1312 - Other Comprehensive Income | |
Note 1413 - Subsequent Events | |
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,MARCH 31, 20172018 (UNAUDITED) AND DECEMBER 31, 20162017
| | | 2017 | | 2016 | 2018 | | 2017 |
| (in thousands) | (in thousands) |
Assets | | | | | | |
Investments: | | | | | | |
Fixed maturities, available for sale, at fair value (Amortized cost 2017: $11,043,394; 2016: $11,523,316) | $ | 11,086,386 |
| | $ | 11,397,114 |
| |
Equity securities, available for sale, at fair value (Cost 2017: $563,110; 2016: $597,366) | 659,751 |
| | 638,744 |
| |
Fixed maturities, available for sale, at fair value (Amortized cost 2018: $11,898,060; 2017: $12,611,219) | | $ | 11,801,396 |
| | $ | 12,622,006 |
|
Equity securities, at fair value (Cost 2018: $374,091; 2017: $552,867) | | 435,742 |
| | 635,511 |
|
Mortgage loans, held for investment, at amortized cost and fair value | 360,381 |
| | 349,969 |
| 364,769 |
| | 325,062 |
|
Other investments, at fair value | 830,253 |
| | 830,219 |
| 1,009,587 |
| | 1,009,373 |
|
Equity method investments | 108,597 |
| | 116,000 |
| 108,597 |
| | 108,597 |
|
Short-term investments, at amortized cost and fair value | 15,282 |
| | 127,461 |
| 56,246 |
| | 83,661 |
|
Total investments | 13,060,650 |
| | 13,459,507 |
| 13,776,337 |
| | 14,784,210 |
|
Cash and cash equivalents | 1,350,613 |
| | 1,039,494 |
| 1,227,736 |
| | 948,626 |
|
Restricted cash and cash equivalents | 280,514 |
| | 202,013 |
| 416,844 |
| | 415,160 |
|
Accrued interest receivable | 68,023 |
| | 74,971 |
| 73,928 |
| | 81,223 |
|
Insurance and reinsurance premium balances receivable | 2,968,096 |
| | 2,313,512 |
| 3,892,957 |
| | 3,012,419 |
|
Reinsurance recoverable on unpaid and paid losses | 2,360,821 |
| | 2,334,922 |
| 3,129,303 |
| | 3,338,840 |
|
Deferred acquisition costs | 562,774 |
| | 438,636 |
| 721,820 |
| | 474,061 |
|
Prepaid reinsurance premiums | 734,129 |
| | 556,344 |
| 1,015,163 |
| | 809,274 |
|
Receivable for investments sold | 9,357 |
| | 14,123 |
| 19,433 |
| | 11,621 |
|
Goodwill and intangible assets | 87,206 |
| | 85,049 |
| |
Goodwill | | 102,003 |
| | 102,003 |
|
Intangible assets | | 253,808 |
| | 257,987 |
|
Value of business acquired | | 150,936 |
| | 206,838 |
|
Other assets | 335,967 |
| | 295,120 |
| 307,041 |
| | 317,915 |
|
Total assets | $ | 21,818,150 |
| | $ | 20,813,691 |
| $ | 25,087,309 |
| | $ | 24,760,177 |
|
| | | | | | |
Liabilities | | | | | | |
Reserve for losses and loss expenses | $ | 10,787,575 |
| | $ | 9,697,827 |
| $ | 12,034,643 |
| | $ | 12,997,553 |
|
Unearned premiums | 3,521,063 |
| | 2,969,498 |
| 4,659,858 |
| | 3,641,399 |
|
Insurance and reinsurance balances payable | 670,292 |
| | 493,183 |
| 1,251,629 |
| | 899,064 |
|
Senior notes | 993,797 |
| | 992,950 |
| |
Senior notes and notes payable | | 1,376,835 |
| | 1,376,529 |
|
Payable for investments purchased | 122,065 |
| | 62,550 |
| 144,315 |
| | 100,589 |
|
Other liabilities | 268,659 |
| | 325,313 |
| 355,634 |
| | 403,779 |
|
Total liabilities | 16,363,451 |
| | 14,541,321 |
| 19,822,914 |
| | 19,418,913 |
|
| | | | | | |
Shareholders’ equity | | | | | | |
Preferred shares | 775,000 |
| | 1,126,074 |
| 775,000 |
| | 775,000 |
|
Common shares (2017: 176,580; 2016: 176,580 shares issued and 2017: 83,157; 2016: 86,441 shares outstanding) | 2,206 |
| | 2,206 |
| |
Common shares (shares issued 2018: 176,580; 2017: 176,580 shares outstanding 2018: 83,518; 2017: 83,161) | | 2,206 |
| | 2,206 |
|
Additional paid-in capital | 2,291,516 |
| | 2,299,857 |
| 2,289,497 |
| | 2,299,166 |
|
Accumulated other comprehensive income (loss) | 141,613 |
| | (121,841 | ) | (85,216 | ) | | 92,382 |
|
Retained earnings | 6,051,659 |
| | 6,527,627 |
| 6,076,294 |
| | 5,979,666 |
|
Treasury shares, at cost (2017: 93,423; 2016: 90,139 shares) | (3,807,295 | ) | | (3,561,553 | ) | |
Treasury shares, at cost (2018: 93,062; 2017: 93,419 shares) | | (3,793,386 | ) | | (3,807,156 | ) |
Total shareholders’ equity | 5,454,699 |
| | 6,272,370 |
| 5,264,395 |
| | 5,341,264 |
|
| | | | | | |
Total liabilities and shareholders’ equity | $ | 21,818,150 |
| | $ | 20,813,691 |
| $ | 25,087,309 |
| | $ | 24,760,177 |
|
See accompanying notes to Consolidated Financial Statements.
6
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 20172018 AND 20162017
| | | Three months ended | | Nine months ended | Three months ended |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
| (in thousands, except for per share amounts) | (in thousands, except for per share amounts) |
Revenues | | | | | | | | | | |
Net premiums earned | $ | 1,017,131 |
| | $ | 934,415 |
| | $ | 2,937,265 |
| | $ | 2,783,746 |
| $ | 1,167,402 |
| | $ | 938,703 |
|
Net investment income | 95,169 |
| | 116,923 |
| | 299,899 |
| | 257,818 |
| 100,999 |
| | 98,664 |
|
Other insurance related income (losses) | (3,197 | ) | | 5,944 |
| | (4,420 | ) | | 4,850 |
| 6,606 |
| | (3,783 | ) |
Bargain purchase gain | — |
| | — |
| | 15,044 |
| | — |
| |
Net realized investment gains (losses): | | | | | | | | |
Net investment losses: | | | | |
Other-than-temporary impairment ("OTTI") losses | (5,412 | ) | | (4,247 | ) | | (13,493 | ) | | (20,346 | ) | (414 | ) | | (6,553 | ) |
Other realized investment gains (losses) | 20,044 |
| | 9,452 |
| | (1,318 | ) | | (19,949 | ) | |
Total net realized investment gains (losses) | 14,632 |
| | 5,205 |
| | (14,811 | ) | | (40,295 | ) | |
Other realized and unrealized investment losses | | (14,416 | ) | | (18,497 | ) |
Total net investment losses | | (14,830 | ) | | (25,050 | ) |
Total revenues | 1,123,735 |
| | 1,062,487 |
| | 3,232,977 |
| | 3,006,119 |
| 1,260,177 |
| | 1,008,534 |
|
| | | | | | | | | | |
Expenses | | | | | | | | | | |
Net losses and loss expenses | 1,235,367 |
| | 532,328 |
| | 2,447,640 |
| | 1,663,584 |
| 661,345 |
| | 606,942 |
|
Acquisition costs | 194,724 |
| | 189,810 |
| | 588,879 |
| | 559,570 |
| 229,260 |
| | 189,792 |
|
General and administrative expenses | 124,629 |
| | 142,906 |
| | 433,704 |
| | 439,554 |
| 169,837 |
| | 161,260 |
|
Foreign exchange losses (gains) | 32,510 |
| | (13,795 | ) | | 90,093 |
| | (69,781 | ) | |
Foreign exchange losses | | 37,860 |
| | 21,465 |
|
Interest expense and financing costs | 12,835 |
| | 12,839 |
| | 38,377 |
| | 38,586 |
| 16,763 |
| | 12,791 |
|
Transaction related expenses | 5,970 |
| | — |
| | 5,970 |
| | — |
| |
Reorganization expenses | | 13,054 |
| | — |
|
Amortization of value of business acquired | | 57,110 |
| | — |
|
Amortization of intangibles | | 2,782 |
| | — |
|
Total expenses | 1,606,035 |
| | 864,088 |
| | 3,604,663 |
| | 2,631,513 |
| 1,188,011 |
| | 992,250 |
|
| | | | | | | | | | |
Income (loss) before income taxes and interest in income (loss) of equity method investments | (482,300 | ) | | 198,399 |
| | (371,686 | ) | | 374,606 |
| |
Income tax (expense) benefit | 25,877 |
| | (9,352 | ) | | 38,547 |
| | (7,712 | ) | |
Income before income taxes and interest in income (loss) of equity method investments | | 72,166 |
| | 16,284 |
|
Income tax benefit | | 1,036 |
| | 9,337 |
|
Interest in loss of equity method investments | (661 | ) | | (2,434 | ) | | (8,402 | ) | | (2,434 | ) | — |
| | (5,766 | ) |
Net income (loss) | (457,084 | ) | | 186,613 |
| | (341,541 | ) | | 364,460 |
| |
Net income | | 73,202 |
| | 19,855 |
|
Preferred share dividends | 10,656 |
| | 9,969 |
| | 36,154 |
| | 29,906 |
| 10,656 |
| | 14,841 |
|
Net income (loss) available to common shareholders | $ | (467,740 | ) | | $ | 176,644 |
| | $ | (377,695 | ) | | $ | 334,554 |
| |
Net income available to common shareholders | | $ | 62,546 |
| | $ | 5,014 |
|
| | | | | | | | | | |
Per share data | | | | | | | | | | |
Net income (loss) per common share: | | | | | | | | |
Basic net income (loss) | $ | (5.61 | ) | | $ | 1.97 |
| | $ | (4.47 | ) | | $ | 3.64 |
| |
Diluted net income (loss) | $ | (5.61 | ) | | $ | 1.96 |
| | $ | (4.47 | ) | | $ | 3.61 |
| |
Net income per common share: | | | | |
Basic net income | | $ | 0.75 |
| | $ | 0.06 |
|
Diluted net income | | $ | 0.75 |
| | $ | 0.06 |
|
Weighted average number of common shares outstanding - basic | 83,305 |
| | 89,621 |
| | 84,479 |
| | 91,852 |
| 83,322 |
| | 86,022 |
|
Weighted average number of common shares outstanding - diluted | 83,305 |
| | 90,351 |
| | 84,479 |
| | 92,579 |
| 83,721 |
| | 86,793 |
|
Cash dividends declared per common share | $ | 0.38 |
| | $ | 0.35 |
| | $ | 1.14 |
| | $ | 1.05 |
| $ | 0.39 |
| | $ | 0.38 |
|
| | | | |
See accompanying notes to Consolidated Financial Statements.
7
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 20172018 AND 20162017
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) |
Net income (loss) | $ | (457,084 | ) | | $ | 186,613 |
| | $ | (341,541 | ) | | $ | 364,460 |
|
Other comprehensive income, net of tax: | | | | | | | |
Available for sale investments: | | | | | | | |
Unrealized investment gains arising during the period | 62,505 |
| | 36,336 |
| | 206,461 |
| | 238,656 |
|
Adjustment for reclassification of net realized investment (gains) losses and OTTI losses recognized in net income | (13,286 | ) | | (2,642 | ) | | 10,169 |
| | 42,620 |
|
Unrealized investment gains arising during the period, net of reclassification adjustment | 49,219 |
| | 33,694 |
| | 216,630 |
| | 281,276 |
|
Foreign currency translation adjustment | 8,088 |
| | 1,722 |
| | 46,824 |
| | 5,694 |
|
Total other comprehensive income, net of tax | 57,307 |
| | 35,416 |
| | 263,454 |
| | 286,970 |
|
Comprehensive income (loss) | $ | (399,777 | ) | | $ | 222,029 |
| | $ | (78,087 | ) | | $ | 651,430 |
|
|
| | | | | | | |
| Three months ended |
| 2018 | | 2017 |
| (in thousands) |
Net income | $ | 73,202 |
| | $ | 19,855 |
|
Other comprehensive income (loss), net of tax: | | | |
Available for sale investments: | | | |
Unrealized investment gains (losses) arising during the period | (112,191 | ) | | 67,703 |
|
Adjustment for reclassification of net realized investment losses and OTTI losses recognized in net income | 785 |
| | 24,968 |
|
Unrealized investment gains (losses) arising during the period, net of reclassification adjustment | (111,406 | ) | | 92,671 |
|
Foreign currency translation adjustment | 1,270 |
| | 29,869 |
|
Total other comprehensive income (loss), net of tax | (110,136 | ) | | 122,540 |
|
Comprehensive income (loss) | $ | (36,934 | ) | | $ | 142,395 |
|
See accompanying notes to Consolidated Financial Statements.
8
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2018 AND 2017 AND 2016
| | | 2017 | | 2016 | 2018 | | 2017 |
| (in thousands) | (in thousands) |
Preferred shares | | | | | | |
Balance at beginning of period | $ | 1,126,074 |
| | $ | 627,843 |
| |
Shares repurchased | (351,074 | ) | | (2,843 | ) | |
Balance at end of period | 775,000 |
| | 625,000 |
| |
Balance at beginning and end of period | | $ | 775,000 |
| | $ | 1,126,074 |
|
| | | | | | |
Common shares (par value) | | | | | | |
Balance at beginning of period | 2,206 |
| | 2,202 |
| |
Shares issued | — |
| | 4 |
| |
Balance at end of period | 2,206 |
| | 2,206 |
| |
Balance at beginning and end of period | | 2,206 |
| | 2,206 |
|
| | | | | | |
Additional paid-in capital | | | | | | |
Balance at beginning of period | 2,299,857 |
| | 2,241,388 |
| 2,299,166 |
| | 2,299,857 |
|
Shares issued - common shares | — |
| | (4 | ) | |
Cost of treasury shares reissued | (39,033 | ) | | (19,647 | ) | |
Settlement of accelerated share repurchase | — |
| | 60,000 |
| |
Treasury shares reissued | | (19,272 | ) | | (37,363 | ) |
Share-based compensation expense | 30,692 |
| | 26,129 |
| 9,603 |
| | 14,177 |
|
Balance at end of period | 2,291,516 |
| | 2,307,866 |
| 2,289,497 |
| | 2,276,671 |
|
| | | | | | |
Accumulated other comprehensive income | | | | |
Accumulated other comprehensive income (loss) | | | | |
Balance at beginning of period | (121,841 | ) | | (188,465 | ) | 92,382 |
| | (121,841 | ) |
Unrealized gains (losses) on available for sale investments, net of tax: | | | | | | |
Balance at beginning of period | (82,323 | ) | | (149,585 | ) | 89,962 |
| | (82,323 | ) |
Unrealized gains arising during the period, net of reclassification adjustment | 216,630 |
| | 281,276 |
| |
Cumulative effect of adoption of ASU No. 2018-02
| | 2,142 |
| | — |
|
Cumulative effect of adoption of ASU No. 2016-01, net of taxes | | (69,604 | ) | | — |
|
Unrealized gains (losses) arising during the period | | (111,406 | ) | | 92,671 |
|
Balance at end of period | 134,307 |
| | 131,691 |
| (88,906 | ) | | 10,348 |
|
Cumulative foreign currency translation adjustments, net of tax: | | | | | | |
Balance at beginning of period | (39,518 | ) | | (38,880 | ) | 2,420 |
| | (39,518 | ) |
Foreign currency translation adjustment | 46,824 |
| | 5,694 |
| 1,270 |
| | 29,869 |
|
Balance at end of period | 7,306 |
| | (33,186 | ) | 3,690 |
| | (9,649 | ) |
Balance at end of period | 141,613 |
| | 98,505 |
| (85,216 | ) | | 699 |
|
| | | | | | |
Retained earnings | | | | | | |
Balance at beginning of period | 6,527,627 |
| | 6,194,353 |
| 5,979,666 |
| | 6,527,627 |
|
Net income (loss) | (341,541 | ) | | 364,460 |
| |
Cumulative effect of adoption of ASU No. 2018-02
| | (2,142 | ) | | — |
|
Cumulative effect of adoption of ASU No. 2016-01, net of taxes | | 69,604 |
| | — |
|
Net income | | 73,202 |
| | 19,855 |
|
Preferred share dividends | (36,154 | ) | | (29,906 | ) | (10,656 | ) | | (14,841 | ) |
Common share dividends | (98,273 | ) | | (98,334 | ) | (33,380 | ) | | (33,379 | ) |
Balance at end of period | 6,051,659 |
| | 6,430,573 |
| 6,076,294 |
| | 6,499,262 |
|
| | | | | | |
Treasury shares, at cost | | | | | | |
Balance at beginning of period | (3,561,553 | ) | | (3,010,439 | ) | (3,807,156 | ) | | (3,561,553 | ) |
Shares repurchased for treasury | (285,659 | ) | | (449,086 | ) | |
Cost of treasury shares reissued | 39,917 |
| | 21,033 |
| |
Shares repurchased | | (7,163 | ) | | (151,242 | ) |
Shares reissued | | 20,933 |
| | 38,248 |
|
Balance at end of period | (3,807,295 | ) | | (3,438,492 | ) | (3,793,386 | ) | | (3,674,547 | ) |
| | | | | | |
Total shareholders’ equity | $ | 5,454,699 |
| | $ | 6,025,658 |
| $ | 5,264,395 |
| | $ | 6,230,365 |
|
| | | | | | |
See accompanying notes to Consolidated Financial Statements.
9
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 20172018 AND 20162017
| | | 2017 | | 2016 | 2018 | | 2017 |
| (in thousands) | (in thousands) |
Cash flows from operating activities: | | | | | | |
Net income (loss) | $ | (341,541 | ) | | $ | 364,460 |
| |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Net realized investment losses | 14,811 |
| | 40,295 |
| |
Net income | | $ | 73,202 |
| | $ | 19,855 |
|
Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Net investment losses | | 8,909 |
| | 25,050 |
|
Net realized and unrealized gains on other investments | (56,759 | ) | | (23,117 | ) | (12,950 | ) | | (18,211 | ) |
Amortization of fixed maturities | 32,528 |
| | 51,660 |
| 9,895 |
| | 12,498 |
|
Interest in loss of equity method investments | 8,402 |
| | 2,434 |
| — |
| | 5,766 |
|
Other amortization and depreciation | 19,279 |
| | 17,370 |
| 68,397 |
| | 6,467 |
|
Share-based compensation expense, net of cash payments | 1,516 |
| | 28,580 |
| (1,481 | ) | | (24,758 | ) |
Non-cash foreign exchange losses
| 24,149 |
| | — |
| — |
| | 24,149 |
|
Bargain purchase gain | (15,044 | ) | | — |
| |
Changes in: | | | | | | |
Accrued interest receivable | 8,730 |
| | 3,286 |
| 3,350 |
| | 5,596 |
|
Reinsurance recoverable balances | 60,522 |
| | (163,212 | ) | (113,656 | ) | | 348,942 |
|
Deferred acquisition costs | (123,961 | ) | | (73,759 | ) | (253,369 | ) | | (171,493 | ) |
Prepaid reinsurance premiums | (178,464 | ) | | (184,648 | ) | (218,772 | ) | | (86,534 | ) |
Reserve for loss and loss expenses | 918,511 |
| | 216,828 |
| 184,511 |
| | (237,773 | ) |
Unearned premiums | 540,108 |
| | 682,686 |
| 1,056,045 |
| | 654,475 |
|
Insurance and reinsurance balances, net | (465,436 | ) | | (623,170 | ) | (854,993 | ) | | (559,456 | ) |
Other items | (135,266 | ) | | (74,383 | ) | (36,973 | ) | | (40,834 | ) |
Net cash provided by operating activities | 312,085 |
| | 265,310 |
| |
Net cash used in operating activities | | (87,885 | ) | | (36,261 | ) |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Purchases of: | | | | | | |
Fixed maturities | (6,250,608 | ) | | (6,624,573 | ) | (2,474,418 | ) | | (2,670,518 | ) |
Equity securities | (108,804 | ) | | (295,827 | ) | (42,522 | ) | | (98,559 | ) |
Mortgage loans | (20,812 | ) | | (131,087 | ) | (59,838 | ) | | — |
|
Other investments | (135,526 | ) | | (177,500 | ) | (31,755 | ) | | (63,742 | ) |
Equity method investments | (1,000 | ) | | (103,548 | ) | — |
| | (1,000 | ) |
Short-term investments | (20,792 | ) | | (81,479 | ) | (57,688 | ) | | (2,320 | ) |
Proceeds from the sale of: | | | | | | |
Fixed maturities | 5,354,398 |
| | 6,067,663 |
| 2,442,673 |
| | 2,429,084 |
|
Equity securities | 232,755 |
| | 296,182 |
| 194,970 |
| | 70,575 |
|
Other investments | 203,896 |
| | 170,111 |
| 44,493 |
| | 131,777 |
|
Short-term investments | 19,284 |
| | 67,408 |
| 46,719 |
| | 7,087 |
|
Proceeds from redemption of fixed maturities | 1,546,998 |
| | 977,852 |
| 319,526 |
| | 521,716 |
|
Proceeds from redemption of short-term investments | 116,261 |
| | 8,185 |
| 16,022 |
| | 111,931 |
|
Proceeds from the repayment of mortgage loans
| 10,702 |
| | 4,808 |
| 20,237 |
| | 10,233 |
|
Purchase of other assets | (25,842 | ) | | (19,055 | ) | — |
| | (4,427 | ) |
Change in restricted cash and cash equivalents | (78,501 | ) | | (42,445 | ) | |
Purchase of subsidiary, net | (73,067 | ) | | — |
| |
Net cash provided by investing activities | 769,342 |
| | 116,695 |
| 418,419 |
| | 441,837 |
|
| | | | | | |
Cash flows from financing activities: | | | | | | |
Repurchase of common shares | (290,496 | ) | | (389,086 | ) | |
Repurchase of common shares - open market | | — |
| | (120,549 | ) |
Taxes paid on withholding shares | | (7,163 | ) | | (23,260 | ) |
Dividends paid - common shares | (102,868 | ) | | (100,670 | ) | (35,273 | ) | | (38,541 | ) |
Repurchase of preferred shares | (351,074 | ) | | (2,843 | ) | |
Dividends paid - preferred shares | (42,188 | ) | | (29,940 | ) | (10,656 | ) | | (14,841 | ) |
Proceeds from issuance of common shares | — |
| | 8 |
| |
Net cash used in financing activities | (786,626 | ) | | (522,531 | ) | (53,092 | ) | | (197,191 | ) |
| | | | | | |
Effect of exchange rate changes on foreign currency cash and cash equivalents | 16,318 |
| | 593 |
| |
Increase (decrease) in cash and cash equivalents | 311,119 |
| | (139,933 | ) | |
Cash and cash equivalents - beginning of period | 1,039,494 |
| | 988,133 |
| |
Cash and cash equivalents - end of period | $ | 1,350,613 |
| | $ | 848,200 |
| |
Effect of exchange rate changes on foreign currency cash, cash equivalents, and restricted cash | | 3,354 |
| | 1,678 |
|
Increase in cash, cash equivalents, and restricted cash | | 280,796 |
| | 210,063 |
|
Cash, cash equivalents, and restricted cash - beginning of period | | 1,363,786 |
| | 1,241,507 |
|
Cash, cash equivalents, and restricted cash - end of period | | $ | 1,644,582 |
| | $ | 1,451,570 |
|
| | | | | | |
Supplemental disclosures of cash flow information: Non-cash foreign exchange losses are attributableConsideration paid related to an agreement for the reclassificationReinsurance to Close ("RITC") of the cumulative translation adjustment related to AXIS Specialty Australia from accumulated other comprehensive income to foreign exchange losses due to2015 and prior years of account of Syndicate 2007 was $688 million in the wind-downquarter of this operation which $513 million was substantially completesettled by transfer of securities and was treated as a non cash activity on the Consolidated Statement of March 31, 2017.Cash Flows. Also refer to Note 76 'Reserve for Losses and LossExpenses' and Note 13 'Other Comprehensive Income'.
See accompanying notes to Consolidated Financial Statements.
10
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
These interim consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”unaudited Consolidated Financial Statements (the "financial statements") and its subsidiaries (herein referred to as “we,” “us,” “our,” or the “Company”).
The consolidated balance sheet at September 30,2017 and the consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the periods ended September 30,2017 and 2016 have not been audited. The balance sheet at December 31, 2016 is derived from our audited financial statements.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. Generally Accepted Accounting Principles (“U.S. GAAP”GAAP") for interim financial information and with the U.S. Securities and Exchange Commission's (“SEC”("SEC") instructions to Form 10-Q and Article 10 of Regulation S-X.S-X and include AXIS Capital Holdings Limited ("AXIS Capital") and its subsidiaries (the "Company"). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in AXIS Capital's Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC.
In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of ourthe Company's 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 followingTo facilitate comparison of information should be read in conjunction with our Annual Report on Form 10-K foracross periods, certain reclassifications have been made to prior year amounts to conform to the year ended December 31, 2016. current year's presentation. These reclassifications did not impact results of operations, financial condition or liquidity.
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 nowas one notable changeschange in our significant accounting policies subsequent to our Annual Report on Form 10-K for the year ended December 31, 20162017.
Recognition and Measurement of Financial Assets and Financial Liabilities
Fixed maturities and equity securities are reported at fair value at the balance sheet date (see Note 4 'Fair Value Measurements'). Effective January 1, 2018, the Company adopted ASU 2016-01 "Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities," which requires:
equity investments (except those accounted for under the equity method of accounting, investments that are consolidated or those that meet a practicability exception) to be measured at fair value with changes in fair value recognized in net income,
simplifies the impairment assessment of equity investments without readily determinable values by requiring a qualitative assessment to identify impairment, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost,
requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes,
requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liabilities in accordance with the fair value option,
requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and
clarifies that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the organization’s other deferred tax assets.
Upon adoption of this guidance, net unrealized gains on equity securities of $70 million, net of deferred income taxes of $13 million, were reclassified from accumulated other comprehensive income into retained earnings. As prescribed, the prior period has not been restated to conform to the current presentation.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
New Accounting Standards Adopted in 2017
Stock Compensation - Improvements to Employee Share-Based Payment Accounting
Effective January 1, 2017, the Company adopted Accounting Standards Update ("ASU" ) ASU 2016-09, "Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting" which simplifies several aspects of the accounting for share-based payments to employees including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance requires all excess tax benefits and tax deficiencies to be recognized in the income statement with the tax effects of exercised or vested awards to be treated as discrete items in the reporting period in which they occur. Excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows. In addition, companies will be required to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The guidance allows withholding up to the maximum statutory tax rates in the applicable jurisdictions to cover income taxes on share-based compensation awards without requiring liability classification. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The adoption of this guidance did not have a material impact on our results of operations, financial condition and liquidity.
Issued Accounting Standards Not Yet Adopted2018
Revenue From Contracts With Customers
In May 2014,Effective January 1, 2018, the FASB issued ASUCompany adopted Accounting Standards Update ("ASU" ) 2014-09 "Revenue from Contracts with Customers (Topic 606),". using the modified retrospective transition approach. This guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards, (for example,such as accounting for insurance contracts are not in scope of the new guidance).contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company generated fee income of $10 million for the three months ended March 31, 2018 which is within the scope of this ASU. These fees represents service fees and reimbursement of expenses earned by the Company's reinsurance segment related to services provided to its strategic capital partners. These fees are recognized when the related services have been performed and are reported in other insurance related income (losses) in the Consolidated Statements of Operations. Given that the timing and measurement of revenue associated with impacted contracts did not change, the adoption of this guidance did not have a material impact on the Company's results of operations, financial condition and liquidity.
Classification of Certain Cash Receipts and Cash Payments
Effective January 1, 2018, the Company adopted ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments," which addresses diversity in practice in how eight specific cash receipts and cash payments should be presented and classified on the statement of cash flows. The adoption of this guidance did not impact the Company's results of operations, financial condition and liquidity.
Restricted Cash
Effective January 1, 2018, the Company adopted ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash," which addresses diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. To facilitate comparison of the Company's Consolidated Statements of Cash Flows, the Company adopted this guidance utilizing the full retrospective approach for all periods presented in the Company's Consolidated Financial Statements. As a result, the Company's Consolidated Statements of Cash Flows now explains the change during the period in the total of cash, cash equivalents, and restricted cash. Therefore, restricted cash is now included with cash and cash equivalents in the reconciliation of the beginning of period and end of period total amounts shown on the statement of cash flows. The adoption of this guidance did not impact the Company's results of operations, financial condition and liquidity.
Stock Compensation - Scope of Modification Accounting
Effective January 1, 2018, the Company adopted ASU 2017-09 "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting," which provides clarity and reduces diversity in practice of applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance states that an entity should account for the effects of a modification unless all the following are met:
| |
1. | the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; |
| |
2. | the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update. The adoption of this guidance did not impact the Company's results of operations, financial condition and liquidity.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
those goodsEffective January 1, 2018, the Company adopted ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" which was a response to a financial reporting issue that arose as a consequence of the U.S. federal government tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 ("U.S. Tax Reform"), which was enacted on December 22, 2017.
U.S. GAAP currently requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or services. rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather than in income from continuing operations. As the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of this Update) do not reflect the appropriate tax rate.
The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. Tax Reform. Consequently, the amendments eliminate the stranded tax effects resulting from U.S. Tax Reform and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of U.S. Tax Reform, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.
As a consequence of U.S. Tax Reform, the Company recognized a tax benefit of $2 million related to the revaluation of net deferred tax liabilities associated with the reduction in the U.S. corporate income tax rate from 35% to 21%, attributable to net unrealized investment gains associated with investments held by the Company's U.S. domiciled entities. Upon adoption of this guidance, the tax benefit of $2 million was reclassified from accumulated other comprehensive income into retained earnings.
Recently Issued Accounting Standards Not Yet Adopted
Leases
In August 2015,February 2016, the FASB delayedissued ASU 2016-02, "Leases (Topic 842)" which provides a new comprehensive model for lease accounting. The guidance will require a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the effective date by one year throughunderlying asset for the issuance of ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date".lease term. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017.2018, with early adoption permitted. The Company is currently evaluating the impact of this guidance on the Company's results of operations, financial condition and liquidity.
Measurement of Credit Losses on Financial Instrument
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments" which replaces the "incurred loss" impairment methodology with an approach based on "expected losses" to estimate credit losses on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses. The guidance also provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016. Accounting for insurance contracts is outside the scope of ASU 2014-09.2018. The Company generates an insignificant amount of fee income, primarily from strategic capital partners, which is reported in other insurance related income (losses) incurrently evaluating the Consolidated Statements of Operations and is subject to this accounting standard update. The Company's current accounting policy to recognize fee income in the period when related services are performed, principally aligns with this update. As a result, the Company does not expect the adoptionimpact of this guidance to have a material impact on ourits results of operations, financial condition and liquidity.
Recently Issued Accounting Standards Not Yet Adopted
13
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment" that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, an impairment charge will be based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on Step 1 of the current goodwill impairment test). This guidance is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The guidance will be adopted on a prospective basis.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08 "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities" which shortens the amortization period for certain purchased callable debt securities held at a premium. This guidance is effective for interim and annual reporting periods, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.
Stock Compensation - Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09 "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting" to provide clarity and reduce diversity in practice of applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance states that an entity should account for the effects of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update. This guidance is effective for interim and annual reporting periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. BUSINESS COMBINATIONS
On April 1, 2017 ("the closing date" or the "acquisition date"), the Company acquired a 100% ownership interest in Compagnie Belge d'Assurances Aviation NV/SA (“Aviabel”). Aviabel is an insurer operating under Belgian law that has its head office in Belgium, a branch office in the Netherlands and a re-insurance company, Aviabel RE S.A. (“Aviabel RE”), in Luxembourg. The Company acquired Aviabel to increase its scale and relevance in the global aviation market.
The purchase price was allocated to the acquired assets and liabilities of Aviabel based on estimated fair values on the closing date. Consequently, the Company recognized investments with a fair value of $182 million, reserves for losses and loss expenses with a fair value of $79 million, and a bargain purchase gain of $15 million. The bargain purchase gain arose as the fair values of the net identifiable assets acquired exceeded the fair value of the consideration transferred at the acquisition date.
The allocation of the purchase price was based on information included in unaudited financial statements prepared by Aviabel's management at March 31, 2017. The allocation is subject to change if additional information becomes available within the measurement period, which cannot exceed 12 months from the acquisition date. The fair values of the acquired assets and liabilities may be subject to adjustments, which may impact the amounts recorded for the acquired assets and liabilities, as well as the bargain purchase gain.
The underwriting results of Aviabel are included in the underwriting results of the Company's insurance segment from the acquisition date.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OurAXIS Capital's underwriting operations are organized around ourits global underwriting platforms, AXIS Insurance and AXIS Re, therefore we haveRe. The Company has determined that we haveit has two reportable segments, insurance and reinsurance. We doThe Company does not allocate ourits assets by segment, with the exception of goodwill and intangible assets, as we evaluateit evaluates the underwriting results of each segment separately from the results of ourits investment portfolio.
During the three months ended March 31, 2018, the Company realigned its accident and health business by integrating this business and its operations into the Company's insurance and reinsurance segments. Financial results relating to the Company's accident and health line of business were previously included in the Company's insurance segment. As a result of the realignment, accident and health results are included in the results of both the insurance and reinsurance segments of the Company with effect from January 1, 2018.
Insurance
OurThe Company's insurance segment providesoffers specialty insurance coverageproducts to a variety of niche markets on a worldwide basis. The product lines in this segment are property, marine, terrorism, aviation, credit and political risk, professional lines, liability, and accident and health.health, together with discontinued lines, which represents lines of business that Novae Group plc ("Novae") exited or placed into run-off in the three month period ended December 31, 2016 and in the three month period ended March 31, 2017.
Reinsurance
OurThe Company's reinsurance segment provides non-life treaty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, professional lines, credit and surety, motor, liability, agriculture, engineering, and marine and other.other, accident and health, together with discontinued lines, which represents lines of business that Novae exited or placed into run-off in the three month period ended December 31, 2016 and in the three month period ended March 31, 2017. The reinsurance segment also writeswrote derivative based risk management products designed to address weather and commodity price risks.
The following tables summarize the underwriting results of our reportable segments, as well as the carrying values of allocated goodwill and intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | |
| Three months ended and at September 30, | Insurance | | Reinsurance | | Total | | Insurance | | Reinsurance | | Total | |
| | | | | | | | | | | | | |
| Gross premiums written | $ | 744,366 |
| | $ | 441,208 |
| | $ | 1,185,574 |
| | $ | 675,430 |
| | $ | 284,532 |
| | $ | 959,962 |
| |
| Net premiums written | 500,022 |
| | 332,721 |
| | 832,743 |
| | 433,131 |
| | 162,300 |
| | 595,431 |
| |
| Net premiums earned | 496,004 |
| | 521,127 |
| | 1,017,131 |
| | 444,691 |
| | 489,724 |
| | 934,415 |
| |
| Other insurance related income (losses) | 526 |
| | (3,723 | ) | | (3,197 | ) | | 39 |
| | 5,905 |
| | 5,944 |
| |
| Net losses and loss expenses | (628,865 | ) | | (606,502 | ) | | (1,235,367 | ) | | (273,226 | ) | | (259,102 | ) | | (532,328 | ) | |
| Acquisition costs | (74,231 | ) | | (120,493 | ) | | (194,724 | ) | | (61,755 | ) | | (128,055 | ) | | (189,810 | ) | |
| General and administrative expenses | (75,038 | ) | | (21,658 | ) | | (96,696 | ) | | (84,588 | ) | | (29,635 | ) | | (114,223 | ) | |
| Underwriting income (loss) | $ | (281,604 | ) | | $ | (231,249 | ) | | (512,853 | ) | | $ | 25,161 |
| | $ | 78,837 |
| | 103,998 |
| |
| | | | | | | | | | | | | |
| Corporate expenses | | | | | (27,933 | ) | | | | | | (28,683 | ) | |
| Net investment income | | | | | 95,169 |
| | | | | | 116,923 |
| |
| Net realized investment gains | | | | | 14,632 |
| | | | | | 5,205 |
| |
| Foreign exchange (losses) gains | | | | | (32,510 | ) | | | | | | 13,795 |
| |
| Interest expense and financing costs | | | | | (12,835 | ) | | | | | | (12,839 | ) | |
| Transaction related expenses | | | | | (5,970 | ) | | | | | | — |
| |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | | | | | $ | (482,300 | ) | | | | | | $ | 198,399 |
| |
| | | | | | | | | | | | | |
| Net loss and loss expense ratio | 126.8 | % | | 116.4 | % | | 121.5 | % | | 61.4 | % | | 52.9 | % | | 57.0 | % | |
| Acquisition cost ratio | 15.0 | % | | 23.1 | % | | 19.1 | % | | 13.9 | % | | 26.1 | % | | 20.3 | % | |
| General and administrative expense ratio | 15.1 | % | | 4.2 | % | | 12.3 | % | | 19.1 | % | | 6.1 | % | | 15.3 | % | |
| Combined ratio | 156.9 | % | | 143.7 | % | | 152.9 | % | | 94.4 | % | | 85.1 | % | | 92.6 | % | |
| | | | | | | | | | | | | |
| Goodwill and intangible assets | $ | 87,206 |
| | $ | — |
| | $ | 87,206 |
| | $ | 85,501 |
| | $ | — |
| | $ | 85,501 |
| |
| | | | | | | | | | | | | |
risks until July 1, 2017.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
3.2. | SEGMENT INFORMATION (CONTINUED) |
The following tables present the underwriting results of the Company's reportable segments, as well as the carrying values of allocated goodwill and intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | |
| Three months ended and at March 31, | Insurance | | Reinsurance | | Total | | Insurance | | Reinsurance | | Total | |
| | | | | | | | | | | | | |
| Gross premiums written | $ | 880,848 |
| | $ | 1,781,947 |
| | $ | 2,662,795 |
| | $ | 545,261 |
| | $ | 1,366,610 |
| | $ | 1,911,871 |
| |
| Net premiums written | 547,893 |
| | 1,437,978 |
| | 1,985,871 |
| | 356,836 |
| | 1,152,122 |
| | 1,508,959 |
| |
| Net premiums earned | 580,059 |
| | 587,343 |
| | 1,167,402 |
| | 391,964 |
| | 546,739 |
| | 938,703 |
| |
| Other insurance related income (losses) | 620 |
| | 5,986 |
| | 6,606 |
| | 42 |
| | (3,825 | ) | | (3,783 | ) | |
| Net losses and loss expenses | (321,538 | ) | | (339,807 | ) | | (661,345 | ) | | (241,085 | ) | | (365,857 | ) | | (606,942 | ) | |
| Acquisition costs | (87,329 | ) | | (141,931 | ) | | (229,260 | ) | | (54,004 | ) | | (135,788 | ) | | (189,792 | ) | |
| General and administrative expenses | (102,370 | ) | | (37,296 | ) | | (139,666 | ) | | (85,256 | ) | | (36,545 | ) | | (121,801 | ) | |
| Underwriting income | $ | 69,442 |
| | $ | 74,295 |
| | 143,737 |
| | $ | 11,661 |
| | $ | 4,724 |
| | 16,385 |
| |
| | | | | | | | | | | | | |
| Corporate expenses | | | | | (30,171 | ) | | | | | | (39,459 | ) | |
| Net investment income | | | | | 100,999 |
| | | | | | 98,664 |
| |
| Net investment losses | | | | | (14,830 | ) | | | | | | (25,050 | ) | |
| Foreign exchange losses | | | | | (37,860 | ) | | | | | | (21,465 | ) | |
| Interest expense and financing costs | | | | | (16,763 | ) | | | | | | (12,791 | ) | |
| Reorganization expenses | | | | | (13,054 | ) | | | | | | — |
| |
| Amortization of value of business acquired | | | | | (57,110 | ) | | | | | | — |
| |
| Amortization of intangibles | | | | | (2,782 | ) | | | | | | — |
| |
| Income before income taxes and interest in income (loss) of equity method investments | | | | | $ | 72,166 |
| | | | | | $ | 16,284 |
| |
| | | | | | | | | | | | | |
| Net loss and loss expense ratio | 55.4 | % | | 57.9 | % | | 56.7 | % | | 61.5 | % | | 66.9 | % | | 64.7 | % | |
| Acquisition cost ratio | 15.1 | % | | 24.2 | % | | 19.6 | % | | 13.8 | % | | 24.8 | % | | 20.2 | % | |
| General and administrative expense ratio | 17.6 | % | | 6.3 | % | | 14.5 | % | | 21.8 | % | | 6.7 | % | | 17.2 | % | |
| Combined ratio | 88.1 | % | | 88.4 | % | | 90.8 | % | | 97.0 | % | | 98.4 | % | | 102.1 | % | |
| | | | | | | | | | | | | |
| Goodwill and intangible assets | $ | 506,747 |
| | $ | — |
| | $ | 506,747 |
| | $ | 84,613 |
| | $ | — |
| | $ | 84,613 |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | |
| Nine months ended and at September 30, | Insurance | | Reinsurance | | Total | | Insurance | | Reinsurance | | Total | |
| | | | | | | | | | | | | |
| Gross premiums written | $ | 2,234,395 |
| | $ | 2,225,377 |
| | $ | 4,459,772 |
| | $ | 2,112,796 |
| | $ | 2,126,762 |
| | $ | 4,239,558 |
| |
| Net premiums written | 1,533,029 |
| | 1,764,689 |
| | 3,297,718 |
| | 1,433,058 |
| | 1,855,529 |
| | 3,288,587 |
| |
| Net premiums earned | 1,448,270 |
| | 1,488,995 |
| | 2,937,265 |
| | 1,322,649 |
| | 1,461,097 |
| | 2,783,746 |
| |
| Other insurance related income (losses) | 1,077 |
| | (5,497 | ) | | (4,420 | ) | | (57 | ) | | 4,907 |
| | 4,850 |
| |
| Net losses and loss expenses | (1,241,495 | ) | | (1,206,145 | ) | | (2,447,640 | ) | | (853,771 | ) | | (809,813 | ) | | (1,663,584 | ) | |
| Acquisition costs | (223,665 | ) | | (365,214 | ) | | (588,879 | ) | | (184,982 | ) | | (374,588 | ) | | (559,570 | ) | |
| General and administrative expenses | (253,308 | ) | | (82,474 | ) | | (335,782 | ) | | (252,652 | ) | | (99,980 | ) | | (352,632 | ) | |
| Underwriting income (loss) | $ | (269,121 | ) | | $ | (170,335 | ) | | (439,456 | ) | | $ | 31,187 |
| | $ | 181,623 |
| | 212,810 |
| |
| | | | | | | | | | | | | |
| Corporate expenses | | | | | (97,922 | ) | | | | | | (86,922 | ) | |
| Net investment income | | | | | 299,899 |
| | | | | | 257,818 |
| |
| Net realized investment losses | | | | | (14,811 | ) | | | | | | (40,295 | ) | |
| Foreign exchange (losses) gains | | | | | (90,093 | ) | | | | | | 69,781 |
| |
| Interest expense and financing costs | | | | | (38,377 | ) | | | | | | (38,586 | ) | |
| Bargain purchase gain | | | | | 15,044 |
| | | | | | — |
| |
| Transaction related expenses | | | | | (5,970 | ) | | | | | | — |
| |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | | | | | $ | (371,686 | ) | | | | | | $ | 374,606 |
| |
| | | | | | | | | | | | | |
| Net loss and loss expense ratio | 85.7 | % | | 81.0 | % | | 83.3 | % | | 64.6 | % | | 55.4 | % | | 59.8 | % | |
| Acquisition cost ratio | 15.4 | % | | 24.5 | % | | 20.0 | % | | 14.0 | % | | 25.6 | % | | 20.1 | % | |
| General and administrative expense ratio | 17.6 | % | | 5.6 | % | | 14.8 | % | | 19.0 | % | | 6.9 | % | | 15.8 | % | |
| Combined ratio | 118.7 | % | | 111.1 | % | | 118.1 | % | | 97.6 | % | | 87.9 | % | | 95.7 | % | |
| | | | | | | | | | | | | |
| Goodwill and intangible assets | $ | 87,206 |
| | $ | — |
| | $ | 87,206 |
| | $ | 85,501 |
| | $ | — |
| | $ | 85,501 |
| |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a) Fixed Maturities and EquitiesEquity securities
Fixed maturities
The amortized cost or cost and fair values of ourthe Company's fixed maturities and equitiesclassified as available for sale were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost or Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Non-credit OTTI in AOCI(5) | |
| | | | | | | | | | | |
| At September 30, 2017 | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,556,963 |
| | $ | 2,729 |
| | $ | (12,374 | ) | | $ | 1,547,318 |
| | $ | — |
| |
| Non-U.S. government | 568,223 |
| | 13,961 |
| | (8,544 | ) | | 573,640 |
| | — |
| |
| Corporate debt | 4,460,337 |
| | 65,230 |
| | (21,600 | ) | | 4,503,967 |
| | — |
| |
| Agency RMBS(1) | 2,313,096 |
| | 12,218 |
| | (18,492 | ) | | 2,306,822 |
| | — |
| |
| CMBS(2) | 665,520 |
| | 5,954 |
| | (1,738 | ) | | 669,736 |
| | — |
| |
| Non-Agency RMBS | 42,653 |
| | 1,968 |
| | (804 | ) | | 43,817 |
| | (867 | ) | |
| ABS(3) | 1,285,080 |
| | 4,572 |
| | (782 | ) | | 1,288,870 |
| | — |
| |
| Municipals(4) | 151,522 |
| | 1,379 |
| | (685 | ) | | 152,216 |
| | — |
| |
| Total fixed maturities | $ | 11,043,394 |
| | $ | 108,011 |
| | $ | (65,019 | ) | | $ | 11,086,386 |
| | $ | (867 | ) | |
| | | | | | | | | | | |
| Equity securities | | | | | | | | | | |
| Common stocks | $ | 13,980 |
| | $ | 1,415 |
| | $ | (569 | ) | | $ | 14,826 |
| | | |
| Exchange-traded funds | 365,412 |
| | 88,782 |
| | — |
| | 454,194 |
| | | |
| Bond mutual funds | 183,718 |
| | 8,686 |
| | (1,673 | ) | | 190,731 |
| | | |
| Total equity securities | $ | 563,110 |
| | $ | 98,883 |
| | $ | (2,242 | ) | | $ | 659,751 |
| | | |
| | | | | | | | | | | |
| At December 31, 2016 | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,681,425 |
| | $ | 1,648 |
| | $ | (27,004 | ) | | $ | 1,656,069 |
| | $ | — |
| |
| Non-U.S. government | 613,282 |
| | 2,206 |
| | (49,654 | ) | | 565,834 |
| | — |
| |
| Corporate debt | 4,633,834 |
| | 42,049 |
| | (75,140 | ) | | 4,600,743 |
| | — |
| |
| Agency RMBS(1) | 2,487,837 |
| | 13,275 |
| | (35,977 | ) | | 2,465,135 |
| | — |
| |
| CMBS(2) | 664,368 |
| | 5,433 |
| | (3,564 | ) | | 666,237 |
| | — |
| |
| Non-Agency RMBS | 57,316 |
| | 1,628 |
| | (2,023 | ) | | 56,921 |
| | (823 | ) | |
| ABS(3) | 1,221,813 |
| | 3,244 |
| | (2,843 | ) | | 1,222,214 |
| | — |
| |
| Municipals(4) | 163,441 |
| | 1,510 |
| | (990 | ) | | 163,961 |
| | — |
| |
| Total fixed maturities | $ | 11,523,316 |
| | $ | 70,993 |
| | $ | (197,195 | ) | | $ | 11,397,114 |
| | $ | (823 | ) | |
| | | | | | | | | | | |
| Equity securities | | | | | | | | | | |
| Common stocks | $ | 379 |
| | $ | 41 |
| | $ | (342 | ) | | $ | 78 |
| | | |
| Exchange-traded funds | 463,936 |
| | 53,405 |
| | (2,634 | ) | | 514,707 |
| | | |
| Bond mutual funds | 133,051 |
| | — |
| | (9,092 | ) | | 123,959 |
| | | |
| Total equity securities | $ | 597,366 |
| | $ | 53,446 |
| | $ | (12,068 | ) | | $ | 638,744 |
| | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Non-credit OTTI in AOCI(5) | |
| | | | | | | | | | | |
| At March 31, 2018 | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,821,951 |
| | $ | 908 |
| | $ | (25,894 | ) | | $ | 1,796,965 |
| | $ | — |
| |
| Non-U.S. government | 649,396 |
| | 21,084 |
| | (9,256 | ) | | 661,224 |
| | — |
| |
| Corporate debt | 4,670,815 |
| | 40,698 |
| | (71,082 | ) | | 4,640,431 |
| | — |
| |
| Agency RMBS(1) | 1,956,394 |
| | 4,644 |
| | (46,193 | ) | | 1,914,845 |
| | — |
| |
| CMBS(2) | 1,042,704 |
| | 1,964 |
| | (14,047 | ) | | 1,030,621 |
| | — |
| |
| Non-Agency RMBS | 39,930 |
| | 1,997 |
| | (530 | ) | | 41,397 |
| | (866 | ) | |
| ABS(3) | 1,566,484 |
| | 4,932 |
| | (4,718 | ) | | 1,566,698 |
| | — |
| |
| Municipals(4) | 150,386 |
| | 781 |
| | (1,952 | ) | | 149,215 |
| | — |
| |
| Total fixed maturities | $ | 11,898,060 |
| | $ | 77,008 |
| | $ | (173,672 | ) | | $ | 11,801,396 |
| | $ | (866 | ) | |
| | | | | | | | | | | |
| At December 31, 2017 | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,727,643 |
| | $ | 1,735 |
| | $ | (16,909 | ) | | $ | 1,712,469 |
| | $ | — |
| |
| Non-U.S. government | 798,582 |
| | 17,240 |
| | (9,523 | ) | | 806,299 |
| | — |
| |
| Corporate debt | 5,265,795 |
| | 61,922 |
| | (29,851 | ) | | 5,297,866 |
| | — |
| |
| Agency RMBS(1) | 2,414,720 |
| | 8,132 |
| | (27,700 | ) | | 2,395,152 |
| | — |
| |
| CMBS(2) | 776,715 |
| | 4,138 |
| | (3,125 | ) | | 777,728 |
| | — |
| |
| Non-Agency RMBS | 45,713 |
| | 1,917 |
| | (799 | ) | | 46,831 |
| | (853 | ) | |
| ABS(3) | 1,432,884 |
| | 5,391 |
| | (1,994 | ) | | 1,436,281 |
| | — |
| |
| Municipals(4) | 149,167 |
| | 1,185 |
| | (972 | ) | | 149,380 |
| | — |
| |
| Total fixed maturities | $ | 12,611,219 |
| | $ | 101,660 |
| | $ | (90,873 | ) | | $ | 12,622,006 |
| | $ | (853 | ) | |
| | | | | | | | | | | |
| |
(1) | Residential mortgage-backed securities (RMBS)("RMBS") originated by U.S. government-sponsored agencies. |
| |
(2) | Commercial mortgage-backed securities (CMBS)("CMBS"). |
| |
(3) | Asset-backed securities (ABS) include debt tranched securities collateralized primarily by auto loans, student loans, credit cards,card receivables collateralized debt obligations ("CDOs") and other asset types. This asset class also includes collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs)("CLOs"). |
| |
(4) | Municipals include bonds issued by states, municipalities and political subdivisions. |
| |
(5) | Represents the non-credit component of the other-than-temporary impairment (OTTI)("OTTI") losses, adjusted for subsequent sales, maturities and redemptions. It does not include the change in fair value subsequent to the impairment measurement date. |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4. | INVESTMENTS (CONTINUED) |
In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by Variable Interest Entities ("VIEs"). These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we invest in limited partnerships (hedge funds, direct lending funds, private equity funds and real estate funds) and CLO equity tranched securities, which are variable interests issued by VIEs (see Note 4(c)). 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 therefore we are not the primary beneficiary of 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, 2017 | | | | | | |
| Maturity | | | | | | |
| Due in one year or less | $ | 434,283 |
| | $ | 432,662 |
| | 4.0 | % | |
| Due after one year through five years | 3,834,452 |
| | 3,850,174 |
| | 34.7 | % | |
| Due after five years through ten years | 2,258,136 |
| | 2,276,190 |
| | 20.5 | % | |
| Due after ten years | 210,174 |
| | 218,115 |
| | 2.0 | % | |
| | 6,737,045 |
| | 6,777,141 |
| | 61.2 | % | |
| Agency RMBS | 2,313,096 |
| | 2,306,822 |
| | 20.8 | % | |
| CMBS | 665,520 |
| | 669,736 |
| | 6.0 | % | |
| Non-Agency RMBS | 42,653 |
| | 43,817 |
| | 0.4 | % | |
| ABS | 1,285,080 |
| | 1,288,870 |
| | 11.6 | % | |
| Total | $ | 11,043,394 |
| | $ | 11,086,386 |
| | 100.0 | % | |
| | | | | | | |
| At December 31, 2016 | | | | | | |
| Maturity | | | | | | |
| Due in one year or less | $ | 313,287 |
| | $ | 305,972 |
| | 2.8 | % | |
| Due after one year through five years | 3,906,190 |
| | 3,850,149 |
| | 33.8 | % | |
| Due after five years through ten years | 2,546,299 |
| | 2,510,975 |
| | 22.0 | % | |
| Due after ten years | 326,206 |
| | 319,511 |
| | 2.8 | % | |
| | 7,091,982 |
| | 6,986,607 |
| | 61.4 | % | |
| Agency RMBS | 2,487,837 |
| | 2,465,135 |
| | 21.6 | % | |
| CMBS | 664,368 |
| | 666,237 |
| | 5.8 | % | |
| Non-Agency RMBS | 57,316 |
| | 56,921 |
| | 0.5 | % | |
| ABS | 1,221,813 |
| | 1,222,214 |
| | 10.7 | % | |
| Total | $ | 11,523,316 |
| | $ | 11,397,114 |
| | 100.0 | % | |
| | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4.3. | INVESTMENTS (CONTINUED) |
Equity Securities
The cost and fair values of the Company's equity securities were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | | | | | | | |
| At March 31, 2018 | | | | | | | | |
| Equity securities | | | | | | | | |
| Common stocks | $ | 23,251 |
| | $ | 1,668 |
| | $ | (977 | ) | | $ | 23,942 |
| |
| Exchange-traded funds | 211,301 |
| | 51,843 |
| | (514 | ) | | 262,630 |
| |
| Bond mutual funds | 139,539 |
| | 9,631 |
| | — |
| | 149,170 |
| |
| Total equity securities | $ | 374,091 |
| | $ | 63,142 |
| | $ | (1,491 | ) | | $ | 435,742 |
| |
| | | | | | | | | |
| At December 31, 2017 | | | | | | | | |
| Equity securities | | | | | | | | |
| Common stocks | $ | 22,836 |
| | $ | 3,412 |
| | $ | (590 | ) | | $ | 25,658 |
| |
| Exchange-traded funds | 356,252 |
| | 71,675 |
| | (294 | ) | | 427,633 |
| |
| Bond mutual funds | 173,779 |
| | 9,440 |
| | (999 | ) | | 182,220 |
| |
| Total equity securities | $ | 552,867 |
| | $ | 84,527 |
| | $ | (1,883 | ) | | $ | 635,511 |
| |
| | | | | | | | | |
In the normal course of investing activities, the Company actively manages allocations to non-controlling tranches of structured securities (variable interests) issued by Variable Interest Entities ("VIEs"). These structured securities include RMBS, CMBS and ABS . The Company also invests in limited partnerships (hedge funds, direct lending funds, private equity funds and real estate funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 3(c) 'Other Investments'). The Company does not have the power to direct the activities that are most significant to the economic performance of the VIEs therefore the Company is not the primary beneficiary of any of these VIEs. The maximum exposure to loss on these interests is limited to the amount of investment by the Company. The Company has not provided financial or other support with respect to these structured securities other than the original investment.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
3. | INVESTMENTS (CONTINUED) |
Contractual Maturities
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. The contractual maturities of fixed maturities are shown below:
|
| | | | | | | | | | | | |
| | Amortized Cost | | Fair Value | | % of Total Fair Value | |
| | | | | | | |
| At March 31, 2018 | | | | | | |
| Maturity | | | | | | |
| Due in one year or less | $ | 513,226 |
| | $ | 507,980 |
| | 4.3 | % | |
| Due after one year through five years | 4,642,999 |
| | 4,626,323 |
| | 39.2 | % | |
| Due after five years through ten years | 1,942,501 |
| | 1,911,664 |
| | 16.2 | % | |
| Due after ten years | 193,822 |
| | 201,868 |
| | 1.7 | % | |
| | 7,292,548 |
| | 7,247,835 |
| | 61.4 | % | |
| Agency RMBS | 1,956,394 |
| | 1,914,845 |
| | 16.2 | % | |
| CMBS | 1,042,704 |
| | 1,030,621 |
| | 8.7 | % | |
| Non-Agency RMBS | 39,930 |
| | 41,397 |
| | 0.4 | % | |
| ABS | 1,566,484 |
| | 1,566,698 |
| | 13.3 | % | |
| Total | $ | 11,898,060 |
| | $ | 11,801,396 |
| | 100.0 | % | |
| | | | | | | |
| At December 31, 2017 | | | | | | |
| Maturity | | | | | | |
| Due in one year or less | $ | 486,659 |
| | $ | 484,663 |
| | 3.8 | % | |
| Due after one year through five years | 4,906,207 |
| | 4,912,189 |
| | 38.9 | % | |
| Due after five years through ten years | 2,338,964 |
| | 2,350,433 |
| | 18.6 | % | |
| Due after ten years | 209,357 |
| | 218,729 |
| | 1.7 | % | |
| | 7,941,187 |
| | 7,966,014 |
| | 63.0 | % | |
| Agency RMBS | 2,414,720 |
| | 2,395,152 |
| | 19.0 | % | |
| CMBS | 776,715 |
| | 777,728 |
| | 6.2 | % | |
| Non-Agency RMBS | 45,713 |
| | 46,831 |
| | 0.4 | % | |
| ABS | 1,432,884 |
| | 1,436,281 |
| | 11.4 | % | |
| Total | $ | 12,611,219 |
| | $ | 12,622,006 |
| | 100.0 | % | |
| | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
3. | INVESTMENTS (CONTINUED) |
Gross Unrealized Losses
The following table summarizes fixed maturities and equitiesequity securities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 12 months or greater | | Less than 12 months | | Total | |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | |
| | | | | | | | | | | | | |
| At September 30, 2017 | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| U.S. government and agency | $ | 161,425 |
| | $ | (5,641 | ) | | $ | 1,207,943 |
| | $ | (6,733 | ) | | $ | 1,369,368 |
| | $ | (12,374 | ) | |
| Non-U.S. government | 61,872 |
| | (7,354 | ) | | 163,477 |
| | (1,190 | ) | | 225,349 |
| | (8,544 | ) | |
| Corporate debt | 412,832 |
| | (12,553 | ) | | 990,308 |
| | (9,047 | ) | | 1,403,140 |
| | (21,600 | ) | |
| Agency RMBS | 350,010 |
| | (8,130 | ) | | 1,126,956 |
| | (10,362 | ) | | 1,476,966 |
| | (18,492 | ) | |
| CMBS | 13,919 |
| | (238 | ) | | 221,941 |
| | (1,500 | ) | | 235,860 |
| | (1,738 | ) | |
| Non-Agency RMBS | 8,342 |
| | (803 | ) | | 222 |
| | (1 | ) | | 8,564 |
| | (804 | ) | |
| ABS | 16,816 |
| | (409 | ) | | 323,886 |
| | (373 | ) | | 340,702 |
| | (782 | ) | |
| Municipals | 23,339 |
| | (474 | ) | | 40,913 |
| | (211 | ) | | 64,252 |
| | (685 | ) | |
| Total fixed maturities | $ | 1,048,555 |
| | $ | (35,602 | ) | | $ | 4,075,646 |
| | $ | (29,417 | ) | | $ | 5,124,201 |
| | $ | (65,019 | ) | |
| | | | | | | | | | | | | |
| Equity securities | | | | | | | | | | | | |
| Common stocks | $ | 33 |
| | $ | (135 | ) | | $ | 2,939 |
| | $ | (434 | ) | | $ | 2,972 |
| | $ | (569 | ) | |
| Exchange-traded funds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Bond mutual funds | — |
| | — |
| | 24,145 |
| | (1,673 | ) | | 24,145 |
| | (1,673 | ) | |
| Total equity securities | $ | 33 |
| | $ | (135 | ) | | $ | 27,084 |
| | $ | (2,107 | ) | | $ | 27,117 |
| | $ | (2,242 | ) | |
| | | | | | | | | | | | | |
| At December 31, 2016 | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| U.S. government and agency | $ | 54,051 |
| | $ | (2,729 | ) | | $ | 1,340,719 |
| | $ | (24,275 | ) | | $ | 1,394,770 |
| | $ | (27,004 | ) | |
| Non-U.S. government | 149,360 |
| | (38,683 | ) | | 283,796 |
| | (10,971 | ) | | 433,156 |
| | (49,654 | ) | |
| Corporate debt | 230,218 |
| | (30,652 | ) | | 1,948,976 |
| | (44,488 | ) | | 2,179,194 |
| | (75,140 | ) | |
| Agency RMBS | 76,694 |
| | (1,101 | ) | | 1,724,170 |
| | (34,876 | ) | | 1,800,864 |
| | (35,977 | ) | |
| CMBS | 84,640 |
| | (749 | ) | | 193,499 |
| | (2,815 | ) | | 278,139 |
| | (3,564 | ) | |
| Non-Agency RMBS | 13,642 |
| | (1,752 | ) | | 7,194 |
| | (271 | ) | | 20,836 |
| | (2,023 | ) | |
| ABS | 362,110 |
| | (1,950 | ) | | 266,763 |
| | (893 | ) | | 628,873 |
| | (2,843 | ) | |
| Municipals | 774 |
| | (29 | ) | | 68,598 |
| | (961 | ) | | 69,372 |
| | (990 | ) | |
| Total fixed maturities | $ | 971,489 |
| | $ | (77,645 | ) | | $ | 5,833,715 |
| | $ | (119,550 | ) | | $ | 6,805,204 |
| | $ | (197,195 | ) | |
| | | | | | | | | | | | | |
| Equity securities | | | | | | | | | | | | |
| Common stocks | $ | — |
| | $ | — |
| | $ | 37 |
| | $ | (342 | ) | | $ | 37 |
| | $ | (342 | ) | |
| Exchange-traded funds | 4,959 |
| | (461 | ) | | 87,760 |
| | (2,173 | ) | | 92,719 |
| | (2,634 | ) | |
| Bond mutual funds | — |
| | — |
| | 123,954 |
| | (9,092 | ) | | 123,954 |
| | (9,092 | ) | |
| Total equity securities | $ | 4,959 |
| | $ | (461 | ) | | $ | 211,751 |
| | $ | (11,607 | ) | | $ | 216,710 |
| | $ | (12,068 | ) | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 12 months or greater | | Less than 12 months | | Total | |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | |
| | | | | | | | | | | | | |
| At March 31, 2018(1) | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| U.S. government and agency | $ | 179,214 |
| | $ | (7,184 | ) | | $ | 1,219,143 |
| | $ | (18,710 | ) | | $ | 1,398,357 |
| | $ | (25,894 | ) | |
| Non-U.S. government | 47,017 |
| | (4,693 | ) | | 214,545 |
| | (4,563 | ) | | 261,562 |
| | (9,256 | ) | |
| Corporate debt | 335,415 |
| | (15,212 | ) | | 2,853,336 |
| | (55,870 | ) | | 3,188,751 |
| | (71,082 | ) | |
| Agency RMBS | 603,008 |
| | (24,241 | ) | | 1,011,088 |
| | (21,952 | ) | | 1,614,096 |
| | (46,193 | ) | |
| CMBS | 29,098 |
| | (1,272 | ) | | 684,264 |
| | (12,775 | ) | | 713,362 |
| | (14,047 | ) | |
| Non-Agency RMBS | 8,089 |
| | (453 | ) | | 108,548 |
| | (77 | ) | | 116,637 |
| | (530 | ) | |
| ABS | 43,804 |
| | (455 | ) | | 547,077 |
| | (4,263 | ) | | 590,881 |
| | (4,718 | ) | |
| Municipals | 11,101 |
| | (375 | ) | | 93,140 |
| | (1,577 | ) | | 104,241 |
| | (1,952 | ) | |
| Total fixed maturities | $ | 1,256,746 |
| | $ | (53,885 | ) | | $ | 6,731,141 |
| | $ | (119,787 | ) | | $ | 7,987,887 |
| | $ | (173,672 | ) | |
| | | | | | | | | | | | | |
| At December 31, 2017 | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| U.S. government and agency | $ | 194,916 |
| | $ | (5,963 | ) | | $ | 1,389,792 |
| | $ | (10,946 | ) | | $ | 1,584,708 |
| | $ | (16,909 | ) | |
| Non-U.S. government | 62,878 |
| | (6,806 | ) | | 204,110 |
| | (2,717 | ) | | 266,988 |
| | (9,523 | ) | |
| Corporate debt | 407,300 |
| | (11,800 | ) | | 2,041,845 |
| | (18,051 | ) | | 2,449,145 |
| | (29,851 | ) | |
| Agency RMBS | 759,255 |
| | (17,453 | ) | | 1,172,313 |
| | (10,247 | ) | | 1,931,568 |
| | (27,700 | ) | |
| CMBS | 31,607 |
| | (703 | ) | | 348,943 |
| | (2,422 | ) | | 380,550 |
| | (3,125 | ) | |
| Non-Agency RMBS | 8,029 |
| | (788 | ) | | 4,197 |
| | (11 | ) | | 12,226 |
| | (799 | ) | |
| ABS | 57,298 |
| | (570 | ) | | 392,170 |
| | (1,424 | ) | | 449,468 |
| | (1,994 | ) | |
| Municipals | 11,230 |
| | (269 | ) | | 65,632 |
| | (703 | ) | | 76,862 |
| | (972 | ) | |
| Total fixed maturities | $ | 1,532,513 |
| | $ | (44,352 | ) | | $ | 5,619,002 |
| | $ | (46,521 | ) | | $ | 7,151,515 |
| | $ | (90,873 | ) | |
| Equity securities | | | | | | | | | | | | |
| Common stocks | $ | — |
| | $ | — |
| | $ | 3,202 |
| | $ | (590 | ) | | $ | 3,202 |
| | $ | (590 | ) | |
| Exchange-traded funds | — |
| | — |
| | 12,323 |
| | (294 | ) | | 12,323 |
| | (294 | ) | |
| Bond mutual funds | — |
| | — |
| | 12,184 |
| | (999 | ) | | 12,184 |
| | (999 | ) | |
| Total equity securities | $ | — |
| | $ | — |
| | $ | 27,709 |
| | $ | (1,883 | ) | | $ | 27,709 |
| | $ | (1,883 | ) | |
| | | | | | | | | | | | | |
| |
(1) | Effective January 1, 2018, the Company adopted ASU No. 2016-01 which requires equity securities to be measured at fair value with changes in fair value recognized in net income therefore equity securities at fair value are excluded from the table above at March 31, 2018. |
Fixed Maturities
At March 31,2018, 2,940 fixed maturities (2017: 2,424) were in an unrealized loss position of $174 million (2017: $91 million), of which $11 million (2017: $7 million) was related to securities below investment grade or not rated.
At March 31,2018, 555 fixed maturities (2017: 627) had been in a continuous unrealized loss position for twelve months or greater and had a fair value of $1,257 million (2017: $1,533 million). Following a credit impairment review, it was concluded that these securities as well as the remaining securities in an unrealized loss position were temporarily impaired at March 31,2018, and were expected to recover in value as the securities approach maturity. At March 31,2018, the Company did not intend to sell the securities
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4.3. | INVESTMENTS (CONTINUED) |
Fixed Maturities
At September 30,2017, 1,625 fixed maturities (2016: 1,881) were in an unrealized loss position of $65 million (2016: $197 million), of which $6 million (2016: $15 million) was related to securities below investment grade or not rated.
At September 30,2017, 403 (2016: 330) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $1,049 million (2016: $971 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 30,2017, and were expected to recover in value as the securities approach maturity. Further, at September 30,2017, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that wethe Company will not be required to sell these securities before the anticipated recovery of their amortized costs.
Equity Securities
At September 30,2017, 31 securities (2016: 23) were in an unrealized loss position of $2 million (2016: $12 million).
At September 30,2017, 2 securities (2016: 3) was in a continuous unrealized loss position for 12 months or greater. 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 30,2017.
b) Mortgage Loans
The following table provides a breakdown of ourthe Company's mortgage loans held-for-investment: |
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | |
| | Carrying Value | | % of Total | | Carrying Value | | % of Total | |
| | | | | | | | | |
| Mortgage Loans held-for-investment: | | | | | | | | |
| Commercial | $ | 360,381 |
| | 100 | % | | $ | 349,969 |
| | 100 | % | |
| | 360,381 |
| | 100 | % | | 349,969 |
| | 100 | % | |
| Valuation allowances | — |
| | — | % | | — |
| | — | % | |
| Total Mortgage Loans held-for-investment | $ | 360,381 |
| | 100 | % | | $ | 349,969 |
| | 100 | % | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | |
| | Carrying Value | | % of Total | | Carrying Value | | % of Total | |
| | | | | | | | | |
| Mortgage Loans held-for-investment: | | | | | | | | |
| Commercial | $ | 364,769 |
| | 100 | % | | $ | 325,062 |
| | 100 | % | |
| | 364,769 |
| | 100 | % | | 325,062 |
| | 100 | % | |
| Valuation allowances | — |
| | — | % | | — |
| | — | % | |
| Total Mortgage Loans held-for-investment | $ | 364,769 |
| | 100 | % | | $ | 325,062 |
| | 100 | % | |
| | | | | | | | | |
For commercial mortgage loans, theThe primary credit quality indicator for commercial mortgage loans is the debt service coverage ratio (whichwhich compares a property’s net operating income to amounts needed to service the principal and interest due under the loan, generally,(generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss) and the loan-to-value ratio (loan-to-value ratios comparewhich compares the unpaid principal balance of the loan to the estimated fair value of the underlying collateral generally,(generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss). The debt service coverage ratio and loan-to-value ratio, as well as the values utilized in calculating these ratios, are updated annually, on a rolling basis.
We haveThe Company has a high quality mortgage loan portfolio with weighted average debt service coverage ratios in excess of 3.0x2.9x and weighted average loan-to-value ratios of less than 60%. ThereAt March 31, 2018 there are no credit losses associated with the commercial mortgage loans that we hold at September 30, 2017.held by the Company.
ThereAt March 31, 2018, there are no past due amounts at September 30, 2017.amounts.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4.3. | INVESTMENTS (CONTINUED) |
c) Other Investments
The following table providestables provide a breakdown of our investments in hedge funds, direct lending funds, private equity funds, real estate funds, CLO-Equities andthe Company's other privately held investments, together with additional information relating to the liquidity of each category:
|
| | | | | | | | | | | | |
| | Fair Value | | Redemption Frequency (if currently eligible) | | Redemption Notice Period | |
| | | | | | | | | |
| At September 30, 2017 | |
| | |
| | | | | |
| Long/short equity funds | $ | 64,067 |
| | 8 | % | | Annually | | 60 days | |
| Multi-strategy funds | 286,452 |
| | 35 | % | | Quarterly, Semi-annually | | 60-95 days | |
| Event-driven funds | 48,578 |
| | 6 | % | | Annually | | 45 days | |
| Direct lending funds | 232,389 |
| | 28 | % | | n/a | | n/a | |
| Private equity funds | 71,896 |
| | 9 | % | | n/a | | n/a | |
| Real estate funds | 46,691 |
| | 6 | % | | n/a | | n/a | |
| CLO-Equities | 36,782 |
| | 3 | % | | n/a | | n/a | |
| Other privately held investments | 43,398 |
| | 5 | % | | n/a | | n/a | |
| Total other investments | $ | 830,253 |
| | 100 | % | | | | | |
| | | | | | | | | |
| At December 31, 2016 | |
| | |
| | | | | |
| Long/short equity funds | $ | 118,619 |
| | 14 | % | | Semi-annually, Annually | | 45-60 days | |
| Multi-strategy funds | 285,992 |
| | 34 | % | | Quarterly, Semi-annually | | 60-95 days | |
| Event-driven funds | 93,539 |
| | 11 | % | | Annually | | 45 days | |
| Direct lending funds | 134,650 |
| | 16 | % | | n/a | | n/a | |
| Private equity funds | 81,223 |
| | 10 | % | | n/a | | n/a | |
| Real estate funds | 13,354 |
| | 2 | % | | n/a | | n/a | |
| CLO-Equities | 60,700 |
| | 8 | % | | n/a | | n/a | |
| Other privately held investments | 42,142 |
| | 5 | % | | n/a | | n/a | |
| Total other investments | $ | 830,219 |
| | 100 | % | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | |
| | Fair Value | | Redemption Frequency (if currently eligible) | | Redemption Notice Period | |
| | | | | | | | | |
| At March 31, 2018 | |
| | |
| | | | | |
| Long/short equity funds | $ | 25,489 |
| | 3 | % | | Annually | | 60 days | |
| Multi-strategy funds | 283,298 |
| | 28 | % | | Quarterly, Semi-annually | | 60-95 days | |
| Event-driven funds | 37,680 |
| | 4 | % | | Annually | | 45 days | |
| Direct lending funds | 261,902 |
| | 26 | % | | n/a | | n/a | |
| Private equity funds | 65,811 |
| | 7 | % | | n/a | | n/a | |
| Real estate funds | 54,720 |
| | 5 | % | | n/a | | n/a | |
| CLO-Equities | 28,556 |
| | 2 | % | | n/a | | n/a | |
| Other privately held investments | 48,787 |
| | 5 | % | | n/a | | n/a | |
| Overseas deposits | 203,344 |
| | 20 | % | | n/a | | n/a | |
| Total other investments | $ | 1,009,587 |
| | 100 | % | | | | | |
| | | | | | | | | |
| At December 31, 2017 | |
| | |
| | | | | |
| Long/short equity funds | $ | 38,470 |
| | 4 | % | | Annually | | 60 days | |
| Multi-strategy funds | 286,164 |
| | 28 | % | | Quarterly, Semi-annually | | 60-95 days | |
| Event-driven funds | 39,177 |
| | 4 | % | | Annually | | 45 days | |
| Direct lending funds | 250,681 |
| | 25 | % | | n/a | | n/a | |
| Private equity funds | 68,812 |
| | 7 | % | | n/a | | n/a | |
| Real estate funds | 50,009 |
| | 5 | % | | n/a | | n/a | |
| CLO-Equities | 31,413 |
| | 2 | % | | n/a | | n/a | |
| Other privately held investments | 46,430 |
| | 5 | % | | n/a | | n/a | |
| Overseas deposits | 198,217 |
| | 20 | % | | n/a | | n/a | |
| Total other investments | $ | 1,009,373 |
| | 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.equity securities.
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.
Event-driven funds: Seek to achieve attractive returns by exploiting situations where announced or anticipated events create opportunities.
Direct lending funds: Seek to achieve attractive risk-adjusted returns, including current income generation, by investing in funds which provide financing directly to borrowers.
Private equity funds: Seek to achieve attractive risk-adjusted returns by investing in private transactions over the course of several years.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4.3. | INVESTMENTS (CONTINUED) |
Real estate funds: Seek to achieve attractive risk-adjusted returns by making and managing investments in real estate and real estate securities and businesses.
Two common redemption restrictions which may impact ourthe Company's 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 2017the three months ended March 31, 2018 and 2016,2017, neither of these restrictions impacted ourthe Company's redemption requests. At September 30, 2017, $64March 31, 2018, $25 million (2016: $60(2017: $38 million), representing 16% (2016: 12%7% (2017: 11%) of our total hedge funds, relate to holdingsa holding where we arethe Company is still within the lockup period. The expiration of thesethis lockup periods range from December 2017 toperiod is in March 2019.
At September 30,2017, weMarch 31, 2018, the Company had $142$128 million (2016: $176 (2017: $137 million) of unfunded commitments as a limited partner 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 5-10five to ten years and the General Partners of certain funds have the option to extend the term by up to 3three years.
At September 30,2017, weMarch 31, 2018, the Company had $16$17 million (2016: $12(2017: $16 million) of unfunded commitments as a limited partner in multi-strategy hedge 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 after the completion of the funds' investment term. These funds have investment terms ranging from 2two years to the dissolution of the underlying fund.
At September 30, 2017, weMarch 31, 2018, the Company had $120$105 million (2016: $140(2017: $115 million) of unfunded commitments as a limited partner in funds which invest in real estate and real estate securities and businesses. These funds have investment terms ranging from 7seven years to the dissolution of the underlying fund.
At September 30, 2017, weMarch 31, 2018, the Company had $21$18 million (2016: $24(2017: $21 million) of unfunded commitments as a limited partner in a private equity fund. The life of the fund is subject to the dissolution of the underlying funds. We expectThe Company expects the overall holding period to be over 10ten years.
During 2015, wethe Company made a $50 million commitment as a limited partner of a bank revolver opportunity fund. The fund is subject tohas an investment term of 7seven years and the General Partners have the option to extend the term by up to 2two years. At September 30, 2017,March 31, 2018, this commitment remains unfunded. It is not anticipated that the full amount of this fund will be drawn.
During 2017, the Company made a $75 million commitment as a limited partner of an open-ended commercial mortgage income fund. At March 31, 2018, this commitment remains unfunded.
Syndicate 2007 holds overseas deposits which include investments in private funds where the underlying investments are primarily U.S. government, Non-U.S. government and corporate debt securities. The funds do not trade on an exchange therefore are not included within available for sale investments.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4.3. | INVESTMENTS (CONTINUED) |
d) Equity Method Investments
During 2016, wethe Company paid $108 million including direct transaction costs to acquire 19% of the common equity of Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by AXIS Capital and The Blackstone Group L.P. ("Blackstone"). Through long-term service agreements, AXIS Capital will serve as Harrington Re's reinsurance underwriting manager and Blackstone will serve as exclusive investment management service provider. As an investor, we expectthe Company expects to benefit from underwriting profit generated by Harrington Re and the income and capital appreciation Blackstone seeks to deliver through its investment management services. In addition, we havethe Company has entered into an arrangement with Blackstone under which underwriting and investment related fees will be shared equally. Harrington is not a variable interest entity. Given that we exercisethe Company exercises significant influence over the operating and financial policies of this investee, we accountthe Company accounts for ourthe ownership in Harrington under the equity method of accounting. The Company's proportionate share of the underlying equity in net assets resulted in a basis difference of $5 million which represents initial transactions costs.
During the ninethree months ended September 30,March 31, 2017, wethe Company recorded an impairment charge of $9$6 million, related to a U.S. based insurance company, which reduced the carrying value of the investment from $9 million to $3 million. During the three months ended June 30, 2017, the carrying value of the investment was reduced to $nil. This charge isThese charges were included in interest in income (loss) of equity method investments in the Consolidated Statement of Operations.
e) Net Investment Income
Net investment income was derived from the following sources:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Fixed maturities | $ | 74,978 |
| | $ | 75,827 |
| | $ | 230,603 |
| | $ | 229,423 |
| |
| Other investments | 17,373 |
| | 38,248 |
| | 59,973 |
| | 25,770 |
| |
| Equity securities | 3,223 |
| | 4,633 |
| | 11,048 |
| | 12,843 |
| |
| Mortgage loans | 2,895 |
| | 2,191 |
| | 7,970 |
| | 5,683 |
| |
| Cash and cash equivalents | 3,111 |
| | 3,768 |
| | 9,640 |
| | 7,071 |
| |
| Short-term investments | 698 |
| | 337 |
| | 1,797 |
| | 708 |
| |
| Gross investment income | 102,278 |
| | 125,004 |
| | 321,031 |
| | 281,498 |
| |
| Investment expenses | (7,109 | ) | | (8,081 | ) | | (21,132 | ) | | (23,680 | ) | |
| Net investment income | $ | 95,169 |
| | $ | 116,923 |
| | $ | 299,899 |
| | $ | 257,818 |
| |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Fixed maturities | $ | 83,958 |
| | $ | 77,407 |
| |
| Other investments | 13,704 |
| | 18,962 |
| |
| Equity securities | 1,758 |
| | 3,478 |
| |
| Mortgage loans | 3,125 |
| | 2,477 |
| |
| Cash and cash equivalents | 4,153 |
| | 3,095 |
| |
| Short-term investments | 875 |
| | 438 |
| |
| Gross investment income | 107,573 |
| | 105,857 |
| |
| Investment expenses | (6,574 | ) | | (7,193 | ) | |
| Net investment income | $ | 100,999 |
| | $ | 98,664 |
| |
| | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4.3. | INVESTMENTS (CONTINUED) |
f) Net Realized Investment Gains (Losses)Losses
The following table provides an analysis of net realized investment gains (losses):losses:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Gross realized gains | | | | | | | | |
| Fixed maturities and short-term investments | $ | 19,297 |
| | $ | 26,211 |
| | $ | 57,524 |
| | $ | 67,833 |
| |
| Equities | 17,980 |
| | 5,570 |
| | 33,794 |
| | 18,804 |
| |
| Gross realized gains | 37,277 |
| | 31,781 |
| | 91,318 |
| | 86,637 |
| |
| Gross realized losses | | | | | | | | |
| Fixed maturities and short-term investments | (15,893 | ) | | (21,908 | ) | | (83,183 | ) | | (90,702 | ) | |
| Equities | (45 | ) | | (576 | ) | | (258 | ) | | (15,923 | ) | |
| Gross realized losses | (15,938 | ) | | (22,484 | ) | | (83,441 | ) | | (106,625 | ) | |
| Net OTTI recognized in earnings | (5,412 | ) | | (4,247 | ) | | (13,493 | ) | | (20,346 | ) | |
| Change in fair value of investment derivatives(1) | (1,295 | ) | | 155 |
| | (9,195 | ) | | 39 |
| |
| Net realized investment gains (losses) | $ | 14,632 |
| | $ | 5,205 |
| | $ | (14,811 | ) | | $ | (40,295 | ) | |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Gross realized investment gains | | | | |
| Fixed maturities and short-term investments | $ | 31,628 |
| | $ | 20,777 |
| |
| Equity securities | 17,557 |
| | 15,783 |
| |
| Gross realized investment gains | 49,185 |
| | 36,560 |
| |
| Gross realized investment losses | | | | |
| Fixed maturities and short-term investments | (43,535 | ) | | (52,935 | ) | |
| Equity securities | (1,276 | ) | | (189 | ) | |
| Gross realized investment losses | (44,811 | ) | | (53,124 | ) | |
| Net OTTI recognized in net income | (414 | ) | | (6,553 | ) | |
| Change in fair value of investment derivatives(1) | 2,023 |
| | (1,933 | ) | |
| Net unrealized gains (losses) on equity securities(2) | (20,813 | ) | | — |
| |
| Net investment losses | $ | (14,830 | ) | | $ | (25,050 | ) | |
| | | | | |
(1) Refer to Note 65 'Derivative Instruments'.
(2) Effective January 1, 2018, the Company adopted ASU No. 2016-01. The change in fair value of equity securities is now recognized in net investment losses.
The following table summarizes the OTTI recognized in earningsnet income by asset class:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Fixed maturities: | | | | | | | | |
| Non-U.S. government | $ | 3,905 |
| | $ | 2,456 |
| | $ | 8,187 |
| | $ | 2,953 |
| |
| Corporate debt | 1,507 |
| | 1,791 |
| | 5,306 |
| | 14,833 |
| |
| | 5,412 |
| | 4,247 |
| | 13,493 |
| | 17,786 |
| |
| Equity Securities | | | | | | | | |
| Exchange-traded funds | — |
| | — |
| | — |
| | 2,560 |
| |
| | — |
| | — |
| | — |
| | 2,560 |
| |
| Total OTTI recognized in earnings | $ | 5,412 |
| | $ | 4,247 |
| | $ | 13,493 |
| | $ | 20,346 |
| |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Fixed maturities: | | | | |
| Non-U.S. government | $ | — |
| | $ | 4,282 |
| |
| Corporate debt | 414 |
| | 2,271 |
| |
| Total OTTI recognized in net income | $ | 414 |
| | $ | 6,553 |
| |
| | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4.3. | INVESTMENTS (CONTINUED) |
The following table provides a roll forward of the credit losses ("credit loss table"), before income taxes, for which a portion of the OTTI was recognized in AOCI:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Balance at beginning of period | $ | 1,481 |
| | $ | 1,513 |
| | $ | 1,493 |
| | $ | 1,506 |
| |
| Credit impairments recognized on securities not previously impaired | — |
| | — |
| | — |
| | — |
| |
| Additional credit impairments recognized on securities previously impaired | 2 |
| | — |
| | 2 |
| | 7 |
| |
| Change in timing of future cash flows on securities previously impaired | — |
| | — |
| | — |
| | — |
| |
| Intent to sell of securities previously impaired | — |
| | — |
| | — |
| | — |
| |
| Securities sold/redeemed/matured | — |
| | (33 | ) | | (12 | ) | | (33 | ) | |
| Balance at end of period | $ | 1,483 |
| | $ | 1,480 |
| | $ | 1,483 |
| | $ | 1,480 |
| |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Balance at beginning of period | $ | 1,494 |
| | $ | 1,493 |
| |
| 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 | (10 | ) | | (10 | ) | |
| Balance at end of period | $ | 1,484 |
| | $ | 1,483 |
| |
| | | | | |
g) Reverse Repurchase Agreements
At September 30, 2017, weMarch 31, 2018, the Company held $34$24 million (December 31, 2016: $176(2017: $37 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 in the Company's Consolidated Balance Sheet.Sheets. 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 receivethe Company receives principal and interest income. We monitorThe Company monitors the estimated fair value of the securities loaned and borrowed on a daily basis with additional collateral obtained as necessary throughout the duration of the transaction.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS |
Fair Value Hierarchy
Fair value is defined as the price to sell an asset or transfer a liability (i.e. the “exit price”"exit price") in an orderly transaction between market participants. U.S. GAAP prescribes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement. 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 havethe Company has 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 ourthe Company's 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 usthe Company to change the selection of our valuation technique (from market to cash flow approach) or may cause usthe Company 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.
Valuation Techniques
The valuation techniques, including significant inputs and assumptions generally used to determine the fair values of ourthe Company's financial instruments as well as the classification of the fair values of ourits financial instruments in the fair value hierarchy are described in detail below.
Fixed Maturities
At each valuation date, we usethe Company uses the market approach valuation technique to estimate the fair value of ourits 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"pricing matrix models”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 maintainthe Company maintains a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, we obtainthe Company obtains non-binding quotes from broker-dealers who are active in the corresponding markets. The valuation techniques including significant inputs generally used to determine the fair values of ourthe Company's fixed maturities by asset class as well as the classifications of the fair values of these securities in the fair value hierarchy are described in detail below.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
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 U.S. Treasury securities are based on unadjusted market prices in active markets, these securities are classified as Level 1. The fair values of U.S. government agency securities are determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of U.S. government agency securities are classified as Level 2.
Non-U.S. government
Non-U.S. government securities include bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair values of these securities are based on prices obtained from international indices or valuation models that include inputs such as 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 used to price these securities are observable market inputs, the fair values of non-U.S. government securities are classified as 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 the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of corporate debt securities are classified as Level 2. Where pricing is unavailable from pricing services, we obtainthe Company obtains 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, the fair values of these securities are classified as Level 3.
Agency RMBS
Agency RMBS consist of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. The fair values of these securities are priced using a mortgage pool specific model which uses daily inputs from the active to be announced market and the spread associated with each mortgage pool based on vintage. As the significant inputs used to price these securities are observable market inputs, the fair values of Agency RMBS are classified as Level 2.
CMBS
CMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using a pricing model which uses dealer quotes and other available trade information along with security level characteristics to determine deal specific spreads. As the significant inputs used to price these securities are observable market inputs, the fair values of CMBS securities are classified as Level 2. Where pricing is unavailable from pricing services, we obtainthe Company obtains 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, the fair values of these securities are classified as Level 3.
Non-Agency RMBS
Non-Agency RMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using an option adjusted spread model or other relevant models, which use inputs including available trade information or broker quotes, prepayment and default projections based on historical statistics of the underlying collateral and current market data. As the significant inputs used to price these securities are observable market inputs, the fair values of Non-Agency RMBS are classified as Level 2.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
ABS
ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables,auto loans, student loans, credit card receivables, CDOs and CLO debt originated by a variety of financial institutions. The fair values of these securities are determined using a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price these securities are observable market inputs, the fair values of ABS are classified as Level 2. Where pricing is unavailable from pricing services, we obtainthe Company obtains 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, the fair values of these securities are classified as Level 3.
Municipals
Municipals comprise revenue and general obligation bonds issued by U.S. domiciled state and municipal entities. The fair values of these securities are determined using spreads obtained from the new issue market, trade prices and broker-dealers quotes. As the significant inputs used to price these securities are observable market inputs, the fair values of municipals are classified as Level 2.
Equity Securities
Equity securities include common stocks, exchange-traded funds and bond mutual funds. As the fair values of common stocks and exchange-traded funds are based on unadjusted quoted market prices in active markets, these securities are classified as Level 1.
As bond mutual funds have daily liquidity with redemptionredemptions based on the Net Asset Values per share ("NAV") of the funds, the fair values of these securities are classified as Level 2.
Other Investments
Other privately held securities include convertible preferred shares, convertible notes and notes payable. These securities are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these securities are determined using an income approach valuation technique, specifically an internally developed discounted cash flow model. As the significant inputs used to price these securities are unobservable, the fair value of these securities are classified as Level 3.
Indirect investments in CLO-Equities are classified as Level 3 as the fair values of these securities are estimated using an income approach valuation technique, (discountedspecifically an externally developed discounted cash flow model)model due to the lack of observable and relevant trades in secondary markets. Direct investments in CLO-Equities are also classified as Level 3 as the fair values of these securities are estimated using a liquidation valuation.
Overseas deposits include investments in private funds held by Syndicate 2007 where the underlying investments are primarily U.S. government, Non-U.S. government and corporate debt securities. The funds do not trade on an exchange therefore are not included within available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.
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 as 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
Derivative Instrumentsinstruments include foreign currency forward contracts, exchange traded interest rate swaps and commodity contracts that are customized to ourthe Company's economic hedging strategies and trade in the over-the-counter derivative market. The fair values of these derivatives are determined using thea market approach valuation technique based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. Accordingly,As the significant inputs used to price these securities are observable market inputs,, the fair values of these derivatives are classified as Level 2.
Weather derivatives relate to non-exchange traded derivative-based risk management products addressing weather risks. The fair values of these derivatives are determined using observable market inputs and unobservable inputs in combination with industry or internally developed valuation and forecasting techniques. Accordingly, the fair values of these derivatives are classified as Level 3.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
Other underwriting-related derivatives include insurance and reinsurance contracts that are required to be accounted for as derivatives. These derivative contracts are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these derivatives are determined using an income approach valuation technique, specifically internally developed discounted cash flow models. As the significant inputs used to price these derivatives are unobservable, the fair valuevalues of these contracts are classified as Level 3.
Insurance-linked Securities
Insurance-linked securities comprise an investment in a catastrophe bond. As pricing is unavailable from pricing services, we obtainthe Company obtains non-binding quotes from broker-dealers to estimate the fair valuesvalue of these securities.this security. Pricing is generally unavailable when there is a low volume of trading activity and current transactions are not orderly. Accordingly,orderly therefore the fair valuesvalue of these securities arethis security is classified as Level 3.
Cash Settled Awards
Cash settled awards comprise restricted stock units that form part of ourthe Company's compensation program. Although the fair values of these awards are determined using observable quoted market prices in active markets, the restricted stock units are not actively traded. Accordingly,As the significant inputs used to price these securities are observable market inputs, the fair values of these liabilities are classified as Level 2.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
The tables below present the financial instruments measured at fair value on a recurring basis for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair value based on NAV practical expedient | | Total Fair Value | |
| | | | | | | | | | | |
| At September 30, 2017 | | | | | | | | | | |
| Assets | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,495,423 |
| | $ | 51,895 |
| | $ | — |
| | $ | — |
| | $ | 1,547,318 |
| |
| Non-U.S. government | — |
| | 573,640 |
| | — |
| | — |
| | 573,640 |
| |
| Corporate debt | — |
| | 4,442,951 |
| | 61,016 |
| | — |
| | 4,503,967 |
| |
| Agency RMBS | — |
| | 2,306,822 |
| | — |
| | — |
| | 2,306,822 |
| |
| CMBS | — |
| | 669,736 |
| | — |
| | — |
| | 669,736 |
| |
| Non-Agency RMBS | — |
| | 43,817 |
| | — |
| | — |
| | 43,817 |
| |
| ABS | — |
| | 1,264,855 |
| | 24,015 |
| | — |
| | 1,288,870 |
| |
| Municipals | — |
| | 152,216 |
| | — |
| | — |
| | 152,216 |
| |
| | 1,495,423 |
| | 9,505,932 |
| | 85,031 |
| | — |
| | 11,086,386 |
| |
| Equity securities | | | | | | | | | | |
| Common stocks | 14,826 |
| | — |
| | — |
| | — |
| | 14,826 |
| |
| Exchange-traded funds | 454,194 |
| | — |
| | — |
| | — |
| | 454,194 |
| |
| Bond mutual funds | — |
| | 190,731 |
| | — |
| | — |
| | 190,731 |
| |
| | 469,020 |
| | 190,731 |
| | — |
| | — |
| | 659,751 |
| |
| Other investments | | | | | | | | | | |
| Hedge funds | — |
| | — |
| | — |
| | 399,097 |
| | 399,097 |
| |
| Direct lending funds | — |
| | — |
| | — |
| | 232,389 |
| | 232,389 |
| |
| Private equity funds | — |
| | — |
| | — |
| | 71,896 |
| | 71,896 |
| |
| Real estate funds | — |
| | — |
| | — |
| | 46,691 |
| | 46,691 |
| |
| Other privately held investments | — |
| | — |
| | 43,398 |
| | — |
| | 43,398 |
| |
| CLO-Equities | — |
| | — |
| | 36,782 |
| | — |
| | 36,782 |
| |
| | — |
| | — |
| | 80,180 |
| | 750,073 |
| | 830,253 |
| |
| Short-term investments | — |
| | 15,282 |
| | — |
| | — |
| | 15,282 |
| |
| Other assets | | | | | | | | | | |
| Derivative instruments (see Note 6) | — |
| | 5,859 |
| | — |
| | — |
| | 5,859 |
| |
| Insurance-linked securities | — |
| | — |
| | 24,976 |
| | — |
| | 24,976 |
| |
| Total Assets | $ | 1,964,443 |
| | $ | 9,717,804 |
| | $ | 190,187 |
| | $ | 750,073 |
| | $ | 12,622,507 |
| |
| Liabilities | | | | | | | | | | |
| Derivative instruments (see Note 6) | $ | — |
| | $ | 1,873 |
| | $ | 11,844 |
| | $ | — |
| | $ | 13,717 |
| |
| Cash settled awards (see Note 9) | — |
| | 18,369 |
| | — |
| | — |
| | 18,369 |
| |
| Total Liabilities | $ | — |
| | $ | 20,242 |
| | $ | 11,844 |
| | $ | — |
| | $ | 32,086 |
| |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair value based on NAV practical expedient | | Total Fair Value | |
| | | | | | | | | | | |
| At March 31, 2018 | | | | | | | | | | |
| Assets | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,769,810 |
| | $ | 27,155 |
| | $ | — |
| | $ | — |
| | $ | 1,796,965 |
| |
| Non-U.S. government | — |
| | 661,224 |
| | — |
| | — |
| | 661,224 |
| |
| Corporate debt | — |
| | 4,596,960 |
| | 43,471 |
| | — |
| | 4,640,431 |
| |
| Agency RMBS | — |
| | 1,914,845 |
| | — |
| | — |
| | 1,914,845 |
| |
| CMBS | — |
| | 1,030,621 |
| | — |
| | — |
| | 1,030,621 |
| |
| Non-Agency RMBS | — |
| | 41,397 |
| | — |
| | — |
| | 41,397 |
| |
| ABS | — |
| | 1,566,698 |
| | — |
| | — |
| | 1,566,698 |
| |
| Municipals | — |
| | 149,215 |
| | — |
| | — |
| | 149,215 |
| |
| | 1,769,810 |
| | 9,988,115 |
| | 43,471 |
| | — |
| | 11,801,396 |
| |
| Equity securities | | | | | | | | | | |
| Common stocks | 23,942 |
| | — |
| | — |
| | — |
| | 23,942 |
| |
| Exchange-traded funds | 262,630 |
| | — |
| | — |
| | — |
| | 262,630 |
| |
| Bond mutual funds | — |
| | 149,170 |
| | — |
| | — |
| | 149,170 |
| |
| | 286,572 |
| | 149,170 |
| | — |
| | — |
| | 435,742 |
| |
| Other investments | | | | | | | | | | |
| Hedge funds (1) | — |
| | — |
| | — |
| | 346,467 |
| | 346,467 |
| |
| Direct lending funds | — |
| | — |
| | — |
| | 261,902 |
| | 261,902 |
| |
| Private equity funds | — |
| | — |
| | — |
| | 65,811 |
| | 65,811 |
| |
| Real estate funds | — |
| | — |
| | — |
| | 54,720 |
| | 54,720 |
| |
| Other privately held investments | — |
| | — |
| | 48,787 |
| | — |
| | 48,787 |
| |
| CLO-Equities | — |
| | — |
| | 28,556 |
| | — |
| | 28,556 |
| |
| Overseas deposits | — |
| | 203,344 |
| | — |
| | — |
| | 203,344 |
| |
| | — |
| | 203,344 |
| | 77,343 |
| | 728,900 |
| | 1,009,587 |
| |
| Short-term investments | — |
| | 56,246 |
| | — |
| | — |
| | 56,246 |
| |
| Other assets | | | | | | | | | | |
| Derivative instruments (see Note 5) | — |
| | 5,283 |
| | — |
| | — |
| | 5,283 |
| |
| Insurance-linked securities | — |
| | — |
| | 25,000 |
| | — |
| | 25,000 |
| |
| Total Assets | $ | 2,056,382 |
| | $ | 10,402,158 |
| | $ | 145,814 |
| | $ | 728,900 |
| | $ | 13,333,254 |
| |
| Liabilities | | | | | | | | | | |
| Derivative instruments (see Note 5) | $ | — |
| | $ | 3,439 |
| | $ | 10,942 |
| | $ | — |
| | $ | 14,381 |
| |
| Cash settled awards (see Note 8) | — |
| | 8,789 |
| | — |
| | — |
| | 8,789 |
| |
| Total Liabilities | $ | — |
| | $ | 12,228 |
| | $ | 10,942 |
| | $ | — |
| | $ | 23,170 |
| |
| | | | | | | | | | | |
(1) Includes Long/short equity, Multi-strategy and Event-driven funds.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair value based on NAV practical expedient | | Total Fair Value | |
| | | | | | | | | | | |
| At December 31, 2016 | | | | | | | | | | |
| Assets | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,583,106 |
| | $ | 72,963 |
| | $ | — |
| | $ | — |
| | $ | 1,656,069 |
| |
| Non-U.S. government | — |
| | 565,834 |
| | — |
| | — |
| | 565,834 |
| |
| Corporate debt | — |
| | 4,524,868 |
| | 75,875 |
| | — |
| | 4,600,743 |
| |
| Agency RMBS | — |
| | 2,465,135 |
| | — |
| | — |
| | 2,465,135 |
| |
| CMBS | — |
| | 663,176 |
| | 3,061 |
| | — |
| | 666,237 |
| |
| Non-Agency RMBS | — |
| | 56,921 |
| | — |
| | — |
| | 56,921 |
| |
| ABS | — |
| | 1,204,750 |
| | 17,464 |
| | — |
| | 1,222,214 |
| |
| Municipals | — |
| | 163,961 |
| | — |
| | — |
| | 163,961 |
| |
| | 1,583,106 |
| | 9,717,608 |
| | 96,400 |
| | — |
| | 11,397,114 |
| |
| Equity securities | | | | | | | | | | |
| Common stocks | 78 |
| | — |
| | — |
| | — |
| | 78 |
| |
| Exchange-traded funds | 514,707 |
| | — |
| | — |
| | — |
| | 514,707 |
| |
| Bond mutual funds | — |
| | 123,959 |
| | — |
| | — |
| | 123,959 |
| |
| | 514,785 |
| | 123,959 |
| | — |
| | — |
| | 638,744 |
| |
| Other investments | | | | | | | | | | |
| Hedge funds | — |
| | — |
| | — |
| | 498,150 |
| | 498,150 |
| |
| Direct lending funds | — |
| | — |
| | — |
| | 134,650 |
| | 134,650 |
| |
| Private equity funds | — |
| | — |
| | — |
| | 81,223 |
| | 81,223 |
| |
| Real estate funds | — |
| | — |
| | — |
| | 13,354 |
| | 13,354 |
| |
| Other privately held investments | — |
| | — |
| | 42,142 |
| | — |
| | 42,142 |
| |
| CLO-Equities | — |
| | — |
| | 60,700 |
| | — |
| | 60,700 |
| |
| | — |
| | — |
| | 102,842 |
| | 727,377 |
| | 830,219 |
| |
| Short-term investments | — |
| | 127,461 |
| | — |
| | — |
| | 127,461 |
| |
| Other assets | | | | | | | | | | |
| Derivative instruments (see Note 6) | — |
| | 14,365 |
| | 2,532 |
| | — |
| | 16,897 |
| |
| Insurance-linked securities | — |
| | — |
| | 25,023 |
| | — |
| | 25,023 |
| |
| Total Assets | $ | 2,097,891 |
| | $ | 9,983,393 |
| | $ | 226,797 |
| | $ | 727,377 |
| | $ | 13,035,458 |
| |
| Liabilities | | | | | | | | | | |
| Derivative instruments (see Note 6) | $ | — |
| | $ | 9,076 |
| | $ | 6,500 |
| | $ | — |
| | $ | 15,576 |
| |
| Cash settled awards (see Note 9) | — |
| | 48,432 |
| | — |
| | — |
| | 48,432 |
| |
| Total Liabilities | $ | — |
| | $ | 57,508 |
| | $ | 6,500 |
| | $ | — |
| | $ | 64,008 |
| |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair value based on NAV practical expedient | | Total Fair Value | |
| | | | | | | | | | | |
| At December 31, 2017 | | | | | | | | | | |
| Assets | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,658,622 |
| | $ | 53,847 |
| | $ | — |
| | $ | — |
| | $ | 1,712,469 |
| |
| Non-U.S. government | — |
| | 806,299 |
| | — |
| | — |
| | 806,299 |
| |
| Corporate debt | — |
| | 5,244,969 |
| | 52,897 |
| | — |
| | 5,297,866 |
| |
| Agency RMBS | — |
| | 2,395,152 |
| | — |
| | — |
| | 2,395,152 |
| |
| CMBS | — |
| | 777,728 |
| | — |
| | — |
| | 777,728 |
| |
| Non-Agency RMBS | — |
| | 46,831 |
| | — |
| | — |
| | 46,831 |
| |
| ABS | — |
| | 1,436,281 |
| | — |
| | — |
| | 1,436,281 |
| |
| Municipals | — |
| | 149,380 |
| | — |
| | — |
| | 149,380 |
| |
| | 1,658,622 |
| | 10,910,487 |
| | 52,897 |
| | — |
| | 12,622,006 |
| |
| Equity securities | | | | | | | | | | |
| Common stocks | 25,658 |
| | — |
| | — |
| | — |
| | 25,658 |
| |
| Exchange-traded funds | 427,633 |
| | — |
| | — |
| | — |
| | 427,633 |
| |
| Bond mutual funds | — |
| | 182,220 |
| | — |
| | — |
| | 182,220 |
| |
| | 453,291 |
| | 182,220 |
| | — |
| | — |
| | 635,511 |
| |
| Other investments | | | | | | | | | | |
| Hedge funds (1) | — |
| | — |
| | — |
| | 363,811 |
| | 363,811 |
| |
| Direct lending funds | — |
| | — |
| | — |
| | 250,681 |
| | 250,681 |
| |
| Private equity funds | — |
| | — |
| | — |
| | 68,812 |
| | 68,812 |
| |
| Real estate funds | — |
| | — |
| | — |
| | 50,009 |
| | 50,009 |
| |
| Other privately held investments | — |
| | — |
| | 46,430 |
| | — |
| | 46,430 |
| |
| CLO-Equities | — |
| | — |
| | 31,413 |
| | — |
| | 31,413 |
| |
| Overseas deposits | — |
| | 198,217 |
| | — |
| | — |
| | 198,217 |
| |
| | — |
| | 198,217 |
| | 77,843 |
| | 733,313 |
| | 1,009,373 |
| |
| Short-term investments | — |
| | 83,661 |
| | — |
| | — |
| | 83,661 |
| |
| Other assets | | | | | | | | | | |
| Derivative instruments (see Note 5) | — |
| | 5,125 |
| | — |
| | — |
| | 5,125 |
| |
| Insurance-linked securities | — |
| | — |
| | 25,090 |
| | — |
| | 25,090 |
| |
| Total Assets | $ | 2,111,913 |
| | $ | 11,379,710 |
| | $ | 155,830 |
| | $ | 733,313 |
| | $ | 14,380,766 |
| |
| Liabilities | | | | | | | | | | |
| Derivative instruments (see Note 5) | $ | — |
| | $ | 2,876 |
| | $ | 11,510 |
| | $ | — |
| | $ | 14,386 |
| |
| Cash settled awards (see Note 8) | — |
| | 21,535 |
| | — |
| | — |
| | 21,535 |
| |
| Total Liabilities | $ | — |
| | $ | 24,411 |
| | $ | 11,510 |
| | $ | — |
| | $ | 35,921 |
| |
| | | | | | | | | | | |
(1) Includes Long/short equity, Multi-strategy and Event-driven funds.
During 20172018 and 20162017, there werethe Company had no transfers between Levels 1 and 2.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5. | FAIR VALUE MEASUREMENTS (CONTINUED) |
Except certain fixed maturities and insurance-linked securities priced using broker-dealer quotes (underlying inputs are not available), the following table quantifies the significant unobservable inputs used in estimating fair values at September 30,2017March 31, 2018 for investments classified as Level 3 in the fair value hierarchy.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
|
| | | | | | | | | |
| | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted Average | |
| | | | | | | |
| Other investments - CLO-Equities | $ | 32,141 |
| Discounted cash flow | Default rates | 3.8% | 3.8% | |
| | | | Loss severity rate | 35.0% | 35.0% | |
| | | | Collateral spreads | 3.0% | 3.0% | |
| | | | Estimated maturity dates | 7 years | 7 years | |
| | | | | | | |
| | 4,641 |
| Liquidation value | Fair value of collateral | 100% | 100% | |
| | | | Discount margin | 0% - 17.8% | 2.7% | |
| | | | | | | |
| Other investments - Other privately held investments | 43,398 |
| Discounted cash flow | Discount rate | 6.0% - 8.0% | 7.5% | |
| | | | | | | |
| Derivatives - Other underwriting-related derivatives | $ | (11,844 | ) | Discounted cash flow | Discount rate | 2.3% | 2.3% | |
| | | | | | | |
|
| | | | | | | | | |
| | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted Average | |
| | | | | | | |
| Other investments - CLO-Equities | $ | 27,118 |
| Discounted cash flow | Default rates | 3.0% | 3.0% | |
| | | | Loss severity rate | 35.0% | 35.0% | |
| | | | Collateral spreads | 3.0% | 3.0% | |
| | | | Estimated maturity dates | 7 years | 7 years | |
| | | | | | | |
| | $ | 1,438 |
| Liquidation value | Fair value of collateral | 100% | 100% | |
| | | | Discount margin | 0.1% - 12.0% | 2.1% | |
| | | | | | | |
| Other investments - Other privately held investments | $ | 48,787 |
| Discounted cash flow | Discount rate | 3.0% - 8.5% | 7.2% | |
| | | | | | | |
| Derivatives - Other underwriting-related derivatives | $ | (10,942 | ) | Discounted cash flow | Discount rate | 2.7% | 2.7% | |
| | | | | | | |
The CLO-Equities market continues to be relatively inactive with only a small number of transactions being observed, particularly as it relates to transactions involving our CLO-Equities.CLO-Equities held by the Company. Accordingly, fair values of investments in CLO-Equities are determined using models. Given that all of ourthe Company's direct investments in CLO-Equities are past their reinvestment period, there is uncertainty overregarding the remaining time tountil maturity. As such ourthe Company's direct investments in CLO-Equities are estimated using a liquidation valuation. Indirect investments in CLO-Equities are valued using a discounted cash flow model prepared by an external investment manager.
The liquidation valuation is based on the fair values of the net underlying collateral which is determined by applying market discount margins by credit quality bucket. An increase (decrease) in the market discount margin would result in a decrease (increase) in value of ourthe Company's CLO-Equities.
Regarding the discounted cash flow 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 investments in CLO-Equities and, in general, a change in default rate assumptions willwould 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 higher (lower) fair value estimates for investments in CLO-Equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, ourthe Company's valuation process for CLO-Equities includes a review of the underlying collateral along with related discount margins by credit quality bucket used in the liquidation valuation and a review of the underlying cash flows and key assumptions used in the discounted cash flow model. The above significant unobservable inputs are reviewed and updated based on information obtained from secondary markets, including information received from the managers of ourthe Company's CLO-Equities portfolio. In order to assess the reasonableness of the inputs we usethe Company uses in ourits models, we maintainthe Company maintains an understanding of current market conditions, historical results, as well as emerging trends that may impact future cash flows. In addition,we update the assumptions we usethe Company uses in ourits models are updated through regular communication with industry participants and ongoing monitoring of the deals in which we participatethe Company participates (e.g. default and loss severity rate trends).
Other privately held securities are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these securities are determined using internally developed discounted cash flow models. These models include inputs that are specific to each investment. The inputs used in the fair value measurements include dividend or interest rates and appropriate discount rates. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation of these securities. A significant increase (decrease) in this input in isolation could result in significantly lower (higher) fair value measurement for other privately held securities. Where relevant, the Company also considers the contractual agreements which stipulate methodologies for calculating the dividend rate to be paid upon liquidation, conversion or redemption. In order to assess the
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
of these securities. A significant increase (decrease) in this input in isolation could result in a significantly lower (higher) fair value measurement for other privately held securities. Where relevant, we also consider the contractual agreements which stipulate methodologies for calculating the dividend rate to be paid upon liquidation, conversion or redemption. In order to assess the reasonableness of the inputs we usethat are used in the discounted cash flow models, we maintainthe Company maintains an understanding of current market conditions, historical results, as well as investee specific information that may impact future cash flows.
Other underwriting-related derivatives are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these derivatives are determined using internally developed discounted cash flow models which uses appropriate discount rates. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation of these derivatives. A significant increase (decrease) in this input in isolation could result in a significantly lower (higher) fair value measurement for the derivative contracts. In order to assess the reasonableness of the inputs we usethe Company uses in the discounted cash flow model, we maintainthe Company maintains an understanding of current market conditions, historical results, as well as contract specific information that may impact future cash flows.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
The following tables present changes in Level 3 for financial instruments measured at fair value on a recurring basis for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Opening Balance | | Transfers into Level 3 | | Transfers out of Level 3 | | Included in net income(1) | | Included in OCI (2) | | Purchases | | Sales | | Settlements/ Distributions | | Closing Balance | | Change in unrealized investment gains/(losses) (3) | |
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2018 | | | | | | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | $ | 52,897 |
| | $ | — |
| | $ | (4,279 | ) | | $ | (118 | ) | | $ | 1,403 |
| | $ | — |
| | $ | (2,536 | ) | | $ | (3,896 | ) | | $ | 43,471 |
| | $ | — |
| |
| CMBS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| ABS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| | 52,897 |
| | — |
| | (4,279 | ) | | (118 | ) | | 1,403 |
| | — |
| | (2,536 | ) | | (3,896 | ) | | 43,471 |
| | — |
| |
| Other investments | | | | | | | | | | | | | | | | | | | |
| Other privately held investments | 46,430 |
| | — |
| | — |
| | 746 |
| | — |
| | 3,111 |
| | (1,500 | ) | | — |
| | 48,787 |
| | 746 |
| |
| CLO - Equities | 31,413 |
| | — |
| | — |
| | 1,616 |
| | — |
| | — |
| | — |
| | (4,473 | ) | | 28,556 |
| | 1,616 |
| |
| | 77,843 |
| | — |
| | — |
| | 2,362 |
| | — |
| | 3,111 |
| | (1,500 | ) | | (4,473 | ) | | 77,343 |
| | 2,362 |
| |
| Other assets | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Insurance-linked securities | 25,090 |
| | — |
| | — |
| | (90 | ) | | — |
| | — |
| | — |
| | — |
| | 25,000 |
| | (90 | ) | |
| | 25,090 |
| | — |
| | — |
| | (90 | ) | | — |
| | — |
| | — |
| | — |
| | 25,000 |
| | (90 | ) | |
| Total assets | $ | 155,830 |
| | $ | — |
| | $ | (4,279 | ) | | $ | 2,154 |
| | $ | 1,403 |
| | $ | 3,111 |
| | $ | (4,036 | ) | | $ | (8,369 | ) | | $ | 145,814 |
| | $ | 2,272 |
| |
| | | | | | | | | | | | | | | | | | | | |
| |
| Other liabilities | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | $ | 11,510 |
| | $ | — |
| | $ | — |
| | $ | (568 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,942 |
| | $ | (568 | ) | |
| Total liabilities | $ | 11,510 |
| | $ | — |
| | $ | — |
| | $ | (568 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,942 |
| | $ | (568 | ) | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Opening Balance | | Transfers into Level 3 | | Transfers out of Level 3 | | Included in net income(1) | | Included in OCI (2) | | Purchases | | Sales | | Settlements/ Distributions | | Closing Balance | | Change in unrealized investment gains/(losses) (3) | |
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2017 | | | | | | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | $ | 75,875 |
| | $ | — |
| | $ | — |
| | $ | 58 |
| | $ | (47 | ) | | $ | 5,964 |
| | $ | (15,720 | ) | | $ | (2,342 | ) | | $ | 63,788 |
| | $ | — |
| |
| CMBS | 3,061 |
| | — |
| | — |
| | — |
| | (3 | ) | | 9,400 |
| | — |
| | (2,645 | ) | | 9,813 |
| | — |
| |
| ABS | 17,464 |
| | — |
| | (18,948 | ) | | — |
| | 1,484 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| | 96,400 |
| | — |
| | (18,948 | ) | | 58 |
| | 1,434 |
| | 15,364 |
| | (15,720 | ) | | (4,987 | ) | | 73,601 |
| | — |
| |
| Other investments | | | | | | | | | | | | | | | | | | | | |
| Other privately held investments | 42,142 |
| | — |
| | — |
| | 236 |
| | — |
| | — |
| | — |
| | — |
| | 42,378 |
| | 236 |
| |
| CLO - Equities | 60,700 |
| | — |
| | — |
| | 1,029 |
| | — |
| | — |
| | — |
| | (7,337 | ) | | 54,392 |
| | 1,029 |
| |
| | 102,842 |
| | — |
| | — |
| | 1,265 |
| | — |
| | — |
| | — |
| | (7,337 | ) | | 96,770 |
| | 1,265 |
| |
| Other assets | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | 2,532 |
| | — |
| | — |
| | 755 |
| | — |
| | — |
| | — |
| | (90 | ) | | 3,197 |
| | 755 |
| |
| Insurance-linked securities | 25,023 |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 25,026 |
| | 3 |
| |
| | 27,555 |
| | — |
| | — |
| | 758 |
| | — |
| | — |
| | — |
| | (90 | ) | | 28,223 |
| | 758 |
| |
| Total assets | $ | 226,797 |
| | $ | — |
| | $ | (18,948 | ) | | $ | 2,081 |
| | $ | 1,434 |
| | $ | 15,364 |
| | $ | (15,720 | ) | | $ | (12,414 | ) | | $ | 198,594 |
| | $ | 2,023 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | $ | 6,500 |
| | $ | — |
| | $ | — |
| | $ | 8,686 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,435 |
| | $ | 16,621 |
| | $ | 7,335 |
| |
| Total liabilities | $ | 6,500 |
| | $ | — |
| | $ | — |
| | $ | 8,686 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,435 |
| | $ | 16,621 |
| | $ | 7,335 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| |
(1) | Realized gains (losses) on fixed maturities, and realized and unrealized gains (losses) on other assets and other liabilities included in net income are included in net investment gains (losses). Realized and unrealized gains and (losses) on other investments included in net income are included in net investment income. |
| |
(2) | Unrealized gains (losses) on fixed maturities are included in other comprehensive income ("OCI"). |
| |
(3) | Change in unrealized investment gain (loss) relating to assets held at the reporting date. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2017 | | | | | | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | $ | 68,320 |
| | $ | — |
| | $ | (1,208 | ) | | $ | (835 | ) | | $ | (9 | ) | | $ | — |
| | $ | (2,274 | ) | | $ | (2,978 | ) | | $ | 61,016 |
| | $ | — |
| |
| CMBS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| ABS | 5,999 |
| | — |
| | (6,001 | ) | | — |
| | 10 |
| | 24,007 |
| | — |
| | — |
| | 24,015 |
| | — |
| |
| | 74,319 |
| | — |
| | (7,209 | ) | | (835 | ) | | 1 |
| | 24,007 |
| | (2,274 | ) | | (2,978 | ) | | 85,031 |
| | — |
| |
| Other investments | | | | | | | | | | | | | | | | | | | |
| Other privately held investments | 42,938 |
| | — |
| | — |
| | 460 |
| | — |
| | — |
| | — |
| | — |
| | 43,398 |
| | 460 |
| |
| CLO - Equities | 47,076 |
| | — |
| | — |
| | 1,402 |
| | — |
| | — |
| | — |
| | (11,696 | ) | | 36,782 |
| | 1,402 |
| |
| | 90,014 |
| | — |
| | — |
| | 1,862 |
| | — |
| | — |
| | — |
| | (11,696 | ) | | 80,180 |
| | 1,862 |
| |
| Other assets | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Insurance-linked securities | 25,047 |
| | — |
| | — |
| | (71 | ) | | — |
| | — |
| | — |
| | — |
| | 24,976 |
| | (71 | ) | |
| | 25,047 |
| | — |
| | — |
| | (71 | ) | | — |
| | — |
| | — |
| | — |
| | 24,976 |
| | (71 | ) | |
| Total assets | $ | 189,380 |
| | $ | — |
| | $ | (7,209 | ) | | $ | 956 |
| | $ | 1 |
| | $ | 24,007 |
| | $ | (2,274 | ) | | $ | (14,674 | ) | | $ | 190,187 |
| | $ | 1,791 |
| |
| | | | | | | | | | | | | | | | | | | | |
| |
| Other liabilities | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | $ | 12,209 |
| | $ | — |
| | $ | — |
| | $ | (291 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (74 | ) | | $ | 11,844 |
| | $ | (291 | ) | |
| Total liabilities | $ | 12,209 |
| | $ | — |
| | $ | — |
| | $ | (291 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (74 | ) | | $ | 11,844 |
| | $ | (291 | ) | |
| | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2017 | | | | | | | | | | | | | | | | | |
| Fixed maturities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Corporate debt | $ | 75,875 |
| | $ | 1,536 |
| | $ | (3,112 | ) | | $ | (762 | ) | | $ | (392 | ) | | $ | 19,181 |
| | $ | (21,475 | ) | | $ | (9,835 | ) | | $ | 61,016 |
| | $ | — |
| |
| CMBS | 3,061 |
| | — |
| | (9,418 | ) | | — |
| | 17 |
| | 9,400 |
| | — |
| | (3,060 | ) | | — |
| | — |
| |
| ABS | 17,464 |
| | — |
| | (24,949 | ) | | — |
| | 1,493 |
| | 30,007 |
| | — |
| | — |
| | 24,015 |
| | — |
| |
| | 96,400 |
| | 1,536 |
| | (37,479 | ) | | (762 | ) | | 1,118 |
| | 58,588 |
| | (21,475 | ) | | (12,895 | ) | | 85,031 |
| | — |
| |
| Other investments | | | | | | | | | | | | | | | | | | | | |
| Other privately held investments | 42,142 |
| | — |
| | — |
| | 1,256 |
| | — |
| | — |
| | — |
| | — |
| | 43,398 |
| | 1,256 |
| |
| CLO - Equities | 60,700 |
| | — |
| | — |
| | 3,930 |
| | — |
| | — |
| | — |
| | (27,848 | ) | | 36,782 |
| | 3,930 |
| |
| | 102,842 |
| | — |
| | — |
| | 5,186 |
| | — |
| | — |
| | — |
| | (27,848 | ) | | 80,180 |
| | 5,186 |
| |
| Other assets | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | 2,532 |
| | — |
| | — |
| | 653 |
| | — |
| | — |
| | — |
| | (3,185 | ) | | — |
| | — |
| |
| Insurance-linked securities | 25,023 |
| | — |
| | — |
| | (47 | ) | | — |
| | — |
| | — |
| | — |
| | 24,976 |
| | (47 | ) | |
| | 27,555 |
| | — |
| | — |
| | 606 |
| | — |
| | — |
| | — |
| | (3,185 | ) | | 24,976 |
| | (47 | ) | |
| Total assets | $ | 226,797 |
| | $ | 1,536 |
| | $ | (37,479 | ) | | $ | 5,030 |
| | $ | 1,118 |
| | $ | 58,588 |
| | $ | (21,475 | ) | | $ | (43,928 | ) | | $ | 190,187 |
| | $ | 5,139 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | $ | 6,500 |
| | $ | — |
| | $ | — |
| | $ | 9,991 |
| | $ | — |
| | $ | 12,135 |
| | $ | — |
| | $ | (16,782 | ) | | $ | 11,844 |
| | $ | (291 | ) | |
| Total liabilities | $ | 6,500 |
| | $ | — |
| | $ | — |
| | $ | 9,991 |
| | $ | — |
| | $ | 12,135 |
| | $ | — |
| | $ | (16,782 | ) | | $ | 11,844 |
| | $ | (291 | ) | |
| | | | | | | | | | | | | | | | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Opening Balance | | Transfers into Level 3 | | Transfers out of Level 3 | | Included in earnings (1) | | Included in OCI (2) | | Purchases | | Sales | | Settlements/ Distributions | | Closing Balance | | Change in unrealized investment gain/(loss) (3) | |
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2016 | | | | | | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | | | | | | | | | |
| Corporate debt | $ | 62,022 |
| | $ | — |
| | $ | — |
| | $ | (9 | ) | | $ | 100 |
| | $ | 7,563 |
| | $ | — |
| | $ | (584 | ) | | $ | 69,092 |
| | $ | — |
| |
| CMBS | 10,210 |
| | — |
| | — |
| | — |
| | (48 | ) | | — |
| | — |
| | (1,242 | ) | | 8,920 |
| | — |
| |
| ABS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| | 72,232 |
| | — |
| | — |
| | (9 | ) | | 52 |
| | 7,563 |
| | — |
| | (1,826 | ) | | 78,012 |
| | — |
| |
| Other investments | | | | | | | | | | | | | | | | | | | | |
| Other privately held investments | 41,755 |
| | — |
| | — |
| | (355 | ) | | — |
| | 1,500 |
| | — |
| | — |
| | 42,900 |
| | (355 | ) | |
| CLO - Equities | 65,883 |
| | — |
| | — |
| | 8,419 |
| | — |
| | — |
| | — |
| | (10,519 | ) | | 63,783 |
| | 8,419 |
| |
| | 107,638 |
| | — |
| | — |
| | 8,064 |
| | — |
| | 1,500 |
| | — |
| | (10,519 | ) | | 106,683 |
| | 8,064 |
| |
| Other assets | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | 5 |
| | — |
| | — |
| | 665 |
| | — |
| | 1,818 |
| | — |
| | — |
| | 2,488 |
| | 665 |
| |
| Insurance-linked securities | 25,025 |
| | — |
| | — |
| | 258 |
| | — |
| | — |
| | — |
| | — |
| | 25,283 |
| | 258 |
| |
| | 25,030 |
| | — |
| | — |
| | 923 |
| | — |
| | 1,818 |
| | — |
| | — |
| | 27,771 |
| | 923 |
| |
| Total assets | $ | 204,900 |
| | $ | — |
| | $ | — |
| | $ | 8,978 |
| | $ | 52 |
| | $ | 10,881 |
| | $ | — |
| | $ | (12,345 | ) | | $ | 212,466 |
| | $ | 8,987 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | $ | 1,978 |
| | $ | — |
| | $ | — |
| | $ | (169 | ) | | $ | — |
| | $ | 6,384 |
| | $ | — |
| | $ | (9 | ) | | $ | 8,184 |
| | $ | 335 |
| |
| Total liabilities | $ | 1,978 |
| | $ | — |
| | $ | — |
| | $ | (169 | ) | | $ | — |
| | $ | 6,384 |
| | $ | — |
| | $ | (9 | ) | | $ | 8,184 |
| | $ | 335 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2016 | | | | | | | | | | | | | | | | | |
| Fixed maturities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Corporate debt | $ | 38,518 |
| | $ | 20,412 |
| | $ | (1,955 | ) | | $ | (988 | ) | | $ | 1,188 |
| | $ | 17,107 |
| | $ | (4,015 | ) | | $ | (1,175 | ) | | $ | 69,092 |
| | $ | — |
| |
| CMBS | 10,922 |
| | — |
| | — |
| | — |
| | (134 | ) | | — |
| | — |
| | (1,868 | ) | | 8,920 |
| | — |
| |
| ABS | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| | 49,440 |
| | 20,412 |
| | (1,955 | ) | | (988 | ) | | 1,054 |
| | 17,107 |
| | (4,015 | ) | | (3,043 | ) | | 78,012 |
| | — |
| |
| Other investments | | | | | | | | | | | | | | | | | | | | |
| Other privately held investments | — |
| | — |
| | — |
| | (1,505 | ) | | — |
| | 44,405 |
| | — |
| | — |
| | 42,900 |
| | (1,505 | ) | |
| CLO - Equities | 27,257 |
| | 36,378 |
| | — |
| | 17,431 |
| | — |
| | — |
| | — |
| | (17,283 | ) | | 63,783 |
| | 17,431 |
| |
| | 27,257 |
| | 36,378 |
| | — |
| | 15,926 |
| | — |
| | 44,405 |
| | — |
| | (17,283 | ) | | 106,683 |
| | 15,926 |
| |
| Other assets | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | 4,395 |
| | — |
| | — |
| | 3,255 |
| | — |
| | 3,623 |
| | — |
| | (8,785 | ) | | 2,488 |
| | 669 |
| |
| Insurance-linked securities | 24,925 |
| | — |
| | — |
| | 358 |
| | — |
| | — |
| | — |
| | — |
| | 25,283 |
| | 358 |
| |
| | 29,320 |
| | — |
| | — |
| | 3,613 |
| | — |
| | 3,623 |
| | — |
| | (8,785 | ) | | 27,771 |
| | 1,027 |
| |
| Total assets | $ | 106,017 |
| | $ | 56,790 |
| | $ | (1,955 | ) | | $ | 18,551 |
| | $ | 1,054 |
| | $ | 65,135 |
| | $ | (4,015 | ) | | $ | (29,111 | ) | | $ | 212,466 |
| | $ | 16,953 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | | | | | | | | | | | | | | | | | |
| Derivative instruments | $ | 10,937 |
| | $ | — |
| | $ | — |
| | $ | 2,445 |
| | $ | — |
| | $ | 7,189 |
| | $ | — |
| | $ | (12,387 | ) | | $ | 8,184 |
| | $ | 457 |
| |
| Total liabilities | $ | 10,937 |
| | $ | — |
| | $ | — |
| | $ | 2,445 |
| | $ | — |
| | $ | 7,189 |
| | $ | — |
| | $ | (12,387 | ) | | $ | 8,184 |
| | $ | 457 |
| |
| | | | | | | | | | | | | | | | | | | | | |
| |
(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. |
The transfers into and out of fair value hierarchy levels reflect the fair value of the securities at the end of the reporting period.
Transfers into Level 3 from Level 2
There were no transfers to Level 3 from Level 2 made during the three months ended September 30,March 31, 2018 and 2017. The transfers to Level 3 from Level 2 made during the nine months ended September 30, 2017 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5. | FAIR VALUE MEASUREMENTS (CONTINUED) |
There were no transfers to Level 3 from Level 2 made during the three months ended September 30, 2016. The transfers into Level 3 made during the nine months ended September 30, 2016 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities and as a result of a change in the valuation methodology used to fair value the CLO-equity fund. An income approach valuation technique (discounted cash flow model) was used to estimate the fair value of the CLO-equity fund at September 30, 2016. As the NAV practical expedient was not used to determine the fair value of the CLO-equity fund, the fair value of the fund was categorized within the fair value hierarchy.
Transfers out of Level 3 into Level 2
The transfers into Level 2 from Level 3 made during the three and nine months ended September 30,March 31, 2018 and 2017 were primarily due to the availability of observable market inputs and quotes from pricing vendors on certain fixed maturities.
There were no transfers to Level 2 from Level 3 made during the three months ended September 30, 2016. The transfers to Level 2 from Level 3 made during the nine months ended September 30, 2016 were primarily due to the availability of observable market inputs and quotes from pricing vendors on certain fixed maturities.
Measuring the Fair Value of Other Investments Using Net Asset Valuations
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using NAVs as advised by external fund managers or third party administrators. For these funds, NAVs are 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.
If there is a reporting lag between the current period end and reporting date of the latest available fund valuation for any hedge fund, we estimatethe Company estimates fair values by starting with the most recently available fund valuation and adjusting for return estimates as well as any subscriptions, redemptions and distributions that took place during the current period. Return estimates are obtained from the relevant fund managers. Accordingly, we dothe Company does not typically have a reporting lag in fair value measurements of these funds. Historically, ourthe Company's valuation estimates incorporating these return estimates have not significantly diverged from the subsequently received NAVs.
For direct lending funds, private equity funds, real estate funds and two of ourthe Company's hedge funds, valuation statements are typically released on a three month reporting lag therefore we estimatethe Company estimates the fair value of these funds by starting with the prior quarter-end fund valuations and adjusting for capital calls, redemptions, drawdowns and distributions. Return estimates are not available from the relevant fund managers for these funds. Accordingly, wefunds therefore the Company typically havehas a reporting lag in ourits fair value measurements of these funds. In 2017,For the three months ended March 31,2018, funds reported on a lag represented 51% (2016: 35%44% (2017: 44%) of ourthe Company's total other investments balance.
WeThe Company often dodoes not have access to financial information relating to the underlying securities held within the funds, therefore management is unable to corroborate the fair values placed on the securities underlying the asset valuations provided by fund managers or fund administrators. In order to assess the reasonableness of the NAVs, we performthe Company performs a number of monitoring procedures on a quarterly basis, to assess the quality of the information provided by fund managers and funds 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 ourthe Company's fair value estimates against subsequently received NAVs. Backtesting involves comparing ourthe Company's previously reported fair values for each fund against NAVs per audited financial statements (for year-end values) and final NAVs from fund managers and fund administrators (for interim values).
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are measured using the NAV practical expedient, therefore the fair values of these funds have not been categorized within the fair value hierarchy.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5.4. | FAIR VALUE MEASUREMENTS (CONTINUED) |
Financial Instruments Disclosed, But Not Carried, at Fair Value
The fair value of financial instruments accounting guidance also applies to financial instruments disclosed, but not carried, at fair value, except for certain financial instruments, including insurance contracts.
TheAt March 31,2018, the carrying values of cash and cash equivalents (includingincluding restricted amounts),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 30,2017, due to their respective short maturities. As these financial instruments are not actively traded, their fair values are classified as Level 2.
TheAt March 31,2018, the carrying value of mortgage loans held-for-investment approximated their fair value at September 30,2017.value. The fair values of mortgage loans are primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk, or are determined from pricing for similar loans. As mortgage loans are not actively traded their fair values are classified as Level 3.
At September 30,March 31, 20172018, senior notes are recorded at amortized cost with a carrying value of $994$1,377 million (20162017: $993$1,341 million) and a fair value of $1.1 billion1,366 million (20162017: $1.0 billion1,412 million). The fair values of these senior notes are based on prices obtained from a third party pricing service and are 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 senior notes are classified as Level 2.
At March 31,2018, notes payable are recorded at amortized cost with a carrying value of $36 million and a fair value of $36 million. The fair values of the notes payable are primarily determined by estimating expected future cash flows and discounting them using current interest rates for notes payable with similar credit risk. As notes payables are not actively traded their fair values are classified as Level 3.
| |
6.5. | DERIVATIVE INSTRUMENTS |
The following table summarizes the balance sheet classificationclassifications of derivatives recorded at fair value.value are shown in the following table. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and isare presented in the table to quantify the volume of ourthe Company's derivative activities. Notional amounts are not reflective of credit risk.
None of ourthe Company's derivative instruments are designated as hedges under current accounting guidance.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | |
| | Derivative Notional Amount | | Derivative Asset Fair Value(1) | | Derivative Liability Fair Value(1) | | Derivative Notional Amount | | Derivative Asset Fair Value(1) | | Derivative Liability Fair Value(1) | |
| | | | | | | | | | | | | |
| Relating to investment portfolio: | | | | | | | | | | | | |
| Foreign exchange forward contracts | $ | 147,015 |
| | $ | — |
| | $ | 439 |
| | $ | 195,979 |
| | $ | 12,331 |
| | $ | 87 |
| |
| Interest rate swaps | 180,000 |
| | 393 |
| | — |
| | — |
| | — |
| | — |
| |
| Relating to underwriting portfolio: | | | | | | | | | | | | |
| Foreign exchange forward contracts | 479,818 |
| | 5,466 |
| | 1,434 |
| | 492,899 |
| | 2,034 |
| | 8,989 |
| |
| Weather-related contracts | — |
| | — |
| | — |
| | 67,957 |
| | 2,532 |
| | 6,500 |
| |
| Commodity contracts | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Other underwriting-related contracts | 85,000 |
| | — |
| | 11,844 |
| | — |
| | — |
| | — |
| |
| Total derivatives | | | $ | 5,859 |
| | $ | 13,717 |
| | | | $ | 16,897 |
| | $ | 15,576 |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | |
| | Derivative Notional Amount | | Derivative Asset Fair Value(1) | | Derivative Liability Fair Value(1) | | Derivative Notional Amount | | Derivative Asset Fair Value(1) | | Derivative Liability Fair Value(1) | |
| | | | | | | | | | | | | |
| Relating to investment portfolio: | | | | | | | | | | | | |
| Foreign exchange forward contracts | $ | 120,762 |
| | $ | 146 |
| | $ | 161 |
| | $ | 137,422 |
| | $ | 10 |
| | $ | 619 |
| |
| Interest rate swaps | 166,000 |
| | — |
| | 1,379 |
| | 191,000 |
| | 448 |
| | 1,556 |
| |
| Relating to underwriting portfolio: | | | | | | | | | | | | |
| Foreign exchange forward contracts | 649,919 |
| | 5,137 |
| | 1,899 |
| | 698,959 |
| | 4,667 |
| | 701 |
| |
| Weather-related contracts | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Other underwriting-related contracts | 85,000 |
| | — |
| | 10,942 |
| | 85,000 |
| | — |
| | 11,510 |
| |
| Total derivatives | | | $ | 5,283 |
| | $ | 14,381 |
| | | | $ | 5,125 |
| | $ | 14,386 |
| |
| | | | | | | | | | | | | |
| |
(1) | Asset and liability derivatives are classified within other assets and other liabilities in the Consolidated Balance Sheets. |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
6.5. | DERIVATIVE INSTRUMENTS (CONTINUED) |
Offsetting Assets and Liabilities
OurThe Company's 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 aA reconciliation of our gross derivative assets and liabilities to the net amounts presented in the Consolidated Balance Sheets, with the difference being attributable to the impact of master netting agreements.agreements, is shown in the following table.
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | |
| | Gross Amounts | Gross Amounts Offset | Net Amounts(1) | | Gross Amounts | Gross Amounts Offset | Net Amounts(1) | |
| | | | | | | | | |
| Derivative assets | $ | 9,682 |
| $ | (3,823 | ) | $ | 5,859 |
| | $ | 22,270 |
| $ | (5,373 | ) | $ | 16,897 |
| |
| Derivative liabilities | $ | 17,540 |
| $ | (3,823 | ) | $ | 13,717 |
| | $ | 20,949 |
| $ | (5,373 | ) | $ | 15,576 |
| |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | |
| | Gross Amounts | Gross Amounts Offset | Net Amounts(1) | | Gross Amounts | Gross Amounts Offset | Net Amounts(1) | |
| | | | | | | | | |
| Derivative assets | $ | 6,703 |
| $ | (1,420 | ) | $ | 5,283 |
| | $ | 8,178 |
| $ | (3,053 | ) | $ | 5,125 |
| |
| Derivative liabilities | $ | 15,801 |
| $ | (1,420 | ) | $ | 14,381 |
| | $ | 17,439 |
| $ | (3,053 | ) | $ | 14,386 |
| |
| | | | | | | | | |
| |
(1) | Net asset and liability derivatives are classified within other assets and other liabilities in the Consolidated Balance Sheets. |
Refer to Note 4 'Investments' forFor information on reverse repurchase agreements.agreements see Note 3 'Investments'.
a) Relating to Investment Portfolio
Foreign Currency Risk
Within ourThe Company's investment portfolio we areis exposed to foreign currency risk. Accordingly,risk therefore the fair values of our investment portfolioits investments are partially influenced by the change in foreign exchange rates. WeThe Company may enter into foreign currency 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.
Interest Rate Risk
OurThe Company's investment portfolio contains a large percentage of fixed maturities which exposes usexpose it to significant interest rate risk. As part of our overall management of this risk, wethe Company may use interest rate swaps.
b) Relating to Underwriting Portfolio
Foreign Currency Risk
OurThe Company's (re)insurance subsidiaries and branches operate in various foreign countries. Consequently, someSome of ourits business is written in currencies other than the U.S. dollar, and, therefore ourthe underwriting portfolio is exposed to significant foreign currency risk. We manageThe Company manages foreign currency risk by seeking to match ourits foreign-denominated net liabilities under (re)insurance contracts with cash and investments that are denominated in suchthe same currencies. WeThe Company may also use derivative instruments, specifically forward contracts and currency options, to economically hedge foreign currency exposures.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
6. | DERIVATIVE INSTRUMENTS (CONTINUED) |
Weather Risk
WeDuring 2013, the Company 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, ourthe Company's 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, wethe Company may also purchase weather derivatives. Effective July 1, 2017, the Company no longer writes derivative-based risk management products which address weather risks.
Within our (re)insurance portfolio we are exposed to commodity price risk. We may hedge a portion of this price risk by entering into commodity derivative contracts.AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5. | DERIVATIVE INSTRUMENTS (CONTINUED) |
Other Underwriting-related Risks
We enterThe Company enters into insurance and reinsurance contracts that are required to be accounted for as derivatives. These insurance or reinsurance contract providescontracts provide indemnification to an insured or cedant as a result of a change in a variable as opposed to a change in an identifiable insuredinsurable event. We considerThe Company considers these contracts to be part of ourits underwriting operations.
The total unrealized and realized gains (losses) recognized in earningsnet income for derivatives not designated as hedges were as follows:are shown in the following table:
|
| | | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivative | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | | |
| | | | | | | | | |
| Relating to investment portfolio: | | | | | | | | | |
| Foreign exchange forward contracts | Net realized investment gains (losses) | $ | (1,815 | ) | | $ | 155 |
| | $ | (6,534 | ) | | $ | 39 |
| |
| Interest rate swaps | Net realized investment gains (losses) | 520 |
| | — |
| | (2,661 | ) | | — |
| |
| Relating to underwriting portfolio: | | | | | | | | | |
| Foreign exchange forward contracts | Foreign exchange losses (gains) | (12,481 | ) | | (182 | ) | | (26,109 | ) | | (2,958 | ) | |
| Weather-related contracts | Other insurance related income (losses) | — |
| | 833 |
| | (9,629 | ) | | 809 |
| |
| Commodity contracts | Other insurance related income (losses) | — |
| | 1,799 |
| | — |
| | 1,499 |
| |
| Other underwriting-related contracts | Other insurance related income (losses) | 514 |
| | — |
| | 852 |
| | — |
| |
| Total | | $ | (13,262 | ) | | $ | 2,605 |
| | $ | (44,081 | ) | | $ | (611 | ) | |
| | | | | | | | | | |
|
| | | | | | | | | | |
| | Location of Gain (Loss) Recognized in Income on Derivative | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | | |
| | | | | |
| Relating to investment portfolio: | | | | | |
| Foreign exchange forward contracts | Net investment gains (losses) | $ | (1,191 | ) | | $ | (2,372 | ) | |
| Interest rate swaps | Net investment gains (losses) | 3,214 |
| | 439 |
| |
| Relating to underwriting portfolio: | | | | | |
| Foreign exchange forward contracts | Foreign exchange losses (gains) | 7,768 |
| | (2,758 | ) | |
| Weather-related contracts | Other insurance related income (losses) | — |
| | (7,932 | ) | |
| Other underwriting-related contracts | Other insurance related income (losses) | 901 |
| | — |
| |
| Total | | $ | 10,692 |
| | $ | (12,623 | ) | |
| | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7.6. RESERVE FOR LOSSES AND LOSS EXPENSES
Reserve Roll-Forward
The following table presents a reconciliation of ourthe Company's 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, | 2017 | | 2016 | |
| | | | | |
| Gross reserve for losses and loss expenses, beginning of period | $ | 9,697,827 |
| | $ | 9,646,285 |
| |
| Less reinsurance recoverable on unpaid losses, beginning of period | (2,276,109 | ) | | (2,031,309 | ) | |
| Net reserve for unpaid losses and loss expenses, beginning of period | 7,421,718 |
| | 7,614,976 |
| |
| | | | | |
| Net incurred losses and loss expenses related to: | | | | |
| Current year | 2,591,135 |
| | 1,887,715 |
| |
| Prior years | (143,495 | ) | | (224,131 | ) | |
| | 2,447,640 |
| | 1,663,584 |
| |
| Net paid losses and loss expenses related to: | | | | |
| Current year | (328,751 | ) | | (233,124 | ) | |
| Prior years | (1,384,510 | ) | | (1,334,772 | ) | |
| | (1,713,261 | ) | | (1,567,896 | ) | |
| | | | | |
| Foreign exchange and other | 333,456 |
| | (112,649 | ) | |
| | | | | |
| Net reserve for unpaid losses and loss expenses, end of period | 8,489,553 |
| | 7,598,015 |
| |
| Reinsurance recoverable on unpaid losses, end of period | 2,298,022 |
| | 2,276,792 |
| |
| Gross reserve for losses and loss expenses, end of period | $ | 10,787,575 |
| | $ | 9,874,807 |
| |
| | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Gross reserve for losses and loss expenses, beginning of period | $ | 12,997,553 |
| | $ | 9,697,827 |
| |
| Less reinsurance recoverable on unpaid losses, beginning of period | (3,159,514 | ) | | (2,276,109 | ) | |
| Net reserve for unpaid losses and loss expenses, beginning of period | 9,838,039 |
| | 7,421,718 |
| |
| | | | | |
| Net incurred losses and loss expenses related to: | | | | |
| Current year | 715,652 |
| | 631,735 |
| |
| Prior years | (54,307 | ) | | (24,793 | ) | |
| | 661,345 |
| | 606,942 |
| |
| Net paid losses and loss expenses related to: | | | | |
| Current year | (48,814 | ) | | (31,047 | ) | |
| Prior years | (675,393 | ) | | (521,478 | ) | |
| | (724,207 | ) | | (552,525 | ) | |
| | | | | |
| Foreign exchange and other | (726,781 | ) | | 36,797 |
| |
| | | | | |
| Net reserve for unpaid losses and loss expenses, end of period | 9,048,396 |
| | 7,512,932 |
| |
| Reinsurance recoverable on unpaid losses, end of period | 2,986,247 |
| | 2,029,031 |
| |
| Gross reserve for losses and loss expenses, end of period | $ | 12,034,643 |
| | $ | 9,541,963 |
| |
| | | | | |
We writeThe Company writes business with loss experience generally characterized as low frequency and high severity in nature, which can result in volatility in ourits financial results. During the ninethree months ended September 30, 2017 and 2016, weMarch 31, 2018, the Company recognized aggregate net losses and loss expenses net of reinstatement premiums of $702$35 million and $145 million, respectively, in relation(2017: $35 million) attributable to catastrophe and weather relatedweather-related events.
On January 1, 2018, AXIS Managing Agency Limited, the managing agent of Syndicate 2007 entered into an agreement for the RITC of the 2015 and prior years of account of Syndicate 2007. Under the terms of this agreement, the Company ceded $819 million of reserves for losses and loss expenses, which were included in Syndicate 2007's balance sheet at December 31, 2017, to a reinsurer. This agreement was accounted for as a novation reinsurance contract. During the three months ended March 31, 2018, the Company recognized a reduction in reserves for losses and loss expenses of $819 million representing the transfer of liabilities to the reinsurer, a reduction in investments and cash of $688 million representing the consideration paid to the reinsurer and a payable of $131 million representing the consideration due to the reinsurer.
The transfer of the insurance business of AXIS Specialty Australia to a reinsurer was approved by the Irish High Court on February 1, 2017 and the Federal Court of Australia on February 10, 2017. Consequently, the insurance policies, assets and liabilities of AXIS Specialty Australia were transferred to the reinsurer with effect from February 13, 2017. This resulted in the reduction of reserves for losses and loss expenses by $223 million and a reduction in reinsurance recoverables on unpaid and paid losses by $223 million.
On April 1, 2017, the Company acquired a 100% ownership interest in Aviabel. Foreign exchange and other includes reserves for losses and loss expenses of $79 million and reinsurance recoverables on unpaid and paid losses of $5 million related to this acquisition.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
7.6. | RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED) |
Prior Year Development
Prior year reserve development arises from changes to loss and loss expense estimates related to losses incurredloss events that occurred in previous calendar years. Such development is summarized by segment in the following table: |
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Insurance | $ | 2,603 |
| | $ | 20,688 |
| | $ | 30,740 |
| | $ | 43,181 |
| |
| Reinsurance | 45,165 |
| | 55,331 |
| | 112,755 |
| | 180,950 |
| |
| Total | $ | 47,768 |
| | $ | 76,019 |
| | $ | 143,495 |
| | $ | 224,131 |
| |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Insurance | $ | 22,775 |
| | $ | 7,865 |
| |
| Reinsurance | 31,532 |
| | 16,928 |
| |
| Total | $ | 54,307 |
| | $ | 24,793 |
| |
| | | | | |
The following tables reconcile reserve classes to the lines of business categories and the expected claim tails:
|
| | | | | | | | | | |
Insurance Segment | | | | | | | | |
| | Reported Lines of Business |
| | | | | | | | | | |
Reserve Classes | Tail | Property | Marine | Terrorism | Aviation | Credit and Political Risk | Professional Lines | Liability | Accident and Health | Discontinued lines - Novae |
| | | | | | | | | | |
Property and Other | Short | X | | X | | | | | X | X |
Marine | Short | | X | | | | | | | |
Aviation | Short | | | | X | | | | | |
Credit and Political Risk | Medium | | | | | X | | | | |
Professional Lines | Medium | | | | | | X | | | X |
Liability | Long | | | | | | | X | | X |
|
| | | | | | | | | | | | |
Reinsurance Segment | | | | | | | | | | |
| | Reported Lines of Business |
| | | | | | | | | | | | |
Reserve Classes | Tail | Catastrophe | Property | Credit and Surety | Professional Lines | Motor | Liability | Engineering | Agriculture | Marine and Other | Accident and Health | Discontinued lines - Novae |
| | | | | | | | | | | | |
Property and Other | Short | X | X | | | | | X | X | X | X | X |
Credit and Surety | Medium | | | X | | | | | | | | |
Professional Lines | Medium | | | | X | | | | | | | |
Motor | Long | | | | | X | | | | | | X |
Liability | Long | | | | | | X | | | | | X |
Net favorable prior year reserve development for the three months ended September 30, 2017 included significant contributions from our medium and long tail reserve classes. Net favorable prior year reserve development for the nine months ended September 30, 2017March 31, 2018 included significant contributions from short medium, and longmedium tail reserve classes. Net favorable prior year reserve development for the three and nine months ended September 30, 2016March 31, 2017 included significant contributions from our shortmedium and long tail reserve classes.
Our short tailShort-tail business
Short-tail business includes the underlying exposures in our property and other, marine and aviation reserve classes within ourthe insurance segment, and the property and other reserve class within ourthe reinsurance segment. Development from
For the three months ended March 31, 2018, these reserve classes contributed $5$38 million and $41 million(2017: $4 million) of net favorable prior year reserve development, for the three and nine months ended September 30, 2017, respectively. These short-tail lines contributed $41 million and $116 million of net favorable prior year reserve development for the three and nine months ended September 30, 2016, respectively. The net favorable development for these classes primarily reflecteddue to the recognition of better than expected loss emergence.
Our medium-tail business consists primarily of professional insurance and reinsurance reserve classes, credit and political risk insurance reserve class, and credit and surety reinsurance reserve class. For the three months ended September 30, 2017, the professional reinsurance reserve class contributed net favorable prior year reserve development of $9 million. For the nine months ended September 30, 2017, the professional insurance and reinsurance reserve class contributed net favorable prior year reserve development of $54 million. For the three and nine months ended September 30, 2017, the credit and surety reinsurance reserve class recorded net favorable prior year development of $17 million and $18 million, respectively. This net favorable prior year reserve development reflected the recognition of generally better than expected loss emergence. For the three and nine months ended September 30, 2016, the professional reserve classes contributed net favorable prior year reserve development of $12 million and $28 million, respectively. The net favorable prior year reserve development on these reserve classes reflected generally favorable experience as we continued to transition to more experience based methods.
Our long-tail business consists primarily of liability and motor reserve classes. For the nine months ended September 30, 2017, the liability reinsurance reserve class contributed net favorable prior year reserve development of $40 million. For the three and nine months ended and September 30, 2016, the liability reinsurance reserve class contributed net favorable prior year development of $10 million and $32 million, respectively. The net favorable prior year reserve development for our liability reinsurance reserve class in both years primarily reflected the progressively increased weight given by management to experience based indications on older accident years, which has generally been favorable. For the nine months ended September 30, 2017, the liability insurance reserve class recorded net adverse prior year reserve development of $6 million, primarily attributable to reserve strengthening within our run-off Bermuda excess casualty book of business.
For the three and nine months ended September 30, 2017, the motor reinsurance reserve class recorded net favorable prior year development of $16 million and net adverse prior year reserve development of $4 million, respectively. For the three months ended September 30, 2017, the net favorable prior year reserve development related to favorable loss emergence trends on several classes of business spanning multiple accident years. For the nine months ended, the net adverse prior year development was driven by the U.K. Ministry of Justice’s recent announcement of a decrease in the discount rate used to calculate lump sum awards in U.K. bodily injury cases, known as the Ogden rate. Effective March 20, 2017, the Ogden rate changed from plus 2.5% to minus 0.75%. For the three and nine months ended September 30, 2016, the motor reinsurance reserve class contributed $7 million and $40 million, respectively, of net favorable prior year reserve development related to favorable loss emergence trends on several classes of business spanning multiple accident years.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
7.6. | RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED) |
Medium-tail business
Our September 30,Medium-tail business consists primarily of insurance and reinsurance professional reserve classes, credit and political risk insurance reserve class and credit and surety reinsurance reserve class.
For the three months ended March 31, 2018, the reinsurance professional reserve class recognized $9 million (2017: $16 million) of net favorable prior year development. The net favorable prior year loss development on this reserve class continued to reflect the generally favorable experience on earlier accident years as the Company continued to transition to more experienced based methods.
For the three months ended March 31, 2018, the insurance professional reserve class recognized net favorable prior year development of $4 million (2017: $7 million). The net favorable prior year loss development on this reserve class reflected the generally favorable experience on earlier accident years as the Company transitions to more experienced based methods.
For the three months ended March 31, 2018, the credit and surety reinsurance reserve class recorded net favorable prior year reserve development of $5 million (2017: $nil) due to the recognition of generally better than expected loss emergence.
Long-tail business
Long-tail business consists primarily of liability and motor reserve classes.
For the three months ended March 31, 2018, reinsurance liability reserve class contributed net favorable prior year reserve development of $2 million (2017: $24 million). The net favorable prior year reserve development for the three months ended March 31, 2017 primarily reflected the progressively increased weight given by management to experience based indications on older accident years, which has generally been favorable.
For the three months ended March 31, 2018, the motor reinsurance reserve classes contributed net favorable prior year reserve development of $3 million (2017: net adverse prior year reserve development of $22 million). The net adverse prior year reserve development for the three months ended March 31, 2017 was primarily due to the decrease in the discount rate used to calculate lump sum awards in U.K. bodily injury cases, known as the Ogden Rate which changed from plus 2.5% to minus 0.75% effective March 20, 2017.
For the three months ended March 31, 2018, the insurance liability reserve class recorded net adverse prior year development of $7 million (2017: $4 million) primarily related to reserve strengthening within the Company's U.S. excess casualty business reflecting slightly higher than expected prior year emerging loss experience.
At March 31, 2018, net reserves for losses and loss expenses includes estimated amounts for numerous catastrophe events. We caution that theThe magnitude and/or complexity of losses arising from certain of these events, in particular Hurricanes Harvey, Irma and Maria, and the two earthquakes in Mexico as well as Hurricane Matthew, the Fort McMurray wildfires, Storm Sandy, the 2011 Japanese earthquake and tsunami, the 2010-11 New Zealand earthquakes and the Tianjin port explosion,wildfires in Northern and Southern California which occurred in 2017, inherently increasesincrease the level of uncertainty and, therefore, the level of management judgment involved in arriving at ourthe 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.
| |
8. | EARNINGS PER COMMON SHARE |
The following table presents a comparison of basic and diluted earnings per common share:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Basic earnings (loss) per common share | | | | | | | | |
| Net income (loss) | $ | (457,084 | ) | | $ | 186,613 |
| | $ | (341,541 | ) | | $ | 364,460 |
| |
| Less: preferred share dividends | 10,656 |
| | 9,969 |
| | 36,154 |
| | 29,906 |
| |
| Net income (loss) available to common shareholders | (467,740 | ) | | 176,644 |
| | (377,695 | ) | | 334,554 |
| |
| Weighted average common shares outstanding - basic (1) | 83,305 |
| | 89,621 |
| | 84,479 |
| | 91,852 |
| |
| Basic earnings (loss) per common share | $ | (5.61 | ) | | $ | 1.97 |
| | $ | (4.47 | ) | | $ | 3.64 |
| |
| | | | | | | | | |
| Diluted earnings (loss) per common share | | | | | | | | |
| Net income (loss) available to common shareholders | $ | (467,740 | ) | | $ | 176,644 |
| | $ | (377,695 | ) | | $ | 334,554 |
| |
| | | | | | | | | |
| Weighted average common shares outstanding - basic (1) | 83,305 |
| | 89,621 |
| | 84,479 |
| | 91,852 |
| |
| Share-based compensation plans (2) | — |
| | 730 |
| | — |
| | 727 |
| |
| Weighted average common shares outstanding - diluted (1) | 83,305 |
| | 90,351 |
| | 84,479 |
| | 92,579 |
| |
| | | | | | | | | |
| Diluted earnings (loss) per common share | $ | (5.61 | ) | | $ | 1.96 |
| | $ | (4.47 | ) | | $ | 3.61 |
| |
| | | | | | | | | |
| Anti-dilutive shares excluded from the dilutive computation | 425 |
| | — |
| | 712 |
| | 226 |
| |
| | | | | | | | | |
| |
(1) | On August 17, 2015, the Company entered into an Accelerated Share Repurchase (“ASR”) agreement (see 'Note 10 - Shareholders' Equity' for additional detail). The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share reflects the Company’s receipt of 4,149,378 common shares delivered to the Company on August 20, 2015, and 1,358,380 common shares delivered to the company on January 15, 2016 under the Company's ASR agreement.
|
(2) Due to the net loss incurred in the three and nine months ended September 30, 2017, all the share equivalents were anti-dilutive.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
9.7. | SHARE-BASED COMPENSATIONEARNINGS PER COMMON SHARE |
For the three months ended September 30, 2017, the Company incurred share-based compensation costs of $13 million (2016: $14 million) related to restricted stock awards, share-settled restricted stock units, and cash-settled restricted stock units and recorded associated tax benefits of $3 million (2016: $3 million).
For the nine months ended September 30, 2017, the Company incurred share-based compensation costs of $57 million (2016: $50 million). In addition, the Company recorded associated tax benefits of $20 million (2016: $11 million), including $7 million related to excess tax benefits associated with the vesting of restricted stock units.
The fair value of share-settled restricted stock units and cash-settled restricted stock units that vested during the nine months ended September 30, 2017 was $125 million (2016: $66 million), including $44 million attributable to a grant of 3 year cliff vesting service-based awards made in 2014. At September 30, 2017 there were $99 million of unrecognized compensation costs (2016 $104 million), which are expected to be recognized over the weighted average period of 2.5 years.
Share-settled Awards
The following table provides a reconciliation of the beginning and ending balance of nonvested share-settled restricted stock units for the nine months endedSeptember 30,2017:
|
| | | | | | | | | | | | | | | |
| | Performance-based Stock Awards | | Service-based Stock Awards | |
| | Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value(1) | | Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value(1) | |
| | | | | | | | | |
| Nonvested restricted stock - beginning of period | 283 |
| | $ | 51.27 |
| | 1,593 |
| | $ | 48.88 |
| |
| Granted | 87 |
| | 64.58 |
| | 525 |
| | 64.22 |
| |
| Vested(2) | (119 | ) | | 49.14 |
| | (881 | ) | | 47.37 |
| |
| Forfeited | — |
| | — |
| | (69 | ) | | 54.66 |
| |
| Nonvested restricted stock - end of period | 251 |
| | $ | 56.88 |
| | 1,168 |
| | $ | 57.08 |
| |
| | | | | | | | | |
(1) Fair value is based on the closing price of our common shares on the grant approval date.
(2) Share-settled restricted stock units vested during the nine months ended September 30, 2017 included 313,391 restricted stock units attributable to a grant of 3 year cliff vesting service-based awards made in 2014.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. SHARE-BASED COMPENSATION (CONTINUED)
Cash-settled awards
The following table provides a reconciliation of the beginning and ending balance of nonvested cash-settled restricted stock units for the nine months endedSeptember 30,2017:
|
| | | | | | | |
| | Performance-based Cash Settled Awards | | Service-based Cash Settled Awards | |
| | Number of Restricted Stock Units | | Number of Restricted Stock Units | |
| | | | | |
| Nonvested restricted stock units - beginning of period | 68 |
| | 1,392 |
| |
| Granted | 15 |
| | 427 |
| |
| Vested(1) | (38 | ) | | (755 | ) | |
| Forfeited | — |
| | (60 | ) | |
| Nonvested restricted stock units - end of period | 45 |
| | 1,004 |
| |
| | | | | |
(1) Cash settled restricted stock units vested during the nine months ended September 30, 2017 included 307,556 restricted stock units attributable to a grant of 3 year cliff vesting service-based awards made in 2014.
At September 30, 2017, the liability for cash-settled restricted stock units, included in other liabilities in the Consolidated Balance Sheets, was $18 million (2016: $34 million).
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. SHAREHOLDERS' EQUITY
The following table presents a comparison of basic and diluted earnings per common shares issued and outstanding:share:
|
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Shares issued, balance at beginning of period | 176,580 |
| | 176,575 |
| | 176,580 |
| | 176,240 |
| |
| Shares issued | — |
| | — |
| | — |
| | 335 |
| |
| Total shares issued at end of period | 176,580 |
| | 176,575 |
| | 176,580 |
| | 176,575 |
| |
| | | | | | | | | |
| Treasury shares, balance at beginning of period | (93,377 | ) | | (85,921 | ) | | (90,139 | ) | | (80,174 | ) | |
| Shares repurchased | (51 | ) | | (2,252 | ) | | (4,284 | ) | | (8,499 | ) | |
| Shares reissued from treasury | 5 |
| | 37 |
| | 1,000 |
| | 537 |
| |
| Total treasury shares at end of period | (93,423 | ) | | (88,136 | ) | | (93,423 | ) | | (88,136 | ) | |
| | | | | | | | | |
| Total shares outstanding | 83,157 |
| | 88,439 |
| | 83,157 |
| | 88,439 |
| |
| | | | | | | | | |
Treasury Shares
The following table presents share repurchases:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| In the open market: | | | | | | | | |
| Total shares(1) | 49 |
| | 2,232 |
| | 3,932 |
| | 8,236 |
| |
| Total cost | $ | 3,237 |
| | $ | 124,948 |
| | $ | 261,180 |
| | $ | 434,948 |
| |
| Average price per share(2) | $ | 65.80 |
| | $ | 56.00 |
| | $ | 66.43 |
| | $ | 52.81 |
| |
| | | | | | | | | |
| From employees:(3) | | | | | | | | |
| Total shares | 2 |
| | 20 |
| | 352 |
| | 263 |
| |
| Total cost | $ | 110 |
| | $ | 1,088 |
| | $ | 24,479 |
| | $ | 14,137 |
| |
| Average price per share(2) | $ | 64.04 |
| | $ | 54.13 |
| | $ | 69.53 |
| | $ | 53.68 |
| |
| | | | | | | | | |
| Total shares repurchased: | | | | | | | | |
| Total shares | 51 |
| | 2,252 |
| | 4,284 |
| | 8,499 |
| |
| Total cost | $ | 3,347 |
| | $ | 126,036 |
| | $ | 285,659 |
| | $ | 449,085 |
| |
| Average price per share(2) | $ | 65.74 |
| | $ | 55.98 |
| | $ | 66.68 |
| | $ | 52.84 |
| |
| | | | | | | | | |
| |
(1) | Total shares repurchased in the open market for the nine months ended September 30, 2016 includes 1,358,380 common shares acquired under the accelerated share repurchase program (see below for more detail). |
| |
(2) | Calculated using whole numbers. |
| |
(3) | To satisfy withholding tax liabilities upon the vesting of restricted stock and restricted stock units. |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Basic earnings per common share | | | | |
| Net income | $ | 73,202 |
| | $ | 19,855 |
| |
| Less: preferred share dividends | 10,656 |
| | 14,841 |
| |
| Net income available to common shareholders | 62,546 |
| | 5,014 |
| |
| Weighted average common shares outstanding - basic | 83,322 |
| | 86,022 |
| |
| Basic earnings per common share | $ | 0.75 |
| | $ | 0.06 |
| |
| | | | | |
| Diluted earnings per common share | | | | |
| Net income available to common shareholders | $ | 62,546 |
| | $ | 5,014 |
| |
| | | | | |
| Weighted average common shares outstanding - basic | 83,322 |
| | 86,022 |
| |
| Share-based compensation plans | 399 |
| | 771 |
| |
| Weighted average common shares outstanding - diluted | 83,721 |
| | 86,793 |
| |
| | | | | |
| Diluted earnings per common share | $ | 0.75 |
| | $ | 0.06 |
| |
| | | | | |
| Weighted average anti-dilutive shares excluded from the dilutive computation | 810 |
| | 551 |
| |
| | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
10.8. | SHAREHOLDERS' EQUITY (CONTINUED)SHARE-BASED COMPENSATION |
Accelerated Share Repurchase ProgramFor the three months ended March 31, 2018, the Company incurred share-based compensation costs of $16 million (2017: $29 million) related to restricted stock awards, share-settled restricted stock units, and cash-settled restricted stock units and recorded associated tax benefits of $2 million (2017: $7 million).
On August 17, 2015,The fair value of share-settled restricted stock units and cash-settled restricted stock units that vested during the Company entered into an Accelerated Share Repurchase agreement with Goldman, Sachs & Co. (“Goldman Sachs”)three months ended March 31, 2018 was $42 million (2017: $120 million, which included $44 million attributable to repurchase an aggregatea grant of $300three year cliff vesting service-based awards made in 2014). At March 31, 2018 there were $137 million of unrecognized compensation costs (2017: $130 million), which are expected to be recognized over the Company’s ordinary shares under an accelerated share repurchase program.weighted average period of 3.0 years.
During August, 2015, underShare-settled Awards
The following table provides a summary of nonvested share settled restricted stock units for the termsthree months endedMarch 31,2018:
|
| | | | | | | | | | | | | | | |
| | Share Settled Performance Vesting Restricted Stock Units | | Share Settled - Service Based Restricted Stock Units | |
| | Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value(1) | | Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value(1) | |
| | | | | | | | | |
| Nonvested restricted stock units - beginning of period | 230 |
| | $ | 57.08 |
| | 1,355 |
| | $ | 57.09 |
| |
| Granted | 104 |
| | 48.89 |
| | 711 |
| | 49.07 |
| |
| Vested | (51 | ) | | 53.81 |
| | (455 | ) | | 54.44 |
| |
| Forfeited | — |
| | — |
| | (20 | ) | | 57.45 |
| |
| Nonvested restricted stock units - end of period | 283 |
| | $ | 54.68 |
| | 1,591 |
| | $ | 54.18 |
| |
| | | | | | | | | |
(1) Fair value is based on the closing price of this agreement, the Company paid $300 million to Goldman Sachs and initially repurchased 4,149,378 ordinary shares. The initial shares acquired represented 80% of the $300 million total paid to Goldman Sachs and were calculated using the Company’s stock price at activation of the program. The ASR program is accounted for as an equity transaction. Accordingly, at December 31, 2015, $240 million ofour common shares repurchased wereon the grant approval date.
Cash-settled awards
The following table provides a summary of nonvested cash settled restricted stock units for the three months endedMarch 31,2018:
|
| | | | | | | |
| | Cash Settled Performance Vesting Restricted Stock Units | | Cash Settled Service-based Restricted Stock Units | |
| | Number of Restricted Stock Units | | Number of Restricted Stock Units | |
| | | | | |
| Nonvested restricted stock units - beginning of period | 42 |
| | 988 |
| |
| Granted | — |
| | 449 |
| |
| Vested | (12 | ) | | (360 | ) | |
| Forfeited | — |
| | (20 | ) | |
| Nonvested restricted stock units - end of period | 30 |
| | 1,057 |
| |
| | | | | |
At March 31,2018, the liability for cash-settled restricted stock units, included as treasury sharesin other liabilities in the Consolidated Balance Sheet with the remaining $60Sheets, was $9 million included as a reduction to additional paid-in capital.
On January 15, 2016, Goldman Sachs early terminated the ASR agreement and delivered 1,358,380 additional common shares to the Company, resulting in the reduction from additional paid-in capital of $60 million being reclassified to treasury shares. In total, the Company repurchased 5,507,758 common shares under the ASR agreement at an average price of $54.47.
Preferred Shares
On April 17, 2017, the Company redeemed the remaining 14,042,955 of its 6.875% Series C preferred shares, for an aggregate liquidation preference of $351 million. (2017: $9 million).
11.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. SHAREHOLDERS' EQUITY
The following table presents common shares issued and outstanding:
|
| | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Shares issued, balance at beginning of period | 176,580 |
| | 176,580 |
| |
| Shares issued | — |
| | — |
| |
| Total shares issued at end of period | 176,580 |
| | 176,580 |
| |
| | | | | |
| Treasury shares, balance at beginning of period | (93,419 | ) | | (90,139 | ) | |
| Shares repurchased | (149 | ) | | (2,229 | ) | |
| Shares reissued | 506 |
| | 958 |
| |
| Total treasury shares at end of period | (93,062 | ) | | (91,410 | ) | |
| | | | | |
| Total shares outstanding | 83,518 |
| | 85,170 |
| |
| | | | | |
Treasury Shares
The following table presents share repurchases:
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| In the open market: | | | | |
| Total shares | — |
| | 1,896 |
| |
| Total cost | $ | — |
| | $ | 127,982 |
| |
| Average price per share(1) | $ | — |
| | $ | 67.52 |
| |
| | | | | |
| From employees:(2) | | | | |
| Total shares | 149 |
| | 333 |
| |
| Total cost | $ | 7,163 |
| | $ | 23,260 |
| |
| Average price per share(1) | $ | 48.08 |
| | $ | 69.80 |
| |
| | | | | |
| Total shares repurchased: | | | | |
| Total shares | 149 |
| | 2,229 |
| |
| Total cost | $ | 7,163 |
| | $ | 151,242 |
| |
| Average price per share(1) | $ | 48.08 |
| | $ | 67.86 |
| |
| | | | | |
(1) Calculated using whole numbers.
| |
(2) | Shares are repurchased from employees to satisfy withholding tax liabilities upon the vesting of restricted stock awards and restricted stock units. |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
10. | DEBT AND FINANCING ARRANGEMENTS |
On March 27, 2017, the $250 million credit facility entered into by AXIS Capital and certain of its subsidiaries and a syndication of lenders expired.
On March 27, 2017,28, 2018, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing $250 million secured letter of credit facility with Citibank Europe plc (the "$250 Million Facility") under their aggregate $750 million secured letter of credit facility with Citibank Europe plc (the "$750 Million Facility") to extend the expiration date to March 31, 2019.
The terms and conditions of the additional $500 million secured letter of credit facility (the “LOC Facility”) with Citibank Europe plc (“Citibank”) to include an additional
$250under the $750 Million Facility remain unchanged. The $500 million of secured letter of credit capacity (the “$250 Million Facility”) pursuant to a Committed Facility Letter and an amendment to the Master Reimbursement Agreement (the “LOC Facility Documents”). Under the terms of the $250 Million Facility, lettersfacility expires December 31, 2019.
Letters of credit to a maximum aggregate amount of $250 million are available for issuance on behalf ofissued under the Participating Subsidiaries. These letters of credit$750 Million Facility will principally be used to support the reinsurance obligations of the Participating Subsidiaries. The $250 Million Facility isParticipating Subsidiaries are subject to certain covenants, including the requirement to maintain sufficient collateral as defined in the LOC Facility Documents, to cover all of the obligations outstanding under the LOC$750 Million Facility.
Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default, Citibank Europe plc may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the LOC$750 Million Facility to any or all of the Participating Subsidiaries. The $250 million Facility expires March 31, 2018. The terms and conditions of the $500 million Facility remain unchanged.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
12.11. | COMMITMENTS AND CONTINGENCIES |
Reinsurance AgreementsLegal Proceedings
We purchase reinsurance and retrocessional protection for our insurance and reinsurance linesFrom time to time, the Company is 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 the Company 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 the Consolidated Balance Sheets.
The minimum reinsurance premiums are contractually due in advance on a quarterly basis. At September 30,2017, we have unrecorded outstanding reinsurance purchase commitmentsCompany is not party to any material legal proceedings arising outside the ordinary course of $97 million, of which $15 million is due in 2017 and the remaining $82 million is due in 2018 and later years. Actual payments under the reinsurance contracts will depend on the underlying subject premium and may exceed the minimum premium.business.
Investments
Refer to Note 43 - 'Investments' for information on the Company's unfunded investment commitments related to ourthe Company's other investments.investment portfolio.
| |
13.12. | OTHER COMPREHENSIVE INCOME (LOSS) |
The tax effects allocated to each component of other comprehensive income were as follows:(loss) are shown in the following table: |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | |
| | Before Tax Amount | | Tax (Expense) Benefit | | Net of Tax Amount | | Before Tax Amount | | Tax (Expense) Benefit | | Net of Tax Amount | |
| | | | | | | | | | | | | |
| Three months ended September 30, | | | | | | | | | | | | |
| Available for sale investments: | | | | | | | | | | | | |
| Unrealized investment gains arising during the period | $ | 64,431 |
| | $ | (1,926 | ) | | $ | 62,505 |
| | $ | 40,125 |
| | $ | (3,789 | ) | | $ | 36,336 |
| |
| Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income | (15,925 | ) | | 2,639 |
| | (13,286 | ) | | (5,050 | ) | | 2,408 |
| | (2,642 | ) | |
| Unrealized investment gains arising during the period, net of reclassification adjustment | 48,506 |
| | 713 |
| | 49,219 |
| | 35,075 |
| | (1,381 | ) | | 33,694 |
| |
| Non-credit portion of OTTI losses | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Foreign currency translation adjustment | 8,088 |
| | — |
| | 8,088 |
| | 1,722 |
| | — |
| | 1,722 |
| |
| Total other comprehensive income, net of tax | $ | 56,594 |
| | $ | 713 |
| | $ | 57,307 |
| | $ | 36,797 |
| | $ | (1,381 | ) | | $ | 35,416 |
| |
| | | | | | | | | | | | | |
| Nine months ended September 30, | | | | | | | | | | | | |
| Available for sale investments: | | | | | | | | | | | | |
| Unrealized investment gains arising during the period | $ | 215,360 |
| | $ | (8,899 | ) | | $ | 206,461 |
| | $ | 263,235 |
| | $ | (24,579 | ) | | $ | 238,656 |
| |
| Adjustment for reclassification of net realized investment losses and OTTI losses recognized in net income | 8,269 |
| | 1,900 |
| | 10,169 |
| | 40,338 |
| | 2,282 |
| | 42,620 |
| |
| Unrealized investment gains arising during the period, net of reclassification adjustment | 223,629 |
| | (6,999 | ) | | 216,630 |
| | 303,573 |
| | (22,297 | ) | | 281,276 |
| |
| Non-credit portion of OTTI losses | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Foreign currency translation adjustment | 46,824 |
| | — |
| | 46,824 |
| | 5,694 |
| | — |
| | 5,694 |
| |
| Total other comprehensive income, net of tax | $ | 270,453 |
| | $ | (6,999 | ) | | $ | 263,454 |
| | $ | 309,267 |
| | $ | (22,297 | ) | | $ | 286,970 |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | |
| | Before Tax Amount | | Tax (Expense) Benefit | | Net of Tax Amount | | Before Tax Amount | | Tax (Expense) Benefit | | Net of Tax Amount | |
| | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | | | | | |
| Available for sale investments: | | | | | | | | | | | | |
| Unrealized investment gains (losses) arising during the period | $ | (105,675 | ) | | $ | (6,516 | ) | | $ | (112,191 | ) | | $ | 70,372 |
| | $ | (2,669 | ) | | $ | 67,703 |
| |
| Adjustment for reclassification of net realized investment losses and OTTI losses recognized in net income | (4,112 | ) | | 4,897 |
| | 785 |
| | 25,759 |
| | (791 | ) | | 24,968 |
| |
| Unrealized investment gains (losses) arising during the period, net of reclassification adjustment(1) | (109,787 | ) | | (1,619 | ) | | (111,406 | ) | | 96,131 |
| | (3,460 | ) | | 92,671 |
| |
| Foreign currency translation adjustment | 1,270 |
| | — |
| | 1,270 |
| | 29,869 |
| | — |
| | 29,869 |
| |
| Total other comprehensive income (loss), net of tax | $ | (108,517 | ) | | $ | (1,619 | ) | | $ | (110,136 | ) | | $ | 126,000 |
| | $ | (3,460 | ) | | $ | 122,540 |
| |
| | | | | | | | | | | | | |
| |
(1) | Effective January 1, 2018, the Company adopted ASU No. 2016-01. The adoption of this guidance resulted in a cumulative adjustment to reclassify unrealized investment gains on equity securities from accumulated other comprehensive income to retained earnings. As prescribed, the prior period has not been restated to conform to the current presentation. Refer to Item 1, Note 1 'Basis of Presentation and Significant Accounting Policies' to the Consolidated Financial Statements for additional information. |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
13. | OTHER COMPREHENSIVE INCOME (CONTINUED) |
12. OTHER COMPREHENSIVE INCOME (LOSS) CONTINUED
Reclassifications out offrom AOCI intoto net income (loss) available to common shareholders were as follows:are shown in the following table:
|
| | | | | | | | | | | | | | | | | | |
| | | 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, | |
| 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | | |
| Unrealized investment gains (losses) on available for sale investments | | | | | | | | | |
| | Other realized investment gains(losses) | $ | 21,337 |
| | $ | 9,297 |
| | $ | 5,224 |
| | $ | (19,992 | ) | |
| | OTTI losses | (5,412 | ) | | (4,247 | ) | | (13,493 | ) | | (20,346 | ) | |
| | Total before tax | 15,925 |
| | 5,050 |
| | (8,269 | ) | | (40,338 | ) | |
| | Income tax expense | (2,639 | ) | | (2,408 | ) | | (1,900 | ) | | (2,282 | ) | |
| | Net of tax | $ | 13,286 |
| | $ | 2,642 |
| | $ | (10,169 | ) | | $ | (42,620 | ) | |
| | | | | | | | | | |
| Foreign currency translation adjustment | | | | | | | | | |
| | Foreign exchange loss | $ | — |
| | $ | — |
| | $ | (24,149 | ) | | $ | — |
| |
| | Income tax expense | — |
| | — |
| | — |
| | — |
| |
| | Net of tax | $ | — |
| | $ | — |
| | $ | (24,149 | ) | | $ | — |
| |
| | | | | | | | | | |
|
| | | | | | | | | | |
| | | Amount Reclassified from AOCI(1) | |
| Details About AOCI Components | Consolidated Statement of Operations Line Item That Includes Reclassification | Three months ended March 31, | |
| 2018 | | 2017 | |
| | | | | | |
| Unrealized investment gains (losses) on available for sale investments | | | | | |
| | Other investment gains (losses) | $ | 4,526 |
| | $ | (19,206 | ) | |
| | OTTI losses | (414 | ) | | (6,553 | ) | |
| | Total before tax | 4,112 |
| | (25,759 | ) | |
| | Income tax (expense) benefit | (4,897 | ) | | 791 |
| |
| | Net of tax | $ | (785 | ) | | $ | (24,968 | ) | |
| | | | | | |
| Foreign currency translation adjustment | | | | | |
| | Foreign exchange loss | $ | — |
| | $ | (24,149 | ) | |
| | Income tax (expense) benefit | — |
| | — |
| |
| | Net of tax | $ | — |
| | $ | (24,149 | ) | |
| | | | | | |
| |
(1) | Amounts in parentheses are debits to net income (loss) available to common shareholders. |
On March 27, 2017, as part of the wind down of our Australia operation, the Australia Prudential Regulation Authority revoked the authorization of AXIS Specialty Australia to carry on insurance business in Australia. As this resulted in the substantial liquidation of AXIS Specialty Australia, we have released the cumulative translation adjustment related to AXIS Specialty Australia of $24 million from accumulated other comprehensive income in the Consolidated Balance Sheet to foreign exchange losses in the Consolidated Statement of Operations.
14.13. SUBSEQUENT EVENTS
Acquisition of Novae Group plc
On July 5, 2017,April 16 2018, the Company entered into a quota share and adverse development cover reinsurance agreement, a retroactive
contract which was deemed to have met the boardestablished criteria for retroactive reinsurance accounting. The Company will recognize reinsurance recoverable on unpaid losses of directors of Novae Group plc (“Novae”), a public limited company incorporated in England and Wales, announced that it had agreed on the terms of a recommended cash offer of 700 pence per share$108 million related to be made by AXIS Capital to acquire the entire issued and to be issued share capital of Novae.
On August 24, 2017, the Company and the board of directors of Novae announced that it had agreed on the terms of an increased recommended cash offer of 715 pence per share (the "Offer") to be made by AXIS Capital for the acquisition of the entire issued and to be issued share capital of Novae.
The acquisition was effected by way of a Scheme of Arrangement (the “Scheme”) under the laws of the United Kingdom (“U.K.”) which requires the approval of a U.K. court and approval of a majority of Novae’s shareholders, representing at least 75% of the votes cast. The Scheme is also subject to receipt of certain regulatory approvals and other customary conditions. On August 29, 2017, Novae shareholders approved the Scheme.
On October 2, 2017, AXIS Capital acquired the shares of Novae for £462.9 million (approximately $615.6 million). The results of Novae will be included in the results of the Company's insurance andthis reinsurance segments from this date (the "Closing date").
On October 6, 2017, AXIS Capital received clearance from all applicable regulators, including the European Commission, and commenced management control and integration of the combined businesses from this date.
agreement.
14. SUBSEQUENT EVENTS (CONTINUED)
Novae is a diversified property and casualty (re)insurance business operating through Syndicate 2007 at Lloyd’s of London. The acquisition of Novae is expected to accelerate the growth strategy of the Company's international insurance business, and significantly scale up its capabilities to enable the Company to even better serve its clients and brokers.
The Company incurred transaction related expenses including due diligence, legal, accounting, and investment banking fees and expenses, as well as integration expenses of $6 million in the three months ended September 30, 2017 related to the acquisition of Novae. In addition, the Company was contractually obligated to pay investment banking fees on the Closing date of the transaction. The Company expects substantially all of the integration costs related to the acquisition to be incurred in 2018. In addition, the Company expects to begin realizing cost savings in 2018.
The Company is currently in the process of determining the fair values of the underlying assets and liabilities at the acquisition date. Given the timing of the acquisition, a preliminary allocation of purchase price is not yet complete. The Company will include amounts recognized for net assets and liabilities acquired, together with goodwill, as of the acquisition date in the Company's Annual Report on Form 10-K.
California Wildfires
In October 2017, Northern California was impacted by a series of devastating wildfires ("California Wildfires") which caused widespread residential and commercial property damage. Current estimated industry insured losses for this event range between $4 billion and $8 billion.
Our preliminary pre-tax net loss estimate for this event is in the range of $35 million to $45 million. The Company's loss estimate is primarily based on a ground-up assessment of losses from individual contracts and treaties exposed to the affected regions, including preliminary information from clients, brokers and loss adjusters. Industry insured loss estimates, market share analyses and catastrophe modeling analyses were also taken into account where appropriate.
Due to the preliminary nature of the information available to prepare these estimates, the actual net ultimate amount of losses for this event may be materially different from the current estimate.
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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, 20162017. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.
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| Page |
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ThirdFirst Quarter 20172018 Financial Highlights | |
Executive Summary | |
Underwriting Results – Group | |
Results by Segment: For the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 | |
i) Insurance Segment | |
ii) Reinsurance Segment | |
Other Expenses (Revenues), Net | |
Net Investment Income and Net Realized Investment Gains (Losses) | |
Cash and Investments | |
Liquidity and Capital Resources | |
Critical Accounting Estimates | |
Recent Accounting Pronouncements | |
Off-Balance Sheet and Special Purpose Entity Arrangements | |
THIRDFIRST QUARTER 20172018 FINANCIAL HIGHLIGHTS
ThirdFirst Quarter 20172018 Consolidated Results of Operations
Net lossincome attributable to common shareholders of $46863 million, or $(5.61)0.75 per common share and diluted common share
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• | Non-GAAP operating lossOperating income(1) of $446123 million, or $(5.35)1.46 per diluted common share(1)
|
Gross premiums written of $1.22.7 billion
Net premiums written of $833 million2.0 billion
Net premiums earned of $11.2 billion
Net favorable prior year reserve development of $4854 million
Estimated pre-tax catastrophe and weather-related pre-tax net losses net of reinstatement premiums, of $617$35 million, or 61.43.0 points on current accident year loss ratio compared to $22$35 million, or 2.33.7 points for the thirdfirst quarter of 2016:2017
| |
◦ | Third quarter estimated catastrophe pre-tax losses, net of reinstatement premiums, of $617 million (Insurance: $315 million and Reinsurance: $302 million) included Hurricanes Harvey, Irma and Maria and the two earthquakes in Mexico; |
| |
◦ | Third quarter estimated weather-related pre-tax net losses of $6 million (Insurance: $4 million and Reinsurance: $2 million); |
| |
◦ | Favorable development on prior quarters' estimated catastrophe and weather related pre-tax net losses of $6 million (Insurance: $2 million and Reinsurance: $4 million) largely related to U.S. weather-related events |
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• | Underwriting lossincome(2) of $513$144 million and combined ratio of 152.9%90.8% |
Net investment income of $95$101 million and net
Net realized investment gainslosses of $15 million
Foreign exchange losses of $33$38 million
ThirdFirst Quarter 20172018 Consolidated Financial Condition
Total cash and investments of $14.7$15.4 billion; fixed maturities, cash and short-term securities comprise 87%88% of total cash and investments and have an average credit rating of AA-
Total assets of $21.825.1 billion
Reserve for losses and loss expenses of $10.812.0 billion and reinsurance recoverable of $2.43.1 billion
Total debt of $1.0$1.4 billion and the debt to total capital ratio of 15.4%20.7%
Total common shares repurchased for $3$7 million.
At November 8, 2017 the remaining authorization under the repurchase program approved by our Board of Directors was $739 million. Following the offer to acquire Novae Group plc ("Novae") on July 5, 2017, the Company suspended its open markmarket share repurchase program. We acquired Novae on October 2, 2017.
Common shareholders’ equity of $4.74.5 billion and diluted book value per common share of $55.3352.57
| |
(1) | Non-GAAP operatingOperating income (loss) and non-GAAP operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation G.S-K. The reconciliations of non-GAAP measures to the most comparable GAAP financial measures (net income (loss) available to common shareholders and diluted earnings per common share, respectively) are provided in the 'Results of Operations', which is included in the 'Executive Summary' section of this Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")– Executive Summary – Results of Operations'.
|
| |
(2) | Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation G.S-K. The reconciliation to net income (loss) before income taxes and interest in income (loss) of equity method investments, the most comparable GAAP measure, is presented in the 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations', which is included in the 'Executive Summary' section of this MD&A.. |
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 ("U.S."), Europe, Singapore, Canada, Latin America and the Middle East. 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 global leader in specialty risks. Our execution on this strategy for the first ninethree months of 20172018 included:
increased relevance in a select number of attractive specialty insurance and reinsurance markets and continued implementation of a more focused distribution strategy;
continued to grow a leadership position in business lines with strong growth of ourpotential including accident and health, lines, which is focused on specialty accidentcyber and health products;renewable energy;
growth of our syndicate at Lloyd's of London ("Lloyd's"), which provides us with access to Lloyd's worldwide licenses and an extensive distribution network. During the first quarter of 2016 we commenced writing business through our underwriting division at Lloyd's in China. On July 14, 2017, we announced that we had received final authorization from Lloyd’s, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) for our own Lloyd’s managing agent, AXIS Managing Agency Limited (“AXIS Managing Agency”). Effective August 4, 2017, AXIS Managing Agency assumed management of AXIS Syndicate 1686 at Lloyd’s, replacing the Company’s third-party managing agency agreement with Asta Managing Agency Limited, which had been in place since 2014;
continued implementation of a more focused distribution strategy and increased our scale and relevance in key markets;
continued rebalancingre-balancing of our portfolio towards less volatile lines of business that carry attractive rates;
launched a new phase of our transformation efforts, an enterprise-wide program to further modernize all of our functions and position us to lead in a transforming industry;
continued improvement in the effectiveness and efficiency of our operating platforms and processes;
increased investment in data and analytics; and
broadened risk-funding sources and developed vehicles that utilize third-party capital including:capital.
Our investment in Harrington Reinsurance Holdings Limitedto Close ("Harrington"RITC"), of the parent company2015 and Prior Years of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by AXIS Capital and The Blackstone Group L.P. ("Blackstone"). Harrington Re’s strategy is to combine a multi-line reinsurance portfolio with a diversified allocation to alternative investment strategies to earn attractive risk-adjusted returns. Harrington has developed a portfolio that optimizes the risk-reward characteristicsAccount of both assets and liabilities, leveraging the respective strengths of AXIS Capital and Blackstone while deploying a disciplined and fully integrated approach to both underwriting and investing; and
AXIS Ventures Reinsurance Limited, which manages capital for investors interested in deploying funds directly into the property-catastrophe and other short-tail business.Syndicate 2007
On AprilJanuary 1, 2018, AXIS Managing Agency Limited, the managing agent of Syndicate 2007 entered into an agreement for the RITC of the 2015 and prior years of account of Syndicate 2007. Under the terms of this agreement, we ceded $819 million of reserves for losses and loss expenses, which were included in Syndicate 2007's balance sheet at December 31, 2017, to a reinsurer. This agreement was accounted for as a novation reinsurance contract. During the Company acquired general aviation insurerthree months ended March 31, 2018, we recognized a reduction in reserves for losses and loss expenses of $819 million representing the transfer of liabilities to the reinsurer, Aviabel, increasinga reduction in investments and cash of $688 million representing the Company's scaleconsideration paid to the reinsurer and relevance ina payable of $131 million representing the global aviation market. The Company will continueconsideration due to maintain Aviabel's physical presence in Brusselsthe reinsurer.
Realignment of our Accident and Amsterdam.Health Business
On April 17, 2017,January 23, 2018, we announced plans to realign our accident and health business by integrating our business and its operations into the Company redeemedour insurance and reinsurance operations. Through this realignment, our accident and health business is expected to benefit from the remaining $351 milliongreater scale and market presence of its 6.875% Series C preferred shares. The execution of this transaction reduced the weighted average annual dividend rate on our preferred equity capital base by 88 basis points to 5.50%.property and casualty insurance and reinsurance businesses and operations.
Effective July 1, 2017,The realignment of the our accident and health business into our insurance and reinsurance segment no longer writes derivative-based risk management products which address weather risks.
On July 5, 2017segments took place in the Company announced that it had agreed on the termsfirst quarter of a recommended offer2018.Financial results relating to acquire Novae Group plc (“Novae”), a diversified specialty (re)insurer that operates through Lloyd’s of London. On October 2, 2017, the Company acquired the shares of Novae. The results of Novae will bethis business were previously included in the results of our insurance segment. As a result of the Company'srealignment, accident and health results are included in the results of both our insurance and reinsurance segments with effect from this date (the "Closing date"). On October 6, 2017, AXIS Capital received clearance from all applicable regulators, includingJanuary 1, 2018. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the European Commission, and commenced management control and integration of the combined businesses from this date.
On July 6, 2017, S&P Global Ratings affirmed its 'A-' long-term counterparty credit and senior debt ratings of AXIS Capital, and its 'A+' long-term counterparty credit and financial strength ratings of the Company's core operating subsidiaries. At the same time, S&P Global Ratings revised its outlook on AXIS Capital to negative from stable based on the planned acquisition of Novae.current year's presentation.
Outlook
We are committed to being a leader in specialty risk, an area in which we already have depth of talent and experience, and have earned an outstanding reputation. Committed to itsour hybrid strategy, AXIS Capital haswe have developed substantial platforms in both insurance and reinsurance, providing itus with balance and diversification. Management believes its positioning, franchise, expert underwriters and strong relationships with distributors and clients will provide opportunities for further profitable growth in 2018, with variances amongst our lines driven by our tactical response to market conditions. At the same time, we are broadening our risk-funding sources and developing vehicles that utilize the industry’s abundantavailable third party capital. Therefore,Consequently, we expect that our net premiums written will not grow as much as our gross premiums written, as we intend to share more of our risk with strategic capital partners.
CompetitiveThe insurance market has begun to respond to the cumulative effects of many years of price deterioration and the record significant catastrophe activity incurred in 2017. Market conditions continue to impact worldwide insurance marketsand rates across most lines have generally improved, with greatest pressures impacting catastrophe exposed property and certain global specialty lines of business. Weexperiencing the most upward rate momentum. While market conditions have observed greater competitiveness for large accounts compared to smaller risks. These competitive pressures have led to price reductions across most lines of business, with decreases in international markets generally more severe than those observed in the U.S. During the month of September, our industry experienced substantial natural catastrophe loss activity, comparable to full year levels incurred in 2005 and 2011, which were the highest catastrophe loss years on record. We believe markets conditionsimproved they will likely remain uncertainvariable through the end of the year and possibly beyond as carriers assess pricing, portfolio construction and account preferences. In this challengingcompetitive market environment with mixed market conditions, we are focusing on lines of business and marketsmarket segments that remainare adequately priced and we will continue to assess pricing adequacy as market conditions and trends evolve. Where necessary we also continue to shift our business mix toward smaller, less volatile risk accounts which we believe will enable us to achieve better, more stable attritional loss experience.priced. In addition, our recent acquisition of Novae increases our scale and relevance in the London marketplace, and we expect to be well-positioned to capitalize on new opportunities and benefit from improved market conditions emerging through the international specialty insurance market, including Lloyd’sLloyd's of London.
The reinsurance markets' trading environment remains challengingmarket is experiencing some upward movement in price after the many ofsubstantial loss activity that occurred in 2017. These increases, both in catastrophe and other lines of business, are necessary to improve adequacy of rates and geographical regions.vary across geographies. The market continuesoverall is strongly capitalized and demand side conditions, while largely stable, do present opportunities to be influenced by excess capacity, strong balance sheetssupport clients in a world of established market participantschanging exposures, regulation, and reinsurance panels. We also believe that there is a consolidationreal opportunity to achieve more leadership and scale, emphasizing our clients and new streams of reinsurance purchasing. As noted above, our industry experienced substantial natural catastrophe loss activity duringincome in the month of September, which we believe will favorably impact pricing in our upcoming renewal cycle. The improvements will differ between lines of business and by geographical regions. These factors, combined with AXIS' customer-centric approach and opportunities in specific lines of business and geographies allow us to execute on our targeted growth strategy. We will continue to protectfuture while still defending the quality and profitability of our existing book, targeting larger shares of the more attractive treaties,portfolio. We are also focused on managing the overall volatility of our reinsurance book,portfolio and expanding our already strong group of strategic capital partners with whom to share our risks.
Non-GAAP Financial MeasureMeasures
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. Some of the measurements we use are "non-GAAPnon-GAAP financial measures"measures under Securities and Exchange CommissionSEC rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income, non-GAAP operating income (in total and on a per share basis), amounts presented on a constant currency basis, and pre-tax total return on cash and investments excluding foreign exchange movements, which are “non-GAAPnon-GAAP financial measures”measures as defined in Item 10(e) of SEC Regulation G.S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP.GAAP").
Underwriting-Related General and Administrative 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 this measure is presented in Item 1, Note 32 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
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. Our total generalGeneral and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, also includes corporate expenses.
The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP measure, is presented in the 'ResultsManagement’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.
Consolidated Underwriting Income
Consolidated underwriting income is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (losses) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses. While this measure is presented in Item 1, Note 32 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
We evaluate our underwriting results separately from the performance of our investment portfolio. As such, we believe it is appropriate to exclude net investment income and net realized investment gains (losses) from our underwriting profitability measure. 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.
Foreign exchange losses (gains) in our Consolidated Statements 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 losses (gains) 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.
Bargain purchase gain reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred. The bargain purchase gain is unrelated to underwriting operations and for this reason it isthese expenses are excluded from consolidated underwriting income.
Transaction relatedInterest expense and financing costs primarily relate to interest payable on our senior notes and notes payable. 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, therefore, these expenses are excluded from consolidated underwriting income.
Reorganization expenses are driven by business decisions, the nature and timing of which are unrelatednot related to the underwriting process and for this reason theytherefore, these expenses are excluded from consolidated underwriting income.
Amortization of intangibles including value of business acquired arose from business decisions, the nature and timing of which are not related to the underwriting process therefore, these expenses are excluded 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. The reconciliation of consolidated underwriting income to income before income taxes and interest in income (loss) of equity method investments, the most comparable GAAP measure is presented in the 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.
Non-GAAP Operating Income
Non-GAAP operatingOperating income represents after-tax operational results without consideration of after-tax net realized investment gains (losses), foreign exchange losses (gains), bargain purchase gain, and transaction relatedreorganization expenses.
Although the investment of premiums to generate income and realized investment gains (losses) is an integral part of our operations, the determination to realize investment gains (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 (losses) is somewhat opportunistic for many companies.
Foreign exchange losses (gains) in our Consolidated Statements of Operations are primarily driven by the impact of foreign exchange rate movements on net insurance related-liabilities. However, this movement is only one element of the overall impact of foreign exchange rate fluctuations on our financial position. In addition, we recognize unrealized foreign exchange losses (gains) on our available-for-sale investments in other comprehensive income and foreign exchange losses (gains) realized upon the sale of these investments in net realized investments gains (losses). These unrealized and realized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported separately in net income (loss), thereby minimizing the impact of foreign
exchange rate movements on total shareholders' equity. As such, the Statement of Operations foreign exchange losses (gains) in our Statement of Operations in isolation isare not a fair representation of the performance of our business.
Bargain purchase gain reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred and is not indicative of future revenues of the company.
Transaction relatedReorganization expenses are primarily driven by business decisions, the nature and timing of which are unrelatednot related to the underwriting process and which are not representative of underlying business performance.
Certain users of our financial statements evaluate earningsperformance excluding after-tax net realized investment gains (losses), foreign exchange losses (gains), bargain purchase gain, and transaction relatedreorganization expenses to understand the profitability of recurring sources of income.
We believe that showing net income (loss) available to common shareholders exclusive of net realizedinvestment gains (losses), foreign exchange losses (gains), bargain purchase gain, and transaction relatedreorganization expenses 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. The reconciliation of non-GAAP operating income to net income (loss) available to common shareholders, the most comparable GAAP measure, is presented in the 'Results'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.
Constant Currency Basis
We present gross premiums written, net premiums written and net premiums earned on a constant currency basis in this MD&A. The amounts presented on a constant currency basis are calculated by applying the average foreign exchange rate from the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze performancegrowth in gross premiums written, net premiums written and net premiums earned on a manner similar to how our management analyzes the underlying business performance.constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in the 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Group Underwriting Results' section of this MD&A..
Pre-Tax Total Return on Cash and Investments excluding Foreign Exchange Movement
Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income (loss), net realized investments gains (losses), interest in income (loss) of equity method investments, and pre-tax change in unrealized gains (losses) generated by our average cash and investment balances. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure is presented in the 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Investment Income and Net Realized Investment Gains (Losses)'
section of this release.. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investments.
Results of Operations
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| | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Change | | 2016 | | 2017 | | % Change | | 2016 | |
| | | | | | | | | | | | | |
| Underwriting revenues: | | | | | | | | | | | | |
| Net premiums earned | $ | 1,017,131 |
| | 9% | | $ | 934,415 |
| | $ | 2,937,265 |
| | 6% | | $ | 2,783,746 |
| |
| Other insurance related income (losses) | (3,197 | ) | | nm | | 5,944 |
| | (4,420 | ) | | nm | | 4,850 |
| |
| Underwriting expenses: | | | | | | | | | | | | |
| Net losses and loss expenses | (1,235,367 | ) | | 132% | | (532,328 | ) | | (2,447,640 | ) | | 47% | | (1,663,584 | ) | |
| Acquisition costs | (194,724 | ) | | 3% | | (189,810 | ) | | (588,879 | ) | | 5% | | (559,570 | ) | |
| Underwriting general and administrative expenses(1) | (96,696 | ) | | (15%) | | (114,223 | ) | | (335,782 | ) | | (5%) | | (352,632 | ) | |
| Underwriting Income (Loss) | $ | (512,853 | ) | | | | $ | 103,998 |
| | $ | (439,456 | ) | | | | $ | 212,810 |
| |
| | | | | | | | | | | | | |
| Corporate expenses(1) | (27,933 | ) | | (3%) | | (28,683 | ) | | (97,922 | ) | | 13% | | (86,922 | ) | |
| Net investment income | 95,169 |
| | (19%) | | 116,923 |
| | 299,899 |
| | 16% | | 257,818 |
| |
| Net realized investment gains (losses) | 14,632 |
| | nm | | 5,205 |
| | (14,811 | ) | | (63%) | | (40,295 | ) | |
| Other (expenses) revenues, net | (45,345 | ) | | nm | | 956 |
| | (128,470 | ) | | nm | | 31,195 |
| |
| Bargain purchase gain | — |
| | nm | | — |
| | 15,044 |
| | nm | | — |
| |
| Transaction related expenses | (5,970 | ) | | nm | | — |
| | (5,970 | ) | | nm | | — |
| |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | (482,300 | ) | | | | 198,399 |
| | (371,686 | ) | | | | 374,606 |
| |
| Income tax (expense) benefit | 25,877 |
| | | | (9,352 | ) | | 38,547 |
| | | | (7,712 | ) | |
| Interest in loss of equity method investments | (661 | ) | | nm | | (2,434 | ) | | (8,402 | ) | | nm | | (2,434 | ) | |
| Net income (loss) | $ | (457,084 | ) | | | | $ | 186,613 |
| | $ | (341,541 | ) | | | | $ | 364,460 |
| |
| Preferred share dividends | (10,656 | ) | | 7% | | (9,969 | ) | | (36,154 | ) | | 21% | | (29,906 | ) | |
| Net income (loss) available to common shareholders | $ | (467,740 | ) | | nm | | $ | 176,644 |
| | $ | (377,695 | ) | | nm | | $ | 334,554 |
| |
| | | | | | | | | | | | | |
| Net realized investment gains (losses), net of tax(2) | $ | (11,975 | ) | | | | $ | (2,726 | ) | | $ | 16,703 |
| | | | $ | 42,667 |
| |
| Foreign exchange gains (losses), net of tax(3) | 28,071 |
| | | | (13,229 | ) | | 85,851 |
| | | | (67,771 | ) | |
| Bargain purchase gain(4) | — |
| | | | — |
| | (15,044 | ) | | | | — |
| |
| Transaction related expenses, net of tax | 5,749 |
| | | | — |
| | 5,749 |
| | | | — |
| |
| Non-GAAP operating income (loss) | $ | (445,895 | ) | | nm | | $ | 160,689 |
| | $ | (284,436 | ) | | nm | | $ | 309,450 |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Change | | 2017 | |
| | | | | | | |
| Underwriting revenues: | | | | | | |
| Net premiums earned | $ | 1,167,402 |
| | 24% | | $ | 938,703 |
| |
| Other insurance related income (losses) | 6,606 |
| | nm | | (3,783 | ) | |
| Underwriting expenses: | | | | | | |
| Net losses and loss expenses | (661,345 | ) | | 9% | | (606,942 | ) | |
| Acquisition costs | (229,260 | ) | | 21% | | (189,792 | ) | |
| Underwriting general and administrative expenses(1) | (139,666 | ) | | 15% | | (121,801 | ) | |
| Underwriting Income | $ | 143,737 |
| | | | $ | 16,385 |
| |
| | | | | | | |
| Corporate expenses(1) | (30,171 | ) | | (24%) | | (39,459 | ) | |
| Net investment income | 100,999 |
| | 2% | | 98,664 |
| |
| Net investment losses | (14,830 | ) | | (41%) | | (25,050 | ) | |
| Other (expenses) revenues, net | (54,623 | ) | | 59% | | (34,256 | ) | |
| Reorganization expenses | (13,054 | ) | | nm | | — |
| |
| Amortization of value of business acquired | (57,110 | ) | | nm | | — |
| |
| Amortization of intangibles | (2,782 | ) | — |
| nm | | — |
| |
| Income before income taxes and interest in income (loss) of equity method investments | 72,166 |
| | | | 16,284 |
| |
| Income tax benefit | 1,036 |
| | (89%) | | 9,337 |
| |
| Interest in loss of equity method investments | — |
| | nm | | (5,766 | ) | |
| Net income | $ | 73,202 |
| | | | $ | 19,855 |
| |
| Preferred share dividends | (10,656 | ) | | (28%) | | (14,841 | ) | |
| Net income available to common shareholders | $ | 62,546 |
| | nm | | $ | 5,014 |
| |
| | | | | | | |
| Net investment losses, net of tax(2) | $ | 15,973 |
| | (34%) | | $ | 24,227 |
| |
| Foreign exchange losses, net of tax(3) | 33,535 |
| | 54% | | 21,723 |
| |
| Reorganization expenses, net of tax (4) | 10,583 |
| | nm | | — |
| |
| Operating income | $ | 122,637 |
| | nm | | $ | 50,964 |
| |
| | | | | | | |
nm – not meaningful
| |
(1) | Underwriting-related general and administrative expenses is a non-GAAP measure as defined in Item 10(e) of SEC Regulation G.S-K. The reconciliation to total general and administrative expenses, the most comparable GAAP measure, also included corporate expenses of ($27,933)$30,171 and ($28,683)$39,459 for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, and ($97,922) and ($86,922) for the nine months ended September 30, 2017 and 2016, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other (expenses) revenues, net'Expenses (Revenues), Net' for additional information related to the corporate expenses. Also, refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures' for additional information. |
| |
(2) | Tax cost (benefit) of $2,657$1,143 and $2,479($823) for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, and $1,892 and $2,372 for the nine months ended September 30, 2017 and 2016, 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. |
| |
(3) | Tax cost (benefit) of ($4,439)4,325) and $566$258 for the three months ended September 30, 2017March 31, 2018 and 20162017, respectively, and $(4,242) and $2,010 for the nine months ended September 30, 2017 and 2016, 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. |
| |
(4) | Tax cost (benefit) of ($2,471) and $nil for the three months ended March 31, 2018 and 2017, respectively. Tax impact is nil.estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions. |
Non-GAAP Financial Measures
We also present non-GAAP operating income per diluted common share and annualized non-GAAP operating return on average common equity (“("annualized non-GAAP operating ROACE”ROACE"), which are derived from the non-GAAP operating income measure and can be reconciled to the most comparable GAAP financial measures as follows:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Net income (loss) available to common shareholders | $ | (467,740 | ) | | $ | 176,644 |
| | $ | (377,695 | ) | | $ | 334,554 |
| |
| Non-GAAP operating income (loss) | (445,895 | ) | | 160,689 |
| | (284,436 | ) | | 309,450 |
| |
| Weighted average common shares and common share equivalents - diluted(1) | 83,305 |
| | 90,351 |
| | 84,479 |
| | 92,579 |
| |
| | | | | | | | | |
| Earnings (loss) per common share - diluted | $ | (5.61 | ) | | $ | 1.96 |
| | $ | (4.47 | ) | | $ | 3.61 |
| |
| Non-GAAP operating income (loss) per common share - diluted | $ | (5.35 | ) | | $ | 1.78 |
| | $ | (3.37 | ) | | $ | 3.34 |
| |
| | | | | | | | | |
| Average common shareholders’ equity | $ | 4,898,698 |
| | $ | 5,369,921 |
| | $ | 4,912,998 |
| | $ | 5,319,849 |
| |
| | | | | | | | | |
| Annualized return on average common equity(2) | nm |
| | 13.2 | % | | (10.3 | %) | | 8.4 | % | |
| Annualized Non-GAAP operating return on average common equity(3) | nm |
| | 12.0 | % | | (7.7 | %) | | 7.8 | % | |
| | | | | | | | | |
nm – not meaningful |
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Net income available to common shareholders | $ | 62,546 |
| | $ | 5,014 |
| |
| Operating income | 122,637 |
| | 50,964 |
| |
| Weighted average common shares and common share equivalents - diluted(1) | 83,721 |
| | 86,793 |
| |
| | | | | |
| Earnings per common share - diluted | $ | 0.75 |
| | $ | 0.06 |
| |
| Operating income per common share - diluted | $ | 1.46 |
| | $ | 0.59 |
| |
| | | | | |
| Average common shareholders’ equity | $ | 4,527,830 |
| | $ | 5,125,294 |
| |
| | | | | |
| Annualized return on average common equity(2) | 5.5 | % | | 0.4 | % | |
| Annualized operating return on average common equity(3) | 10.8 | % | | 4.0 | % | |
| | | | | |
| |
(1) | Refer to Item 1, Note 87 to our Consolidated Financial Statements 'Earnings per Common Share' for further detailsadditional information on the dilution calculation. |
| |
(2) | ReturnAnnualized return on average common equity ("ROACE") is calculated by dividing annualized net income (loss) 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. |
| |
(3) | Non-GAAPAnnualized operating ROACE, a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation G,S-K, is calculated by dividing annualized operating income for the period by the average common shareholders' equity. The reconciliation to ROACE, the most comparable GAAP measure, is presented above in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations –Results of Operations', Also, refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures' for additional information. |
Underwriting Results
Total underwriting lossincome for the three months ended September 30, 2017March 31, 2018 was $513$144 million, a decreasean increase of $617$127 million compared to the underwriting income of $104$16 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in underwriting income was primarily driven by an increase in net premiums earned, a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses, a decreasean increase in net favorable prior year reserve development, an increase in other insurance-related income, partially offset by an increase in general and administrative expenses.
The reinsurance segment underwriting income increased by $70 million for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The increase in underwriting income was primarily driven by an increase in net premiums earned, a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses, an increase in net favorable prior year reserve development, an increase in other insurance-related income and a decrease in catastrophe and weather-related losses.
The insurance segment underwriting income increased by $58 million for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. The increase in underwriting income was primarily driven by an increase in net premiums earned, an increase in net favorable prior year reserve development, a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses, partially offset by a decrease in general and administrative expenses.
The reinsurance segment underwriting loss increased by $310 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses and a decrease in net favorable prior year reserve development, partially offset by a decrease acquisition costs.
The insurance segment underwriting loss increased by $307 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, and a decrease in net favorable prior year reserve development.
Total underwriting loss in the nine months ended September 30, 2017 was $439 million, a decrease to underwriting income of $652 million compared to $213 million in the nine months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses, decrease in net favorable prior year reserve development, partially offset by a decrease in general and administrative expenses.
The reinsurance segment underwriting income decreased by $352 million in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, decrease in net favorable prior year reserve development, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses, partially offset by a decrease in general and administrative expenses.
The insurance segment underwriting loss increased by $300 million in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, and an increase in acquisition costs.
Net Investment Income
Net investment income for the three and nine months ended September 30, 2017March 31, 2018 was $95$101 million, and $300 million, respectively, a decrease of $22 million and an increase of $42$2 million, respectively, compared to the three and nine months ended September 30, 2016 primarily attributable to our alternative investments portfolio.March 31, 2017.
Net Realized Investment Gains (Losses)
Net realized investment gainslosses were $15 million for the three months ended September 30, 2017March 31, 2018 compared to net realized investment gains of $5 million for for the same period of 2016. The net realized investment gains for the three months ended September 30, 2017 were mainly attributable to gains on sales of ETFs, partially offset by an other than temporary impairment ("OTTI") charge of $5 million. The net realized investment gains for the three months ended September 30, 2016 were attributable to sales of fixed income and equities which benefited from improved pricing in 2016.
Net realized investment losses were $15 million in the nine months ended September 30, 2017, compared to net realized investment losses of $40$25 million for the same period of 2016. The2017. Net investment losses for the three months ended March 31, 2018 were mainly attributable to net unrealized investment losses on equity securities recognized in the income statement due to the adoption of Accounting Standards Update ("ASU") ASU 2016-01 "Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities,". Net realized investment losses for the ninethree months ended September 30,March 31, 2017 and 2016 were primarily attributable to foreign currencyexchange losses (net of forward contracts) on the sale of non-U.S. government and corporate debtdenominated securities as a result ofdue to the strengthening of the U.S. dollar, and OTTI.by other-than-temporary impairment ("OTTI") charges.
CorporateOther Expenses (Revenues), Net
Corporate expenses were $28$30 million for the three months ended September 30, 2017,March 31, 2018, compared to $29$39 million for the three months ended September 30, 2016.March 31, 2017. The decrease was primarily attributable to a decrease in performance related compensationpersonnel costs and executive transition costs, together with an
increase in the allocation of corporate costs to the insurance and reinsurance segments, largelypartially offset by an increase in personnel expenses.information technology costs.
Corporate expenses were $98 million for the nine months ended September 30, 2017 compared to $87 million in the same period in 2016. The increase was primarily attributable to an increase in personnel expenses.
Other Expenses (Revenues), Net
The foreignForeign exchange losses of $33 million and $90were $38 million for the three and nine months ended September 30, 2017, respectively,March 31, 2018, compared to $21 million for the three months ended March 31, 2017. Foreign exchange losses for the three months ended March 31, 2018 were primarily attributable to the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro. For the nine months ended September 30, 2017 compared to the same period in 2016, foreign exchange losses also included the reclass of the cumulative translation adjustment of $24 million related to the wind-down of AXIS Specialty Australia from accumulated other comprehensive income to foreign exchange losses.
The foreign exchange gains of $14 million and $70 million for the three and nine months ended September 30, 2016, respectively, were primarily driven by the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated against the pound sterling.
The financial results for the three and nine months ended September 30, 2017March 31, 2018 resulted in a tax benefit of $26$1 million and $39compared to $9 million respectively.for the three months ended March 31, 2017. The tax benefit of $26$1 million recognized in the three months ended September 30, 2017March 31, 2018 was primarily driven by an underwriting loss recognizedthe generation of pre-tax losses in our U.K. operations , largely offset by the generation of pre-tax income in our U.S. operations. The tax benefit of $39 million recognized in the nine months ended September 30, 2017 was primarily driven by an underwriting loss recognized in our U.S. operations,attributable to share based compensation excess tax benefits which were recognized in the income statement and a tax adjustment relateddue to the bargain purchase gain recognized in connection with the acquisitionadoption of Aviabel.
The financial results for the three and nine months ended and 2016 resulted in a tax expense of $9 million and $8 million, respectively, was primarily driven by the generation of consolidated pre-tax net income in our European operations.
Bargain Purchase Gain
On April 1, 2017, the Company acquired general aviation insurer and reinsurer, Aviabel. The purchase price was allocatedASU 2016-09, "Compensation-Stock Compensation (Topic 718) - Improvements to the acquired assets and liabilities of Aviabel based on estimated fair values on the closing date and a bargain purchase gain of $15 million was recognized in the nine months ended September 30, 2017.
Transaction Related Expenses
The Company incurred transaction related expenses including due diligence, legal, accounting, and investment banking fees and expenses,Employee Share-Based Payment Accounting", as well as integration expensesunderwriting losses recognized in our U.S. and European operations.
Interest expense and financing costs were $17 million infor the three months ended September 30,March 31, 2018, compared to $13 million for the three months ended March 31, 2017. The increase was primarily attributable to interest due on the 4.0% Senior Notes issued by the Company in the fourth quarter of 2017, as well as interest due on the Dekania Notes issued by Novae in 2004.
Reorganization Expenses
Reorganization related expenses were $13 million for the three months ended March 31, 2018, compared to $nil for the three months ended March 31, 2017, related to the acquisition of Novae. In addition, the Company was contractually obligated to pay investment banking fees on the closing date of the transaction. The Company expects substantially all ofa new transformation program launched earlier this year. This program encompasses the integration costs relatedof Novae which commenced in the fourth quarter of 2017, the realignment of our accident and health business together with other initiatives designed to increase our efficiency and enhance our profitability while delivering a customer-centric operating model.
We expect to achieve annual run-rate cost savings of approximately $100 million with effect from 2020. These expense savings will be achieved through the acquisitionelimination of redundant roles, efficiencies introduced through organizational redesign, operating efficiency improvements, integration of systems, and the rationalization of third party contracts and professional fees.
In order to beachieve annual run-rate cost savings across the transformation program with effect from 2020, we expect to incur cumulative pre-tax reorganization charges of approximately $100 million by 2020. Pre-tax reorganization charges of $28 million were incurred in 2018. In addition, the Company expects to begin realizing cost savingstwo most recent quarters. These expenses are not included in 2018.operating income.
Interest in Loss of Equity Method Investments
Interest in loss of equity method investments was $1 millionrepresents our aggregate share of losses related to investments in which we have significant influence over the operating and $8 million forfinancial policies of the investee.
The three and nine months ended September 30, 2017, respectively. The nine months ended September 30,March 31, 2017 included impairment losses of $9$6 million related to an investment in a U.S. based insurance company, partially offset by income of $1 million related to the Company’sour aggregate share of profits in a company in which it haswe had significant influence over the operating and financial policies.
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, | | Nine months ended and at September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| ROACE (annualized)(1) | nm |
| | 13.2 | % | | (10.3 | %) | | 8.4 | % | |
| Non-GAAP operating ROACE (annualized)(2) | nm |
| | 12.0 | % | | (7.7 | %) | | 7.8 | % | |
| Diluted book value per common share(3) | $ | 55.33 |
| | $ | 59.77 |
| | $ | 55.33 |
| | $ | 59.77 |
| |
| Cash dividends declared per common share | 0.38 |
| | 0.35 |
| | 1.14 |
| | 1.05 |
| |
| Increase (decrease) in diluted book value per common share adjusted for dividends | $ | (4.74 | ) | | $ | 2.50 |
| | $ | (1.80 | ) | | $ | 6.74 |
| |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended and at March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Annualized ROACE | 5.5 | % | | 0.4 | % | |
| Annualized operating ROACE | 10.8 | % | | 4.0 | % | |
| Diluted book value per common share(1) | $ | 52.57 |
| | $ | 58.89 |
| |
| Cash dividends declared per common share | 0.39 |
| | 0.38 |
| |
| Increase (decrease) in diluted book value per common share adjusted for dividends | $ | (0.92 | ) | | $ | 1.00 |
| |
| | | | | |
nm – not meaningful
| |
(1) | Diluted book value 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. |
(1) Return on average common equity (“ROACE”)Equity
Our objective is calculated by dividing annualized net income available to generate superior returns on capital that appropriately reward our common shareholders for the risks we assume and to grow revenue only when we expect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any one year may challenge the ability to achieve a profitability target in any specific period, by the average shareholders’ equity determined by using the common shareholders’ equity balances at the beginning and end of the period.
(2) Non-GAAPtherefore our goal is to achieve top-quintile industry 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 non-GAAP operating ROACE is a non-GAAP financial measure as definedgrowth in SEC Regulation G. The reconciliation to ROACE, the most comparable GAAP measure, is presented in the 'Results of Operations'.
(3) Diluted book value per common share represents total common shareholders’ equity divided byadjusted for dividends, with volatility consistent with 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 Equityindustry average.
ROACE reflects the impact of net income attributable to common shareholders including net realized investment gains (losses), foreign exchange losses (gains), a bargain purchase gain related to the acquisition of Aviabel, and transaction related expenses associated with the acquisition of Novae.reorganization expenses.
The decreaseincrease in ROACE for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016,March 31, 2017, was primarily driven by an increase in underwriting income, together with a decrease in underwriting income and net investment income together with foreign exchange losses and corporate expenses, partially offset by a tax benefit compared to a tax expense in 2016amortization of value of business acquired and intangible assets associated with the acquisition of Novae, reorganization expenses, and an increase in net realized investment gains .
The decrease in ROACE in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was primarily driven by a decrease in underwriting income and foreign exchange losses, partially offset by a tax benefit compared to a tax expense in 2016, an increase in net investment income, a decrease in net realized investment losses, and the bargain purchase gain.losses.
Non-GAAP operatingOperating ROACE excludes the impact of net realized investment gains (losses), foreign exchange losses (gains), the bargain purchase gain and transaction relatedreorganization expenses.
The decreaseincrease in non-GAAP operating ROACE for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016,March 31, 2017, was primarily driven by a decreasean increase in underwriting income and net investment incomea decrease in corporate expense, partially offset by a tax benefit compared to a tax expense in 2016.
The decrease in non-GAAP operating ROACE inamortization of value of business acquired and intangible assets associated with the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was primarily driven by a decrease in underwriting income, partially offset by a tax benefit compared to a tax expense in 2016 and an increase in net investment income.
acquisition of Novae.
Diluted Book Value per Common Share
We consider diluted book value per common share to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis will ultimately translate into appreciation of our stock price.
Diluted book value per common share decreased by 7%11% to $55.33$52.57 at September 30,March 31, 2018, from $58.89 at March 31, 2017, from $59.77 at September 30, 2016, which primarily reflected net losses attributable to common shareholders generated over the past twelve months of $247$358 million, and common share dividends declared.declared and unrealized investment losses reported in other comprehensive income.
Cash Dividends Declared per Common Share
We believe in returning excess capital to our shareholders by way of dividends (as well as share repurchases) accordingly, our dividend policy is an integral part of the value we create for our shareholders. Our cumulatively strong earnings have permitted our Board of Directors to approve thirteen successive increases in quarterly common share dividends.
Diluted Book Value per Common Share Adjusted for Dividends
Diluted book value per common share adjusted for dividends decreased by $4.74$0.92 or 8%2% per common share for the three months ended September 30, 2017, by $1.80March 31, 2018 and $4.78, or 3% per common share for the nine months ended September 30, 2017, and $2.92, or 5%8%, per common share over the past twelve months.
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 investors use the diluted book value per common share adjusted for dividends metric to measure comparable performance across the industry.
During the three and nine months ended September 30, 2017, respectively,March 31, 2018, the decrease in diluted book value per common share adjusted for dividends was primarily attributable to net loss generateddriven by the unrealized investment losses reported in both periods and common share dividends declared,accumulated other comprehensive income, partially offset by anthe net income generated in the quarter.
During the three months ended March 31, 2017, total value created consisted primarily of the increase in unrealized gains on investments reported in accumulated other comprehensive income.
During the three and nine months ended September 30, 2016, respectively, total value created consisted primarily of net income and an increase in unrealized gains on investments reported in accumulated other comprehensive income, partially offset by common share dividends declared.
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 (loss) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Change | | 2016 | | 2017 | | % Change | | 2016 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 1,185,574 |
| | 24% | | $ | 959,962 |
| | $ | 4,459,772 |
| | 5% | | $ | 4,239,558 |
| |
| Net premiums written | 832,743 |
| | 40% | | 595,431 |
| | 3,297,718 |
| | —% | | 3,288,587 |
| |
| Net premiums earned | 1,017,131 |
| | 9% | | 934,415 |
| | 2,937,265 |
| | 6% | | 2,783,746 |
| |
| Other insurance related income (losses) | (3,197 | ) | | nm | | 5,944 |
| | (4,420 | ) | | nm | | 4,850 |
| |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current year net losses and loss expenses | (1,283,135 | ) | |
| | (608,347 | ) | | (2,591,135 | ) | |
| | (1,887,715 | ) | |
| Prior year reserve development | 47,768 |
| |
| | 76,019 |
| | 143,495 |
| |
| | 224,131 |
| |
| Acquisition costs | (194,724 | ) | |
| | (189,810 | ) | | (588,879 | ) | |
| | (559,570 | ) | |
| Underwriting-related general and administrative | | | | | | | | | | | | |
| expenses(1) | (96,696 | ) | |
| | (114,223 | ) | | (335,782 | ) | |
| | (352,632 | ) | |
| | | | | | | | | | | | | |
| Underwriting income (loss)(2) | $ | (512,853 | ) | | nm | | $ | 103,998 |
| | $ | (439,456 | ) | | nm | | $ | 212,810 |
| |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| General and administrative expenses(1) | $ | 124,629 |
| |
| | $ | 142,906 |
| | $ | 433,704 |
| |
| | $ | 439,554 |
| |
| Income (loss) before income taxes and interest in income (loss) of equity method investments(2) | $ | (482,300 | ) | |
| | $ | 198,399 |
| | $ | (371,686 | ) | |
| | $ | 374,606 |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Change | | 2017 | |
| | | | | | | |
| Revenues: | | | | | | |
| Gross premiums written | $ | 2,662,795 |
| | 39% | | $ | 1,911,871 |
| |
| Net premiums written | 1,985,871 |
| | 32% | | 1,508,959 |
| |
| Net premiums earned | 1,167,402 |
| | 24% | | 938,703 |
| |
| Other insurance related income (losses) | 6,606 |
| | nm | | (3,783 | ) | |
| | | | | | | |
| Expenses: | | | | | | |
| Current year net losses and loss expenses | (715,652 | ) | |
| | (631,735 | ) | |
| Prior year reserve development | 54,307 |
| |
| | 24,793 |
| |
| Acquisition costs | (229,260 | ) | |
| | (189,792 | ) | |
| Underwriting-related general and administrative expenses(1) | (139,666 | ) | |
| | (121,801 | ) | |
| Underwriting income(2) | $ | 143,737 |
| | nm | | $ | 16,385 |
| |
| | | | | | | |
| | | | | | | |
| General and administrative expenses(1) | $ | 169,837 |
| |
| | $ | 161,260 |
| |
| Income before income taxes and interest in income (loss) of equity method investments(2) | $ | 72,166 |
| |
| | $ | 16,284 |
| |
| | | | | | | |
nm – not meaningful
| |
(1) | Underwriting-related general and administrative expenses is a non-GAAP measure as defined in Item 10(e) of SEC Regulation G.S-K. The reconciliation to general and administrative expenses, the most comparable GAAP measure, is presented in the 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations', which is included in the 'Executive Summary' section of this MD&A.. |
| |
(2) | Group (or consolidated) underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation G.S-K. The reconciliation to net income (loss(loss) before tax and interest in income (loss) of equity investments),investments, the most comparable GAAP measure, is presented in the "'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations', which is included in the 'Executive Summary' section of this MD&A.. |
UNDERWRITING REVENUESUnderwriting Revenues
Gross and net premiums written by segment were as follows: |
| | | | | | | | | | | | | | | | | | | | | |
| | Gross Premiums Written | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Change | | 2016 | | 2017 | | % Change | | 2016 | |
| | | | | | | | | | | | | |
| Insurance | $ | 744,366 |
| | 10% | | $ | 675,430 |
| | $ | 2,234,395 |
| | 6% | | $ | 2,112,796 |
| |
| Reinsurance | 441,208 |
| | 55% | | 284,532 |
| | 2,225,377 |
| | 5% | | 2,126,762 |
| |
| Total | $ | 1,185,574 |
| | 24% | | $ | 959,962 |
| | $ | 4,459,772 |
| | 5% | | $ | 4,239,558 |
| |
| | | | | | | | | | | | | |
| Constant currency(3) | $ | 1,188,100 |
| | 24% | | $ | 959,962 |
| | $ | 4,522,500 |
| | 7% | | $ | 4,239,558 |
| |
| | | | | | | | | | | | | |
| % ceded | | | | | | | | | | | | |
| Insurance | 33% | | (3) pts | | 36% | | 31% | | (1) pts | | 32% | |
| Reinsurance | 25% | | (18) pts | | 43% | | 21% | | 8 pts | | 13% | |
| Total | 30% | | (8) pts | | 38% | | 26% | | 4 pts | | 22% | |
| | | | | | | | | | | | | |
| | Net Premiums Written | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Change | | 2016 | | 2017 | | % Change | | 2016 | |
| | | | | | | | | | | | | |
| Insurance | $ | 500,022 |
| | 15% | | $ | 433,131 |
| | $ | 1,533,029 |
| | 7% | | $ | 1,433,058 |
| |
| Reinsurance | 332,721 |
| | 105% | | 162,300 |
| | 1,764,689 |
| | (5%) | | 1,855,529 |
| |
| Total | $ | 832,743 |
| | 40% | | $ | 595,431 |
| | $ | 3,297,718 |
| | —% | | $ | 3,288,587 |
| |
| | | | | | | | | | | | | |
| Constant currency(3) | $ | 835,600 |
| | 40% | | $ | 595,431 |
| | $ | 3,360,300 |
| | 2% | | $ | 3,288,587 |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Gross Premiums Written | |
| | Three months ended March 31, | |
| | 2018 | | % Change | | 2017 | |
| | | | | | | |
| Insurance | $ | 880,848 |
| | 62% | | $ | 545,261 |
| |
| Reinsurance | 1,781,947 |
| | 30% | | 1,366,610 |
| |
| Total | $ | 2,662,795 |
| | 39% | | $ | 1,911,871 |
| |
| | | | | | | |
| % ceded | | | | | | |
| Insurance | 38% | | 3 pts | | 35% | |
| Reinsurance | 19% | | 3 pts | | 16% | |
| Total | 25% | | 4 pts | | 21% | |
| | | | | | | |
| | Net Premiums Written | |
| | Three months ended March 31, | |
| | 2018 | | % Change | | 2017 | |
| | | | | | | |
| Insurance | $ | 547,893 |
| | 54% | | $ | 356,836 |
| |
| Reinsurance | 1,437,978 |
| | 25% | | 1,152,122 |
| |
| Total | $ | 1,985,871 |
| | 32% | | $ | 1,508,959 |
| |
| | | | | | | |
| |
(3) | Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance. |
Gross Premiums Written:Written:
Gross premiums written for the three and nine months ended September 30, 2017March 31, 2018 increased by $226$751 million or 24% ($228 million or 24% on a constant currency basis) and $220 million or 5% ($283 million or 7% on a constant currency basis), respectively,39% compared to the three and nine months ended September 30, 2016, respectively.March 31, 2017. The increase for the three and nine months ended September 30, 2017March 31, 2018, compared to the same periods in 2016,2017, was due to an increase in both the insurancereinsurance and reinsuranceinsurance segments.
The reinsurance segment's gross premiums written increased by $157$415 million or 55% ($160 million or 56% on a constant currency basis) and $99 million or 5% ($150 million or 7% on a constant currency basis)30% for the three and nine months ended September 30, 2017, respectively,March 31, 2018, compared to the same periodsperiod in 2016.
2017. The increase in the reinsurance segment gross premiums written included $50 million attributable to catastrophe, marine and aviation lines associated with our acquisition of Novae. In addition, gross premiums written increased by $365 million, or 27% ($286 million or 21% on a constant currency basis1) for the three months ended September 30, 2017March 31, 2018 compared to the same period of 2016, was primarily2017, driven by our motor, accident and health, credit and surety, catastrophe, liability, catastrophe, property and motorprofessional lines, partially offset by decrease in marine and other lines. The increase in our motor, credit and surety, liability lines was due to timing differences. The increase in our catastropheand professional lines was largely due to reinstatement premiums associated withtiming. In addition, the third quarter catastrophe losses. The increase in our property and motor lines was primarily driven by new business. Timing differences also contributed to the increase in premiums written in our motor lines.
The increase for the nine months ended September 30, 2017 compared to the same period in 2016, was primarily driven by our catastrophe, agriculture, property and motor lines, partially offset by a decrease in our credit and surety lines. The increase in our catastrophe and property lines was driven by new business. Favorable premium adjustments and reinstatement premiums contributed to the increase in premiums written in our catastrophe and agriculture lines. The increase in our motor lines was driven by rate increases and new businessbusiness. The increase in our accident and favorable premium adjustments,health, and catastrophe lines was due to new business. Increased line sizes on a number of treaties also contributed to the increase in catastrophe lines. These increases were partially offset by a lower level of premiums written on a multi-year basis during 2017
compared to 2016, together with the impact of foreign exchange movements. The decrease in our creditmarine and suretyother lines was primarily due to the non-renewal of a lower level of premiums written on a multi-year basis.large treaty.
The insurance segment's gross premiums written increased by $69$336 million or 10% and $122 million or 6% ($133 million on a constant currency basis)62% for the three and nine months ended September 30, 2017, respectively,March 31, 2018, compared to the same periodsperiod in 2016.
2017. The increase in the insurance segment gross premiums written included $302 million attributable to property, marine, professional lines, and credit and political risk lines associated with our acquisition of Novae. In addition, gross premiums written increased by $34 million, or 6% ($28 million or 5% on a constant currency basis) for the three months ended September 30,March 31, 2018 comparable to the same period of 2017, was attributable to our professional lines, liability, lines, and our creditaccident and political riskhealth lines driven by new business opportunities, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a reduction in premiums written in our property lines following our exit from some U.S. retail insurance operationsAviabel which was completed last year.
(1) Amounts presented on a constant currency basis are non-GAAP financial measures as defined in Item10 (e) of SEC Regulation S-K. The increase inconstant currency basis is calculated by applying the nine months ended September 30, 2017 was attributableaverage foreign exchange rate from the current year to our liability, accident and health lines and our professional lines, primarily driven by new business opportunities, together with an increase in our aviation lines associated with our recent acquisitionthe prior year balance.
Ceded Premiums Written:Written:
Ceded premiums written for the three and nine months ended September 30, 2017March 31, 2018 were $353$677 million or 30% and $1.2 billion or 26%25% of gross premiums written respectively, compared to $365$403 million or 38% and $951 million or 22% of gross premiums written for the three and nine months ended September 30, 2016, respectively. The decrease in the ratio of ceded premiums written to gross premiums written21% for the three months ended September 30, 2017 andMarch 31, 2017. The increase for the nine months ended September 30, 2017, compared to the same period in 2016, was primarily attributable to the reinsurance segment.
The decrease in the reinsurance segment ratio of ceded premiums written to gross premiums written for the three months ended September 30, 2017 compared to the same period in 2016, was primarily due to an increase in gross premiums written in the quarter together with a decrease in premiums ceded to our strategic capital partners. The decrease in premiums ceded was attributable to our professional and liability lines, partially offset by an increase in premiums ceded in our catastrophe lines.both segments.
The increase in the reinsurance segment ratio of ceded premiums written to gross premiums written for the ninethree months ended September 30, 2017March 31, 2018 compared to the same period in 2016, primarily due2017, included $31 million attributable to an increasecatastrophe and marine lines associated with the acquisition of Novae. In addition, ceded premiums written increased by $98 million, or 46% for the three months ended March 31, 2018 compared to the same period in premiums ceded in2017, attributable to our catastrophe, agriculture, credit and surety, lines as well as ouraccident and health, liability lines, partially offset by anand professional lines.
The increase in grossthe insurance segment ceded premiums written.written for the three months ended March 31, 2018 compared to the same period in 2017, included $117 million primarily attributable to property, professional lines and marine lines associated with our acquisition of Novae. In addition, ceded premiums increased by $27 million or 14% for the three months ended March 31, 2018, compared to the same period in 2017 primarily driven by our professional lines and liability lines.
In June 2017, the Company obtained catastrophe protection for its insurance and reinsurance segments through a reinsurance agreement with Northshore Re II Limited ("Northshore"). In connection with the reinsurance agreement, Northshore issued notes to unrelated investors in an amount equal to the full $350 million of coverage provided under the reinsurance agreement covering a three year period. At the time of the agreement, the Company performed an evaluation of Northshore to determine if it meets the definition of a variable interest entity ("VIE"). The Company concluded that Northshore is a VIE but that the Company does not have a variable interest in the entity, as the variability in results is expected to be absorbed entirely by the investors in Northshore. Accordingly, Northshore is not consolidated in the Company's consolidated financial statements. The premium ceded toCeded premiums earned associated with the reinsurance agreement with Northshore during the ninethree months ended September 30, 2017March 31, 2018 was $27$6.7 million.
Net Premiums Earned:Earned:
Net premiums earned by segment were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2017 | | | | 2016 | | | | % Change | | 2017 | | | | 2016 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Insurance | $ | 496,004 |
| | 49 | % | | $ | 444,691 |
| | 48 | % | | 12% | | $ | 1,448,270 |
| | 49 | % | | $ | 1,322,649 |
| | 48 | % | | 9% | |
| Reinsurance | 521,127 |
| | 51 | % | | 489,724 |
| | 52 | % | | 6% | | 1,488,995 |
| | 51 | % | | 1,461,097 |
| | 52 | % | | 2% | |
| Total | $ | 1,017,131 |
| | 100 | % | | $ | 934,415 |
| | 100 | % | | 9% | | $ | 2,937,265 |
| | 100 | % | | $ | 2,783,746 |
| | 100 | % | | 6% | |
| | | | | | | | | | | | | | | | | | | | | |
| Constant currency(3) | $ | 1,027,050 |
| | | | $ | 934,415 |
| |
|
| | 10% | | $ | 2,999,050 |
| | | | $ | 2,783,746 |
| | | | 8% | |
| | | | | | | | | | | | | | | | | | | | | |
| |
(3) | Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance. |
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. |
| | | | | | | | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | | | 2017 | | | |
| | | | | | | | | |
| Insurance | $ | 580,059 |
| | 50 | % | | $ | 391,964 |
| | 42 | % | |
| Reinsurance | 587,343 |
| | 50 | % | | 546,739 |
| | 58 | % | |
| Total | $ | 1,167,402 |
| | 100 | % | | $ | 938,703 |
| | 100 | % | |
| | | | | | | | | |
Net premiums earned for the three and nine months ended September 30, 2017March 31, 2018 increased by $83$229 million or 9% ($93 million or 10% on a constant currency basis) and $154 million or 6% ($215 million or 8% on a constant currency basis), respectively,24% compared to the three and nine months ended September 30, 2016, respectively.March 31, 2017. The increasesincrease for both periodsthe three months ended March 31, 2018 compared to the same periodsperiod in 2016, were2017, was driven by increases in both the insurance and reinsurance segments.
Net premiums earned increased by 48% in our insurance segment for the three months ended March 31, 2018 compared to the same period in 2017. The increase in net premiums earned in the insurance segment for the threeincluded $178 million primarily attributable to property, marine, and nine months ended September 30, 2017 compared to the same periods in 2016, wereaccident and health lines associated with our acquisition of Novae. In addition, net premiums earned increased by $10 million, or 3% (2% on a constant currency basis) driven by strong premium growth in our accident and health lines as well as our aviation lines in recent periods, together with a decrease in ceded premiums earned in our property lines. Net premiums earned for the nine months ended September 30, 2017 was also impacted by strong premium growth in our propertyaviation lines in recent periods.associated with the acquisition of Aviabel completed last year.
The increase in netNet premiums earned increased by 7% in theour reinsurance segment for the three months ended September 30, 2017March 31, 2018 compared to the same periodsperiod in 2016, was2017. The increase in net premiums earned included $13 million primarily attributable to marine and catastrophe lines associated with our acquisition of Novae. In addition, net premiums earned increased by $27 million, or 5% (4% on a constant currency basis) for the three months ended March 31, 2018 compared to the same period in 2017, driven by strong premium growth in our catastrophe, motor, lines, as well as favorable reinstatement premiums impacting our catastrophe lines, and favorable premium estimate adjustments impacting our agricultureaccident and health lines, partially offset by an increase in ceded premiums earned in our catastrophe agriculture and professional lines, as well as a decrease in gross premium earned in our professional lines.
The increase in net premiums earned in the reinsurance segment for the nine months ended September 30, 2017, compared to the same periods in 2016, driven by an increase in gross premium earned in our motor and agriculture lines, partially offset by an increase in ceded premiums earned in our agriculture and professional lines, together with a decrease in gross premiums earned in our professional lines.
Other Insurance Related Income (Losses):
Other insurance related losses was $3 million for the three months ended September 30, 2017, compared to other insurance related income of $6 million for the same period in 2016. The decrease in other insurance related income of $9 million was driven by the reinsurance segment and reflected a decrease in profit commissions associated withretrocessional agreements with strategic capital partner related to the third quarter catastrophe losses.
Other insurance related losses for the nine months ended September 30, 2017 was $4 million, compared to other insurance related income of $5 million for the same period in 2016. The decrease in other insurance related income of $9 million was driven by the reinsurance segment and reflected net realized losses on our weather and commodities derivative portfolio partially offset by fees from our strategic capital partners.
UNDERWRITING EXPENSESOther Insurance Related Income (Losses):
Other insurance related income was $7 million for the three months ended March 31, 2018, compared to other insurance related loss of $4 million for the same period in 2017. The increase in other insurance related income of $10 million for the three months ended March 31, 2018 compared to the same period in 2017, was driven by a decrease in realized losses and unfavorable mark-to-market adjustments on our weather and commodities derivative portfolio which we no longer write, partially offset by favorable mark-to-market adjustments on other insurance and reinsurance contracts accounted for as derivatives and an increase in fees from strategic capital partners.
Underwriting Expenses
The following table provides a breakdown of our combined ratio:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Point Change | | 2016 | | 2017 | | % Point Change | | 2016 | |
| | | | | | | | | | | | | |
| Current accident year loss ratio | 126.2 | % | | 61.1 | | 65.1 | % | | 88.2 | % | | 20.4 | | 67.8 | % | |
| Prior year reserve development | (4.7 | %) | | 3.4 | | (8.1 | %) | | (4.9 | %) | | 3.1 | | (8.0 | %) | |
| Acquisition cost ratio | 19.1 | % | | (1.2) | | 20.3 | % | | 20.0 | % | | (0.1) | | 20.1 | % | |
| General and administrative expense ratio(1) | 12.3 | % | | (3.0) | | 15.3 | % | | 14.8 | % | | (1.0) | | 15.8 | % | |
| Combined ratio | 152.9 | % | | 60.3 | | 92.6 | % | | 118.1 | % | | 22.4 | | 95.7 | % | |
| | | | | | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Point Change | | 2017 | |
| | | | | | | |
| Current accident year loss ratio | 61.3 | % | | (6.0) | | 67.3 | % | |
| Prior year reserve development | (4.6 | %) | | (2.0) | | (2.6 | %) | |
| Acquisition cost ratio | 19.6 | % | | (0.6) | | 20.2 | % | |
| General and administrative expense ratio(1) | 14.5 | % | | (2.7) | | 17.2 | % | |
| Combined ratio | 90.8 | % | | (11.3) | | 102.1 | % | |
| | | | | | | |
| |
(1) | The general and administrative expense ratio includes corporate expenses not allocated to reportable segments of 2.7%2.6% and 3.1%4.2% for the three months ended September 30, 2017March 31, 2018 and 2016, respectively, and 3.3% and 3.1% for the six months ended September 30, 2017 and 2016, respectively. These costs are further discussed in the ‘'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net’ section.Net' |
Current Accident Year Loss Ratio:Ratio:
The current accident year loss ratio increaseddecreased to 126.2% and 88.2%61.3% for the three and nine months ended September 30, 2017, respectively,March 31, 2018, from 65.1% and 67.8%67.3% for the three and nine months ended September 30, 2016, respectively.same period in 2017.
The increasedecrease in the current accident year loss ratio for the three and nine months ended September 30, 2017March 31, 2018 compared to the same period in 2016,2017, was impacted by a higher level ofattributable to both segments. During the three months ended March 31, 2018 we incurred pre-tax catastrophe and weather-related losses. Duringlosses, of $35 million or 3.0 points primarily attributable to the Papua New Guinea earthquake, Windstorm Friederike and U.S. and European weather-related events. Comparatively, during the three and nine months ended September 30,March 31, 2017 we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $617$35 million, or 61.4 points and $702 million or 24.1 points, respectively, primarily attributable to Hurricanes Harvey, Irma and Maria, the two earthquakes in Mexico and U.S. weather-related events. Comparatively, during the three and nine months ended September 30, 2016 we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums of $22 million, or 2.3 points, and $145 million, or 5.3 points, respectively.3.7 points.
After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio for the three and nine months ended September 30, 2017March 31, 2018 was 64.8% and 64.1%, respectively,58.3% compared to 62.8% and 62.5%63.6% for the same period in the three and nine months ended September 30, 2016, respectively.2017.
The increasedecrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the three months ended September 30, 2017March 31, 2018 compared to the same period in 2016,2017, was mainly due to higher attritional lossesdriven by changes in our insurance property lines, higherbusiness mix, together with favorable impact of rate and trend in both segments, a decrease in mid-size loss experience, in our reinsurance creditpartially offset by mid-size and surety lines, the ongoing impact of the Ogden rate change on our reinsurance motor lines together with the adverse impact on rate and trend.
The increase in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the nine months ended September 30, 2017 compared to the same period in 2016, was mainly due to higherattritional loss experience in our insurance and reinsurance property lines, the adverse impact on rate and trend and the ongoing impact of the Ogden rate change on our reinsurance motoraviation lines.
For further discussion on current accident year loss ratios, refer to the insurance and reinsurance segment discussions below.
Estimates of Significant Catastrophe Events
Our September 30, 2017March 31, 2018 net reserves for losses and loss expenses includes estimated amounts for numerous catastrophe events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular Hurricanes Harvey, Irma and Maria, and the two earthquakes in Mexico as well as Hurricane Matthew, the Fort McMurray wildfires, Storm Sandy, the 2011 Japanese earthquake and tsunami, the 2010-11 New Zealand earthquakes and the Tianjin port explosion,wildfires in Northern and Southern California which occurred in 2017 inherently increasesincrease 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 in relation to the catastrophe events described above were 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.
We continue to monitor paid and incurred loss development for catastrophe events of prior years and update our estimates of ultimate losses accordingly.
Prior Year Reserve Development: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, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Insurance | $ | 2,603 |
| | $ | 20,688 |
| | $ | 30,740 |
| | $ | 43,181 |
| |
| Reinsurance | 45,165 |
| | 55,331 |
| | 112,755 |
| | 180,950 |
| |
| Total | $ | 47,768 |
| | $ | 76,019 |
| | $ | 143,495 |
| | $ | 224,131 |
| |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Insurance | $ | 22,775 |
| | $ | 7,865 |
| |
| Reinsurance | 31,532 |
| | 16,928 |
| |
| Total | $ | 54,307 |
| | $ | 24,793 |
| |
| | | | | |
Overview
Short-tail business
Our short tail business includes the underlying exposures in our property and other, marine and aviation reserve classes within our insurance segment, and theour property and other reserve class within our reinsurance segment. Development from these
These reserve classes contributed $5$38 million and $41$4 million of net favorable prior year reserve development for the three and nine months ended September 30,March 31, 2018 and March 31, 2017, respectively. These short-tail lines contributed $41 millionrespectively, and $116 million of net favorable prior year reserve development for the three and nine months ended September 30, 2016, respectively. The net favorable development for these classes primarily reflected the recognition of better than expected loss emergence.
Medium-tail business
Our medium-tail business consists primarily of professional insurance and reinsurance professional reserve classes, credit and political risk insurance reserve class and credit and surety reinsurance reserve class. For
Our reinsurance professional reserve class recognized $9 million and $16 million of net favorable prior year development for the three months ended September 30,March 31, 2018 and March 31, 2017, the professional reinsurance reserve class contributedrespectively. The net favorable prior year loss development on this reserve development of $9 million. Forclass continued to reflect the nine months ended September 30, 2017, thegenerally favorable experience on earlier accident years as we continued to transition to more experienced based methods.
Our insurance professional insurance and reinsurance reserve classes contributedclass recognized net favorable prior year reserve development of $54 million. For$4 million and $7 million for the three and nine months ended September 30,March 31, 2018 and March 31, 2017, respectively. The net favorable prior year loss development on this reserve class reflected the generally favorable experience on earlier accident years as we transition to more experienced based methods.
Our credit and surety reinsurance reserve class recorded net favorable prior year reserve development of $17$5 million and $18 million, respectively. This net favorable prior year reserve development reflected$nil for the three months ended March 31, 2018 and March 31, 2017, respectively due to the recognition of generally better than expected loss emergence.
For the three and nine months ended September 30, 2016, the professional reserve classes contributed net favorable prior year reserve development of $12 million and $28 million, respectively. The net favorable prior year reserve development on these reserve classes reflected the generally favorable experience as we continued to transition to more experience based methods.Long-tail business
Our long-tail business consists primarily of liability and motor reserve classes. For the nine months ended September 30, 2017, the
Our reinsurance liability reinsurance reserve class contributed net favorable prior year reserve development of $40 million. For$2 million and $24 million for the three and nine months ended March 31, 2018 and September 30, 2016, the liability reinsurance reserve class contributed net favorable prior year development of $10 million and $32 million,March 31, 2017, respectively. The net favorable prior year reserve development for our liability reinsurance reserve class in both yearsthe three months ended March 31, 2017 primarily reflected the progressively increased weight given by management to experience based indications on older accident years, which has generally been favorable. For the nine months ended September 30, 2017, the liability insurance reserve class recorded net adverse prior year reserve development of $6 million, primarily attributable to reserve strengthening within our run-off Bermuda excess casualty book of business.
For the three and nine months ended September 30, 2017, theOur motor reinsurance reserve class recordedclasses contributed net favorable prior year reserve development of $16$3 million and net adverse prior year reserve development of $4$22 million respectively. Forfor the three months ended September 30,March 31, 2018 and March 31, 2017, therespectively. The net favorableadverse prior year reserve development related to favorable loss emergence trends on several classes of
business spanning multiple accident years. Forfor the ninethree months ended the net adverse prior year developmentMarch 31, 2017 was driven byprimarily due to the U.K. Ministry of Justice’s recent announcement of a decrease in the discount rate used to calculate lump sum awards in U.K. bodily injury cases, known as the Ogden rate. Effective March 20, 2017, the Ogden rateRate which changed from plus 2.5% to minus 0.75%. For the three and nine months ended September 30, 2016, the motor reinsurance effective March 20, 2017.
Our insurance liability reserve class contributedrecorded net adverse prior year development of $7 million and $40$4 million for the three months ended March 31, 2018 and March 31, 2017, respectively, of net favorableprimarily related to reserve strengthening within our U.S. excess casualty business reflecting slightly higher than expected prior year reserve development related to favorableemerging loss emergence trends on several classes of business spanning multiple accident years.experience.
We caution that conditions and trends that impacted the development of our liabilities in the past may not necessarily occur in the future.
The following tables reconcile reserve classes to the lines of business categories and the expected claim tails:
|
| | | | | | | | | | |
Insurance Segment | | | | | | | | |
| | Reported Lines of Business |
| | | | | | | | | | |
Reserve Classes | Tail | Property | Marine | Terrorism | Aviation | Credit and Political Risk | Professional Lines | Liability | Accident and Health | Discontinued lines - Novae |
| | | | | | | | | | |
Property and Other | Short | X | | X | | | | | X | X |
Marine | Short | | X | | | | | | | |
Aviation | Short | | | | X | | | | | |
Credit and Political Risk | Medium | | | | | X | | | | |
Professional Lines | Medium | | | | | | X | | | X |
Liability | Long | | | | | | | X | | X |
|
| | | | | | | | | | | | |
Reinsurance Segment | | | | | | | | | | |
| | Reported Lines of Business |
| | | | | | | | | | | | |
Reserve Classes | Tail | Catastrophe | Property | Credit and Surety | Professional Lines | Motor | Liability | Engineering | Agriculture | Marine and Other | Accident and Health | Discontinued lines - Novae |
| | | | | | | | | | | | |
Property and Other | Short | X | X | | | | | X | X | X | X | X |
Credit and Surety | Medium | | | X | | | | | | | | |
Professional Lines | Medium | | | | X | | | | | | | |
Motor | Long | | | | | X | | | | | | X |
Liability | Long | | | | | | X | | | | | X |
The following sections provide further details on prior year reserve development by segment, reserving class and accident year.
Insurance Segment:Segment:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Property and other | $ | 432 |
| | $ | 10,061 |
| | $ | 4,434 |
| | $ | 24,048 |
| |
| Marine | 2,461 |
| | 4,682 |
| | 17,957 |
| | 8,382 |
| |
| Aviation | (831 | ) | | 517 |
| | (4,344 | ) | | 437 |
| |
| Credit and political risk | (18 | ) | | (25 | ) | | (53 | ) | | (232 | ) | |
| Professional lines | (261 | ) | | 3,378 |
| | 18,489 |
| | 8,956 |
| |
| Liability | 820 |
| | 2,075 |
| | (5,743 | ) | | 1,590 |
| |
| Total | $ | 2,603 |
| | $ | 20,688 |
| | $ | 30,740 |
| | $ | 43,181 |
| |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Property and other | $ | 17,188 |
| | $ | (218 | ) | |
| Marine | 11,272 |
| | 6,088 |
| |
| Aviation | (3,692 | ) | | (1,545 | ) | |
| Credit and political risk | 765 |
| | (17 | ) | |
| Professional lines | 3,907 |
| | 7,450 |
| |
| Liability | (6,665 | ) | | (3,894 | ) | |
| Total | $ | 22,775 |
| | $ | 7,865 |
| |
| | | | | |
For the three months ended September 30, 2017March 31, 2018 we recognized $323 million of net favorable prior year reserve development, the principal component of which was:
$217 million of net favorable prior year reserve development on property and other business, primarily due to generally better than expected loss emergence related to the 2017 catastrophe events.
$11 million of net favorable prior year reserve development on marine business, due to better than expected loss emergence on recent accident years.
$7 million of net adverse prior year reserve development on liability business due to reserve strengthening within our U.S. excess casualty book of business mainly driven by a higher frequency of large auto and general liability claims primarily related to accident year 2015 and primarily driven by better than expected development.2017 accident years.
For the three months ended September 30, 2016March 31, 2017 we recognized $218 million of net favorable prior year reserve development, the principal components of which were:
$107 million of net favorable prior year reserve development on property and other business,professional lines, driven by better than expected loss emergence, primarily driven by reductions in mid-size loss estimates impacting accident year 2015 and favorable loss experience in our accident and health lines impactingdevelopment related to accident year 2014.
$56 million of net favorable prior year reserve development on marine business, driven by better than expected loss emergence primarily driven by reductions in mid-size loss estimates impacting accident yearyears 2014 and 2015.
For the nine months ended September 30, 2017 we recognized $31 million of net favorable prior year reserve development, the principal components of which were:
$18 million of net favorable prior year reserve development on professional lines business, primarily related to accident years 2013 and 2014 due to the recognition of better than expected development.
$18 million of net favorable prior year reserve development on marine business, primarily related to accident years 2013, 2015 and 2016 driven by better than expected loss emergence.
$64 million of net adverse prior year development on liability lines, primarily attributablerelated to reserve strengthening on two large claims within our run-off Bermuda excess casualty book of business impacting 2014 and prior accidentin recent years.
For the nine months ended September 30, 2016 we recognized $43 million of net favorable prior year reserve development, the principal components of which were:
$24 million of net favorable prior year reserve development on property and other business, driven by better than expected loss emergence primarily related to accident year 2014.
$9 million of net favorable prior year reserve development on professional lines business, driven by better than expected
development related to various accident years, partially offset by reserve strengthening relating to updated information on one specific claim impacting accident year 2010.
$8 million of net favorable prior year reserve development on marine business, driven by better than expected loss emergence, primarily driven by reductions in mid-size loss estimates impacting accident year 2015.
Reinsurance Segment:Segment:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Property and other | $ | 3,041 |
| | $ | 25,831 |
| | $ | 22,482 |
| | $ | 83,522 |
| |
| Credit and surety | 16,838 |
| | 3,900 |
| | 18,361 |
| | 6,761 |
| |
| Professional lines | 8,918 |
| | 8,761 |
| | 35,764 |
| | 18,918 |
| |
| Motor | 15,653 |
| | 6,653 |
| | (3,963 | ) | | 39,794 |
| |
| Liability | 715 |
| | 10,186 |
| | 40,111 |
| | 31,955 |
| |
| Total | $ | 45,165 |
| | $ | 55,331 |
| | $ | 112,755 |
| | $ | 180,950 |
| |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Property and other | $ | 13,087 |
| | $ | (825 | ) | |
| Credit and surety | 4,986 |
| | (86 | ) | |
| Professional lines | 8,573 |
| | 15,925 |
| |
| Motor | 3,191 |
| | (22,156 | ) | |
| Liability | 1,695 |
| | 24,070 |
| |
| Total | $ | 31,532 |
| | $ | 16,928 |
| |
| | | | | |
For the three months ended September 30, 2017March 31, 2018 we recognized $4532 million of net favorable prior year reserve development, the principal components of which were:
$1713 million of net favorable prior year reserve development on creditproperty and surety, primarily related to accident years 2012 through 2015 driven by better than expected loss emergence.
$16 million of net favorable prior year reserve development on motorother business, due to overall better than expected loss emergence emanating from all accident years, partially offset byrelated to the adverse impact of the recent change in Ogden rate.2017 catastrophe events and better than expected loss emergence on our agriculture business.
$9 million of net favorable prior year reserve development on professional lines business, reflecting the generally favorable experience on earlier accident years, particularly 2010 through 2011, as we continue to transition to more experience based methods.
$5 million of net favorable prior year reserve development on credit and surety, due to better than expected loss emergence primarily related to earlier accident year 2009 for reasons discussed in the overview.years 2012 through 2015.
For the three months ended September 30, 2016March 31, 2017 we recognized $5517 million of net favorable prior year reserve development, the principal components of which were:
$26 million of net favorable prior year reserve development on property and other business, related to 2011 through 2015 accident years driven by better than expected loss emergence including a reserve reduction of $7 million related to Storm Sandy.
$10 million of net favorable prior year reserve development on liability business, primarily related to the 2007 through 2010 accident years, for reasons discussed in the overview.
$9 million of net favorable prior year reserve development on professional lines business, primarily related to the 2005 through 2010 accident years, for reasons discussed in the overview.
$7 million of net favorable prior year reserve development on motor business, related to non-proportional business spanning multiple accident years, driven by better than expected loss emergence.
For the nine months ended September 30, 2017 we recognized $113 million of net favorable prior year reserve development, the principal components of which were:
$40 million of net favorable prior year reserve development on liability business, primarily related to accident years 2008 through 2010, for reasons discussed in the overview.
$36 million of net favorable prior year reserve development on professional lines business, primarily related to accident years 2008 through 2012, for reasons discussed in the overview.
$22 million of net favorable prior year reserve development on property and other business, primarily related to 2013, 2014 and 2016 accident years driven by overall better than expected loss emergence.
$18 million of net favorable prior year reserve development on credit and surety business, primarily related to accident year 2012 driven by better than expected loss emergence.
$4 million of net adverse prior year reserve development on motor business related to the impact of the recent change in Ogden rate, largely offset by continued better than expected loss emergence spanning multiple accident years.
For the nine months ended September 30, 2016 we recognized $181 million of net favorable prior year reserve development, the principal components of which were:
$84 million of net favorable prior year reserve development on property and other business, primarily related to the 2010 through 2015 accident years driven by better than expected loss emergence.
$40 million of net favorable prior year reserve development on motor business, primarily related to non-proportional business spanning multiple accident years, driven by better than expected loss emergence.
$3224 million of net favorable prior year reserve development on liability business, primarily related to the 2006 through 2011 accident years, for reasons discussed in the overview.
$1916 million of net favorable prior year reserve development on professional lines business, primarily related to the 2005 through 2010earlier accident years, for reasons discussed in the overview.
$22 million of net adverse prior year reserve development on motor business, related to the impact of the Ogden Rate change, partially offset by continued better than expected loss emergence related to non-proportional business spanning multiple accident years.
Acquisition Cost Ratio:Ratio:
The acquisition cost ratio decreased to 19.1% and 20.0%19.6% for the three and nine months ended September 30, 2017, respectively,March 31, 2018 from 20.3% and 20.1% in20.2% for the three and nine months ended September 30, 2016, respectively,March 31, 2017 driven by our reinsurance segment andprimarily as a result of changes in business mix. This decrease was partially offset by an increase in our insurance segment primarily attributable to the acquisition of Novae and changes in business mix.
General and Administrative Expense Ratio:Ratio:
The general and administrative expense ratio decreased to 12.3% and 14.8%14.5% for the three and nine months ended September 30, 2017,March 31, 2018 from 15.3% and 15.8% in17.2% for the three and nine months ended September 30, 2016 respectively,March 31, 2017. The decrease was driven by both segments primarily reflectingdue to a decrease in performance related compensationpersonnel costs, partially offset by Novae general and an increase in fees from strategic capital partners.
administrative expenses.
RESULTS BY SEGMENT
INSURANCE SEGMENTInsurance Segment
Results from our insurance segment were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Change | | 2016 | | 2017 | | % Change | | 2016 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 744,366 |
| | 10% | | $ | 675,430 |
| | $ | 2,234,395 |
| | 6% | | $ | 2,112,796 |
| |
| Net premiums written | 500,022 |
| | 15% | | 433,131 |
| | 1,533,029 |
| | 7% | | 1,433,058 |
| |
| Net premiums earned | 496,004 |
| | 12% | | 444,691 |
| | 1,448,270 |
| | 9% | | 1,322,649 |
| |
| Other insurance related income (losses) | 526 |
| | nm | | 39 |
| | 1,077 |
| | nm | | (57 | ) | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current year net losses and loss expenses | (631,468 | ) | | | | (293,914 | ) | | (1,272,235 | ) | | | | (896,952 | ) | |
| Prior year reserve development | 2,603 |
| | | | 20,688 |
| | 30,740 |
| | | | 43,181 |
| |
| Acquisition costs | (74,231 | ) | | | | (61,755 | ) | | (223,665 | ) | | | | (184,982 | ) | |
| General and administrative expenses | (75,038 | ) | | | | (84,588 | ) | | (253,308 | ) | | | | (252,652 | ) | |
| | | | | | | | | | | | | |
| Underwriting income (loss) | $ | (281,604 | ) | | nm | | $ | 25,161 |
| | $ | (269,121 | ) | | nm | | $ | 31,187 |
| |
| | | | | | | | | | | | | |
| Ratios: | | | % Point Change | | | | | | % Point Change | | | |
| Current accident year loss ratio | 127.3 | % | | 61.2 | | 66.1 | % | | 87.8 | % | | 20.0 | | 67.8 | % | |
| Prior year reserve development | (0.5 | %) | | 4.2 | | (4.7 | %) | | (2.1 | %) | | 1.1 | | (3.2 | %) | |
| Acquisition cost ratio | 15.0 | % | | 1.1 | | 13.9 | % | | 15.4 | % | | 1.4 | | 14.0 | % | |
| General and administrative expense ratio | 15.1 | % | | (4.0) | | 19.1 | % | | 17.6 | % | | (1.4) | | 19.0 | % | |
| Combined ratio | 156.9 | % | | 62.5 | | 94.4 | % | | 118.7 | % | | 21.1 | | 97.6 | % | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Change | | 2017 | |
| | | | | | | |
| Revenues: | | | | | | |
| Gross premiums written | $ | 880,848 |
| | 62% | | $ | 545,261 |
| |
| Net premiums written | 547,893 |
| | 54% | | 356,836 |
| |
| Net premiums earned | 580,059 |
| | 48% | | 391,964 |
| |
| Other insurance related income | 620 |
| | nm | | 42 |
| |
| | | | | | | |
| Expenses: | | | | | | |
| Current year net losses and loss expenses | (344,313 | ) | | | | (248,950 | ) | |
| Prior year reserve development | 22,775 |
| | | | 7,865 |
| |
| Acquisition costs | (87,329 | ) | | | | (54,004 | ) | |
| General and administrative expenses | (102,370 | ) | | | | (85,256 | ) | |
| | | | | | | |
| Underwriting income | $ | 69,442 |
| | nm | | $ | 11,661 |
| |
| | | | | | | |
| Ratios: | | | % Point Change | | | |
| Current accident year loss ratio | 59.4 | % | | (4.1) | | 63.5 | % | |
| Prior year reserve development | (4.0 | %) | | (2.0) | | (2.0 | %) | |
| Acquisition cost ratio | 15.1 | % | | 1.3 | | 13.8 | % | |
| General and administrative expense ratio | 17.6 | % | | (4.2) | | 21.8 | % | |
| Combined ratio | 88.1 | % | | (8.9) | | 97.0 | % | |
| | | | | | | |
nm – not meaningful
Gross Premiums Written:Written:
The following table provides gross premiums written by line of business:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2017 | | | | 2016 | | | | % Change | | 2017 | | | | 2016 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Property | $ | 154,882 |
| | 19 | % | | $ | 164,605 |
| | 25 | % | | (6%) | | $ | 498,127 |
| | 22 | % | | $ | 522,380 |
| | 24 | % | | (5%) | |
| Marine | 42,483 |
| | 6 | % | | 33,677 |
| | 5 | % | | 26% | | 182,005 |
| | 8 | % | | 191,298 |
| | 9 | % | | (5%) | |
| Terrorism | 12,147 |
| | 2 | % | | 9,394 |
| | 1 | % | | 29% | | 34,470 |
| | 2 | % | | 28,090 |
| | 1 | % | | 23% | |
| Aviation | 23,814 |
| | 3 | % | | 9,684 |
| | 1 | % | | nm | | 59,434 |
| | 3 | % | | 37,111 |
| | 2 | % | | 60% | |
| Credit and Political Risk | 19,793 |
| | 3 | % | | 5,423 |
| | 1 | % | | nm | | 51,105 |
| | 2 | % | | 34,299 |
| | 2 | % | | 49% | |
| Professional Lines | 213,009 |
| | 29 | % | | 204,926 |
| | 30 | % | | 4% | | 612,597 |
| | 27 | % | | 590,417 |
| | 28 | % | | 4% | |
| Liability | 131,975 |
| | 18 | % | | 108,447 |
| | 16 | % | | 22% | | 359,304 |
| | 16 | % | | 310,797 |
| | 15 | % | | 16% | |
| Accident and Health | 146,263 |
| | 20 | % | | 139,274 |
| | 21 | % | | 5% | | 437,353 |
| | 20 | % | | 398,404 |
| | 19 | % | | 10% | |
| Total | $ | 744,366 |
| | 100 | % | | $ | 675,430 |
| | 100 | % | | 10% | | $ | 2,234,395 |
| | 100 | % | | $ | 2,112,796 |
| | 100 | % | | 6% | |
| | | | | | | | | | | | | | | | | | | | | |
| Constant currency(1) | $ | 743,500 |
| | | | $ | 675,430 |
| | | | 10% | | $ | 2,245,400 |
| | | | $ | 2,112,796 |
| | | | 6% | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | |
| | 2018 | | | | 2017 | | | | % Change | |
| | | | | | | | | | | |
| Property | $ | 295,206 |
| | 34 | % | | $ | 144,564 |
| | 25 | % | | 104% | |
| Marine | 126,743 |
| | 14 | % | | 65,601 |
| | 12 | % | | 93% | |
| Terrorism | 16,900 |
| | 2 | % | | 11,814 |
| | 2 | % | | 43% | |
| Aviation | 21,013 |
| | 2 | % | | 14,583 |
| | 3 | % | | 44% | |
| Credit and Political Risk | 44,731 |
| | 5 | % | | 16,172 |
| | 3 | % | | nm | |
| Professional Lines | 207,965 |
| | 24 | % | | 155,469 |
| | 29 | % | | 34% | |
| Liability | 105,661 |
| | 12 | % | | 90,603 |
| | 17 | % | | 17% | |
| Accident and Health | 60,674 |
| | 7 | % | | 46,455 |
| | 9 | % | | 31% | |
| Discontinued Lines | 1,955 |
| | —% | | — |
| | — | % | | nm | |
| Total | $ | 880,848 |
| | 100 | % | | $ | 545,261 |
| | 100 | % | | 62% | |
| | | | | | | | | | | |
nm – not meaningful
| |
(1) | Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance. |
Gross premiums written for the three months ended September 30, 2017March 31, 2018 increased by $69$336 million or 10%62% compared to the three months ended September 30, 2016.March 31, 2017. The increase in gross premiums written wasincluded $302 million attributable to property, marine, professional lines, and credit and political risk lines associated with our acquisition of Novae. In addition, gross premiums written increased by $34 million, or 6% ($28 million or 5% on a constant currency basis) for three months ended March 31, 2018 compared to the same period in 2017, attributable to our professional lines, liability, lines, and our creditaccident and political riskhealth lines driven by new business opportunities, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a reduction in premiums written in our property lines following our exit from some retail insurance operations in the U.S.Aviabel which was completed last year.
Gross premiums written for the nine months ended September 30, 2017 increased by $122 million or 6% compared to the nine months ended September 30, 2016. The increase in gross premiums written was attributable to our liability, our accident and health lines, and our professional lines primarily driven by new business opportunities, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a reduction in premiums written in our property lines following our exit from some U.S. retail insurance operations last year.
Ceded Premiums Written:Written:
Ceded premiums written for the three and nine months ended September 30, 2017March 31, 2018 were $244$333 million or 33%38% of gross premiums written and $701 million or 31% of gross premiums written, respectively, compared to $242188 million or 36% of gross premiums written and $680 million or 32%35% of gross premiums written for the three and nine months ended September 30, 2016, respectively.
March 31, 2017. The decreaseincrease in the ratio of ceded premiums written included $117 million primarily attributable to grossproperty, professional lines and marine lines associated with our acquisition of Novae. In addition, ceded premiums writtenincreased by $27 million or 14% for the three and nine months ended September 30, 2017March 31, 2018, compared to the same periodsperiod in 2016, was2017, primarily due to an increase in gross premiums written together with a decrease in premiums ceded indriven by our propertyprofessional lines partially offset by an increase in premiums ceded in ourand liability lines.
Net Premiums Earned:Earned:
The following table provides net premiums earned by line of business:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2017 | | | | 2016 | | | | % Change | | 2017 | | | | 2016 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Property | $ | 116,771 |
| | 22 | % | | $ | 106,578 |
| | 25 | % | | 10% | | $ | 355,392 |
| | 24 | % | | $ | 312,804 |
| | 23 | % | | 14% | |
| Marine | 34,217 |
| | 7 | % | | 36,218 |
| | 8 | % | | (6%) | | 108,822 |
| | 8 | % | | 113,693 |
| | 9 | % | | (4%) | |
| Terrorism | 8,790 |
| | 2 | % | | 8,276 |
| | 2 | % | | 6% | | 25,577 |
| | 2 | % | | 26,011 |
| | 2 | % | | (2%) | |
| Aviation | 22,500 |
| | 5 | % | | 9,015 |
| | 2 | % | | nm | | 53,265 |
| | 4 | % | | 33,528 |
| | 3 | % | | 59% | |
| Credit and Political Risk | 9,073 |
| | 2 | % | | 12,274 |
| | 3 | % | | (26%) | | 29,957 |
| | 2 | % | | 42,661 |
| | 3 | % | | (30%) | |
| Professional Lines | 126,946 |
| | 26 | % | | 126,574 |
| | 28 | % | | —% | | 379,426 |
| | 26 | % | | 386,241 |
| | 29 | % | | (2%) | |
| Liability | 48,135 |
| | 10 | % | | 42,205 |
| | 9 | % | | 14% | | 134,467 |
| | 9 | % | | 126,429 |
| | 10 | % | | 6% | |
| Accident and Health | 129,572 |
| | 26 | % | | 103,551 |
| | 23 | % | | 25% | | 361,364 |
| | 25 | % | | 281,282 |
| | 21 | % | | 28% | |
| Total | $ | 496,004 |
| | 100 | % | | $ | 444,691 |
| | 100 | % | | 12% | | $ | 1,448,270 |
| | 100 | % | | $ | 1,322,649 |
| | 100 | % | | 9% | |
| | | | | | | | | | | | | | | | | | | | | |
| Constant currency(1) | $ | 497,350 |
| | | | $ | 444,691 |
| | | | 12% | | $ | 1,458,850 |
| | | | $ | 1,322,649 |
| | | | 10% | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | |
| | 2018 | | | | 2017 | | | | % Change | |
| | | | | | | | | | | |
| Property | $ | 196,613 |
| | 34 | % | | $ | 118,875 |
| | 29 | % | | 65% | |
| Marine | 76,376 |
| | 13 | % | | 38,669 |
| | 10 | % | | 98% | |
| Terrorism | 14,507 |
| | 3 | % | | 7,938 |
| | 2 | % | | 83% | |
| Aviation | 18,488 |
| | 3 | % | | 10,847 |
| | 3 | % | | 70% | |
| Credit and Political Risk | 27,721 |
| | 5 | % | | 10,180 |
| | 3 | % | | nm | |
| Professional Lines | 135,612 |
| | 23 | % | | 125,138 |
| | 32 | % | | 8% | |
| Liability | 51,096 |
| | 9 | % | | 42,773 |
| | 11 | % | | 19% | |
| Accident and Health | 48,578 |
| | 8 | % | | 37,544 |
| | 10 | % | | 29% | |
| Discontinued Lines | 11,068 |
| | 2 | % | | — |
| | — | % | | nm | |
| Total | $ | 580,059 |
| | 100 | % | | $ | 391,964 |
| | 100 | % | | 48% | |
| | | | | | | | | | | |
nm - not meaningful
| |
(1) | Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance. |
Net premiums earned for the three and nine months ended September 30, 2017March 31, 2018 increased by $51$188 million or 12%,48% compared to the three months ended March 31, 2017. The increase in net premiums earned included $178 million primarily attributable to property, marine, and $126accident and health lines associated with our acquisition of Novae. In addition, net premiums earned increased by $10 million, or 9% ($136 million or 10%3% (2% on a constant currency basis) compared to the three and nine months ended September 30, 2016, respectively.
The increase for the three and nine months ended September 30, 2017 compared to the same periods in 2016, was driven by strong premium growth in our accident and health lines as well as our aviation lines in recent periods, together with a decrease in ceded premiums earned in our property lines. Net premiums earned for the nine months ended September 30, 2017, was also impacted by strong premium growth in our propertyaviation lines in recent periods.associated with the acquisition of Aviabel completed last year.
Loss Ratio:Ratio:
The table below shows the components of our loss ratio:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Point Change | | 2016 | | 2017 | | % Point Change | | 2016 | |
| | | | | | | | | | | | | |
| Current accident year | 127.3 | % | | 61.2 | | 66.1 | % | | 87.8 | % | | 20.0 | | 67.8 | % | |
| Prior year reserve development | (0.5 | %) | | 4.2 | | (4.7 | %) | | (2.1 | %) | | 1.1 | | (3.2 | %) | |
| Loss ratio | 126.8 | % | | 65.4 | | 61.4 | % | | 85.7 | % | | 21.1 | | 64.6 | % | |
| | | | | | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Point Change | | 2017 | |
| | | | | | | |
| Current accident year | 59.4 | % | | (4.1) | | 63.5 | % | |
| Prior year reserve development | (4.0 | %) | | (2.0) | | (2.0 | %) | |
| Loss ratio | 55.4 | % | | (6.1) | | 61.5 | % | |
| | | | | | | |
CurrentCurrent Accident Year Loss Ratio:
The current accident year loss ratios increaseddecreased to 127.3% and 87.8%59.4% for the three and nine months ended September 30, 2017, respectively,March 31, 2018 from 66.1% and 67.8%63.5% for the three and nine months ended September 30, 2016, respectively.March 31, 2017.
The increasedecrease in the current accident year loss ratiosratio for the three and nine months ended September 30, 2017March 31, 2018 compared to the same period in 2016,2017, was impacted by a higherlower level of catastrophe and weather-related losses. During the three and nine months ended September 30, 2017March 31, 2018 we incurred $317$28 million, or 64.04.9 points, and $379 million, or 26.1 points, respectively, in pre-tax catastrophe and weather-related losses, primarily attributable to Hurricanes Harvey, Irmathe Papua New Guinea earthquake and MariaU.S. and the two earthquakes in Mexico and U.S.European weather-related events. Comparatively, during the three and nine months ended September 30, 2016,March 31, 2017, we incurred $15$20 million or 3.35.1 points in pre-tax catastrophe and $73 million, or 5.5 points, respectively.weather-related losses.
After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio for the three and nine months ended September 30, 2017March 31, 2018 was 63.3% and 61.7%, respectively,54.5% compared to 62.8% and 62.3%58.4% for the three and nine months ended September 30, 2016, respectively.
March 31, 2017. The increasedecrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the three months ended September 30, 2017March 31, 2018 compared to the same period in 2016,2017, was principally due to changes in business mix, together with favorable impact of rate and trend, partially offset by an increase in attritional loss experience in our property lines, together with the adverse impact of rate and trend, partially offset by changes in business mix.
The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the nine months ended September 30, 2017 compared to the same period in 2016, was principally due to the recognition of better than expected attritional loss experience in our professional lines, partially offset by the adverse impact of rate and trend.aviation lines.
Refer to the ‘Prior Year Reserve Development’ section for further details.
Acquisition Cost Ratio:Ratio:
The acquisition cost ratio increased to 15.0% and 15.4%15.1% for the three and nine months ended September 30, 2017, respectively,March 31, 2018 from 13.9% and 14.0%13.8% for the three and nine months ended September 30, 2016, respectively,March 31, 2017 primarily attributable to changes in business mix in our accident and health lines. In addition, for the three months ended September 30, 2017 the increase in the acquisition cost ratio was related to an increase in variable acquisition costs associated with on certain lines of business, partially offset by an increase in ceding commissions following increased cessions in our liability lines.mix.
General and Administrative Expense Ratio:Ratio:
The general and administrative expense ratio decreased to 15.1% and 17.6% for the three and nine months ended September 30, 2017, respectively,March 31, 2018, from 19.1% and 19.0%21.8% for the three and nine months ended September 30, 2016, respectively,March 31, 2017 reflecting a decrease in performance-related compensationpersonnel costs, and an increase in net premiums earned, partially offset by increases ingeneral and administrative expenses associated with the allocationacquisition of certain corporate expenses and information technology fees.Novae.
REINSURANCE SEGMENTReinsurance Segment
Results from our reinsurance segment were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Change | | 2016 | | 2017 | | % Change | | 2016 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 441,208 |
| | 55% | | $ | 284,532 |
| | $ | 2,225,377 |
| | 5% | | $ | 2,126,762 |
| |
| Net premiums written | 332,721 |
| | 105% | | 162,300 |
| | 1,764,689 |
| | (5%) | | 1,855,529 |
| |
| Net premiums earned | 521,127 |
| | 6% | | 489,724 |
| | 1,488,995 |
| | 2% | | 1,461,097 |
| |
| Other insurance related income (losses) | (3,723 | ) | | nm | | 5,905 |
| | (5,497 | ) | | nm | | 4,907 |
| |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current year net losses and loss expenses | (651,667 | ) | | | | (314,433 | ) | | (1,318,900 | ) | | | | (990,763 | ) | |
| Prior year reserve development | 45,165 |
| | | | 55,331 |
| | 112,755 |
| | | | 180,950 |
| |
| Acquisition costs | (120,493 | ) | | | | (128,055 | ) | | (365,214 | ) | | | | (374,588 | ) | |
| General and administrative expenses | (21,658 | ) | | | | (29,635 | ) | | (82,474 | ) | | | | (99,980 | ) | |
| | | | | | | | | | | | | |
| Underwriting income (loss) | $ | (231,249 | ) | | nm | | $ | 78,837 |
| | $ | (170,335 | ) | | nm | | $ | 181,623 |
| |
| Ratios: | | | % Point Change | | | | | | % Point Change | | | |
| Current accident year loss ratio | 125.0 | % | | 60.8 | | 64.2 | % | | 88.6 | % | | 20.8 | | 67.8 | % | |
| Prior year reserve development | (8.6 | %) | | 2.7 | | (11.3 | %) | | (7.6 | %) | | 4.8 | | (12.4 | %) | |
| Acquisition cost ratio | 23.1 | % | | (3.0) | | 26.1 | % | | 24.5 | % | | (1.1) | | 25.6 | % | |
| General and administrative expense ratio | 4.2 | % | | (1.9) | | 6.1 | % | | 5.6 | % | | (1.3) | | 6.9 | % | |
| Combined ratio | 143.7 | % | | 58.6 | | 85.1 | % | | 111.1 | % | | 23.2 | | 87.9 | % | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Change | | 2017 | |
| | | | | | | |
| Revenues: | | | | | | |
| Gross premiums written | $ | 1,781,947 |
| | 30% | | $ | 1,366,610 |
| |
| Net premiums written | 1,437,978 |
| | 25% | | 1,152,122 |
| |
| Net premiums earned | 587,343 |
| | 7% | | 546,739 |
| |
| Other insurance related income (losses) | 5,986 |
| | nm | | (3,825 | ) | |
| | | | | | | |
| Expenses: | | | | | | |
| Current year net losses and loss expenses | (371,339 | ) | | | | (382,785 | ) | |
| Prior year reserve development | 31,532 |
| | | | 16,928 |
| |
| Acquisition costs | (141,931 | ) | | | | (135,788 | ) | |
| General and administrative expenses | (37,296 | ) | | | | (36,545 | ) | |
| | | | | | | |
| Underwriting income | $ | 74,295 |
| | nm | | $ | 4,724 |
| |
| Ratios: | | | % Point Change | | | |
| Current accident year loss ratio | 63.2 | % | | (6.8) | | 70.0 | % | |
| Prior year reserve development | (5.3 | %) | | (2.2) | | (3.1 | %) | |
| Acquisition cost ratio | 24.2 | % | | (0.6) | | 24.8 | % | |
| General and administrative expense ratio | 6.3 | % | | (0.4) | | 6.7 | % | |
| Combined ratio | 88.4 | % | | (10.0) | | 98.4 | % | |
| | | | | | | |
nm – not meaningful
Gross Premiums Written:Written:
The following table provides gross premiums written by line of business for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2017 | | | | 2016 | | | | % Change | | 2017 | | | | 2016 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 89,510 |
| | 19 | % | | $ | 46,338 |
| | 16 | % | | 93% | | $ | 411,004 |
| | 18 | % | | $ | 316,692 |
| | 15 | % | | 30% | |
| Property | 90,001 |
| | 20 | % | | 61,957 |
| | 22 | % | | 45% | | 341,265 |
| | 15 | % | | 283,555 |
| | 13 | % | | 20% | |
| Professional Lines | 20,175 |
| | 5 | % | | 19,479 |
| | 7 | % | | 4% | | 217,772 |
| | 10 | % | | 235,094 |
| | 11 | % | | (7%) | |
| Credit and Surety | 38,216 |
| | 9 | % | | 36,174 |
| | 13 | % | | 6% | | 183,284 |
| | 8 | % | | 315,102 |
| | 15 | % | | (42%) | |
| Motor | 40,385 |
| | 9 | % | | 13,344 |
| | 5 | % | | nm | | 373,901 |
| | 17 | % | | 338,403 |
| | 16 | % | | 10% | |
| Liability | 139,083 |
| | 32 | % | | 91,387 |
| | 32 | % | | 52% | | 368,999 |
| | 17 | % | | 365,380 |
| | 17 | % | | 1% | |
| Agriculture | 11,152 |
| | 3 | % | | 1,286 |
| | — | % | | nm | | 218,437 |
| | 10 | % | | 151,315 |
| | 7 | % | | 44% | |
| Engineering | 10,120 |
| | 2 | % | | 13,588 |
| | 5 | % | | (26%) | | 58,000 |
| | 3 | % | | 56,719 |
| | 3 | % | | 2% | |
| Marine and Other | 2,566 |
| | 1 | % | | 979 |
| | — | % | | nm | | 52,715 |
| | 2 | % | | 64,502 |
| | 3 | % | | (18%) | |
| Total | $ | 441,208 |
| | 100 | % | | $ | 284,532 |
| | 100 | % | | 55% | | $ | 2,225,377 |
| | 100 | % | | $ | 2,126,762 |
| | 100 | % | | 5% | |
| | | | | | | | | | | | | | | | | | | | | |
| Constant currency(1) | $ | 444,600 |
| | | | $ | 284,532 |
| | | | 56% | | $ | 2,277,100 |
| | | | $ | 2,126,762 |
| | | | 7% | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | |
| | 2018 | | | | 2017 | | | | % Change | |
| | | | | | | | | | | |
| Catastrophe | $ | 281,883 |
| | 17 | % | | $ | 185,935 |
| | 14 | % | | 52% | |
| Property | 200,707 |
| | 11 | % | | 194,541 |
| | 14 | % | | 3% | |
| Professional Lines | 106,178 |
| | 6 | % | | 77,012 |
| | 6 | % | | 38% | |
| Credit and Surety | 196,316 |
| | 11 | % | | 119,925 |
| | 9 | % | | 64% | |
| Motor | 412,077 |
| | 23 | % | | 291,423 |
| | 21 | % | | 41% | |
| Liability | 159,009 |
| | 9 | % | | 111,821 |
| | 8 | % | | 42% | |
| Agriculture | 145,397 |
| | 8 | % | | 149,191 |
| | 11 | % | | (3%) | |
| Engineering | 26,506 |
| | 1 | % | | 40,533 |
| | 3 | % | | (35%) | |
| Marine and Other | 26,647 |
| | 1 | % | | 47,483 |
| | 3 | % | | (44%) | |
| Accident and Health | 227,689 |
| | 13 | % | | 148,746 |
| | 11 | % | | 53% | |
| Discontinued Lines | (462 | ) | | — | % | | — |
| | — | % | | nm | |
| Total | $ | 1,781,947 |
| | 100 | % | | $ | 1,366,610 |
| | 100 | % | | 30% | |
| | | | | | | | | | | |
nm – not meaningful
| |
(1) | Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance. |
Gross premiums written increased by $157$415 million, or 55% (56% on a constant currency basis)30%, for the three months ended September 30, 2017March 31, 2018 compared to the same period in 2016.2017. The increase wasincluded $50 million attributable to catastrophe, marine and aviation lines associated with the acquisition of Novae. In addition, gross premiums written increased by $365 million, or 27% ($286 million or 21% on a constant currency basis) for the three months ended March 31, 2018, compared to the same period of in 2017, driven by our motor, accident and health, credit and surety, catastrophe, liability catastrophe, property and motorprofessional lines, partially offset by a decrease in marine and other lines. The increase in our liabilitymotor and credit and surety lines was primarily due to timing differences related to the restructuring of large quota share treaties which affected the timing of premium recognition. The increase in our catastrophe lines was largely due to reinstatement premiums associated with the third quarter catastrophe losses. The increase in our property and motor lines was primarily driven by new business opportunities. Timing differences also contributed to the increase in premiums written in our motor lines.
Gross premiums written increased by $99 million, or 5% (7% on a constant currency basis), for the nine months ended September 30, 2017 compared to the same period in 2016. The increase in gross premiums written was attributable to our catastrophe, agriculture, property and motor lines, partially offset by a decrease in our credit and surety lines. The increase in our catastrophe and property lines was driven by new business spread across several cedants. The increase in our agriculture lines was due to increased participation on a renewing treaty, which more than offset the cancellation of a large treaty. Reinstatement premiums and favorable premium estimate adjustments also contributed to the increase in premiums written in our catastrophe and agriculture lines. The increase in our motor lines was driven by new business and favorable premium adjustments, partially offset by a lower level of premiums written on a multi-year basis during 2017 compared to 2016,recognition, together with the impact of foreign exchange movements as the strengtheningweakening of the U.S. dollar drove comparative premium decreasesincreases in treaties denominated in foreign currencies. In addition, the increase in our motor lines was attributable to rate increases in U.K. non-proportional motor business following the reduction in the Ogden Rate during the first quarter of 2017 together with new business. The increase in our accident and health and catastrophe lines was due to new business. Increased line sizes on a number of treaties also contributed to the increase in catastrophe lines. The increase in liability and professional lines was largely due to timing differences. These increases were partially offset by a decrease in our creditmarine and surety lines was primarilyother due to the non-renewal of a lower level of premiums written on a multi-year basis.large treaty.
Ceded Premiums Written:Written:
Ceded premiums written for the three and nine months ended September 30, 2017March 31, 2018 were $108$344 million or 25%19% of gross premiums written and $461compared to $214 million or 21%16% of gross premiums written, respectively, compared to $122 million or 43% of gross premiums written and $271 million or 13% of gross premiums written for the three and nine months ended September 30, 2016, respectively.
The decrease in the ratio of ceded premiums written to gross premiums written for the three months ended September 30,March 31, 2017, respectively. The increase in ceded premiums written for the three months ended March 31, 2018 included $31 million attributable to catastrophe and marine lines associated with the acquisition of Novae. In addition, ceded premiums written increased by $98 million, or 46% for the three months ended March 31, 2018 compared to the same period in 2016, was2017, attributable to our catastrophe, credit and surety, and accident and health, liability and professional lines primarily due to an increase in gross premiums written in the quarter together with a decrease in premiums ceded to our strategic capital partners. The decreasepartners in premiums ceded was attributable to our professional and liabilitycatastrophe lines due to the timing of premiums ceded to the retrocessional cover entered intotogether with Harrington Re Ltd., in the same period in 2016, partially offset by an increase in premiums ceded into new quota share retrocessional treaties which cover our catastrophecredit and surety, accident and health, liability and professional lines.
The increase in the ratio of ceded premiums written to gross premiums written for the nine months ended September 30, 2017 compared to the same period in 2016, was primarily due to an increase in premiums ceded in our catastrophe, agriculture and our credit and surety lines, together with the impact of the retrocessional cover entered into with Harrington Re Ltd., which increased premiums ceded in our liability lines, partially offset by an increase in gross premiums written.
Net Premiums Earned:Earned:
The following table provides net premiums earned by line of business:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2017 | | | | 2016 | | | | % Change | | 2017 | | | | 2016 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 63,032 |
| | 11 | % | | $ | 48,799 |
| | 10 | % | | 29% | | $ | 150,134 |
| | 12 | % | | $ | 151,416 |
| | 12 | % | | (1%) | |
| Property | 81,522 |
| | 16 | % | | 71,649 |
| | 15 | % | | 14% | | 228,043 |
| | 15 | % | | 208,179 |
| | 14 | % | | 10% | |
| Professional Lines | 52,390 |
| | 10 | % | | 73,109 |
| | 15 | % | | (28%) | | 170,438 |
| | 11 | % | | 225,813 |
| | 15 | % | | (25%) | |
| Credit and Surety | 62,215 |
| | 12 | % | | 67,430 |
| | 14 | % | | (8%) | | 176,754 |
| | 12 | % | | 192,135 |
| | 13 | % | | (8%) | |
| Motor | 92,147 |
| | 18 | % | | 77,786 |
| | 16 | % | | 18% | | 273,568 |
| | 18 | % | | 232,383 |
| | 16 | % | | 18% | |
| Liability | 89,927 |
| | 17 | % | | 80,137 |
| | 16 | % | | 12% | | 258,500 |
| | 17 | % | | 247,103 |
| | 17 | % | | 5% | |
| Agriculture | 45,688 |
| | 9 | % | | 36,704 |
| | 7 | % | | 24% | | 138,554 |
| | 9 | % | | 106,251 |
| | 7 | % | | 30% | |
| Engineering | 18,529 |
| | 4 | % | | 18,573 |
| | 4 | % | | —% | | 49,577 |
| | 3 | % | | 51,024 |
| | 3 | % | | (3%) | |
| Marine and Other | 15,677 |
| | 3 | % | | 15,537 |
| | 3 | % | | 1% | | 43,427 |
| | 3 | % | | 46,793 |
| | 3 | % | | (7%) | |
| Total | $ | 521,127 |
| | 100 | % | | $ | 489,724 |
| | 100 | % | | 6% | | $ | 1,488,995 |
| | 100 | % | | $ | 1,461,097 |
| | 100 | % | | 2% | |
| | | | | | | | | | | | | | | | | | | | | |
| Constant currency(1) | $ | 529,700 |
| | | | $ | 489,724 |
| | | | 8% | | $ | 1,540,200 |
| | | | $ | 1,461,097 |
| | | | 5% | |
| | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | |
| | 2018 | | | | 2017 | | | | % Change | |
| | | | | | | | | | | |
| Catastrophe | $ | 61,854 |
| | 10 | % | | $ | 41,520 |
| | 7 | % | | 49% | |
| Property | 78,456 |
| | 13 | % | | 74,272 |
| | 14 | % | | 6% | |
| Professional Lines | 56,190 |
| | 10 | % | | 59,897 |
| | 11 | % | | (6%) | |
| Credit and Surety | 52,736 |
| | 9 | % | | 56,049 |
| | 10 | % | | (6%) | |
| Motor | 103,533 |
| | 18 | % | | 87,465 |
| | 16 | % | | 18% | |
| Liability | 89,592 |
| | 15 | % | | 80,833 |
| | 15 | % | | 11% | |
| Agriculture | 38,559 |
| | 7 | % | | 52,796 |
| | 10 | % | | (27%) | |
| Engineering | 17,705 |
| | 3 | % | | 14,273 |
| | 3 | % | | 24% | |
| Marine and Other | 6,457 |
| | 1 | % | | 13,167 |
| | 2 | % | | (51%) | |
| Accident and Health | 78,558 |
| | 13 | % | | 66,467 |
| | 12 | % | | 18% | |
| Discontinued Lines | 3,703 |
| | 1 | % | | — |
| | — | % | | nm | |
| Total | $ | 587,343 |
| | 100 | % | | $ | 546,739 |
| | 100 | % | | 7% | |
| | | | | | | | | | | |
nm – not meaningful
| |
(1) | Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance. |
Net premiums earned increased by $31$41 million or 6% ($40 million or 8% on a constant currency basis), and $28 million, or 2% ($79 million or 5% on a constant currency basis),7% for the three and nine months ended September 30, 2017,March 31, 2018, compared to the same periods in 2016, respectively.
2017. The increase in net premiums earned included $13 million primarily attributable to marine and catastrophe lines associated with our acquisition of Novae. In addition, net premiums earned increased by $27 million, or 5% (4% on a constant currency basis) for the three months ended September 30, 2017March 31, 2018 compared to the same period in 2016, was primarily2017, driven by strong premium growth in our catastrophe, motor, lines, as well as favorable reinstatement premiums impacting our catastrophe lines, and favorable premium estimate adjustments impacting our agriculture lines. These increases wereaccident and health lines partially offset by an increase in ceded premiums earned in our catastrophe and agriculture lines, together with the impact of the retrocession to Harrington Re, which increased ceded premiums earned in our professional lines, as well as a decrease in gross premium earned in our professional lines.
The increase in net premiums earned for the nine months ended September 30, 2017 compared to the same period in 2016, was primarily driven by an increase in gross premiums earned in our motor and agriculture lines, partially offset by an increase in ceded premiums earned in our agriculture and professional lines, together with a decrease in gross premiums earned in our professional lines.
Other Insurance Related Income (Losses):
Other insurance related lossesincome was $4$6 million for the three months ended September 30, 2017,March 31, 2018, compared to other insurance related incomeloss of $6$4 million for the same period in 2016.2017. The decreaseincrease of $10 million for the three months ended September 30, 2017March 31, 2018 compared to the same period in 2016,2017, reflected a decrease in profit commissions associated withretrocessional agreements with strategic capital partnersrealized losses and unfavorable mark-to-market adjustments related to the third quarter catastrophe losses.
Other insurance related losses was $5 million for the nine months ended September 30, 2017, compared to other insurance related income of $5 million for the same period in 2016. The decrease of $10 million for the nine months ended September 30, 2017 compared to the same period in 2016, reflected net realized losses on our weather and commodities derivative portfolio,business which we no longer write, partially offset by favorable mark-to-market adjustments related to other insurance and reinsurance contracts accounted for as derivatives and an increase in fees from our strategic capital partners.
Loss Ratio:Ratio:
The table below shows the components of our loss ratio: |
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Point Change | | 2016 | | 2017 | | % Point Change | | 2016 | |
| | | | | | | | | | | | | |
| Current accident year | 125.0 | % | | 60.8 | | 64.2 | % | | 88.6 | % | | 20.8 | | 67.8 | % | |
| Prior year reserve development | (8.6 | %) | | 2.7 | | (11.3 | %) | | (7.6 | %) | | 4.8 | | (12.4 | %) | |
| Loss ratio | 116.4 | % | | 63.5 | | 52.9 | % | | 81.0 | % | | 25.6 | | 55.4 | % | |
| | | | | | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Point Change | | 2017 | |
| | | | | | | |
| Current accident year | 63.2 | % | | (6.8) | | 70.0 | % | |
| Prior year reserve development | (5.3 | %) | | (2.2) | | (3.1 | %) | |
| Loss ratio | 57.9 | % | | (9.0) | | 66.9 | % | |
| | | | | | | |
Current Accident Year Loss Ratio:
The current accident year loss ratio increaseddecreased to 125.0% and 88.6%63.2% for the three and nine months ended September 30, 2017, respectively,March 31, 2018 from 64.2% and 67.8%70.0% for the three and nine months ended September 30, 2016,March 31, 2017, respectively.
The increasedecrease in the current accident year loss ratios for the three and nine months ended September 30, 2017March 31, 2018 compared to the same period in 2016,2017, was impacted by a higherlower level of catastrophe and weather-related losses. During the three and nine months ended September 30,March 31, 2018, we incurred
pre-tax catastrophe and weather-related losses of $7 million or 1.1 points attributable to Windstorm Friederike and U.S. weather-related events. Comparatively, during the three months ended March 31, 2017 we incurred pre-tax catastrophe and weather-related losses net of reinstatement premiums, of $299$15 million, or 58.7 points, and $323 million, or 22.2 points, respectively, attributable to Hurricanes Harvey, Irma and Maria, the two earthquakes in Mexico and U.S. weather-related events. Comparatively, during the three and nine months ended September 30, 2016 we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums of $7 million, or 1.5 points, and $72 million, or 5.0 points, respectively.2.8 points.
After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio for the three and nine months ended September 30, 2017March 31, 2018 was 66.3% and 66.4%, respectively,62.1% compared to 62.7% and 62.8%67.2% for the three and nine months ended September 30, 2016, respectively.March 31, 2017. The increasedecrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the three months ended September 30, 2017March 31, 2018 compared to the same period in 2016,2017, was principally due to an increasechanges in business mix, a decrease in mid-size loss experience in our credit and surety lines,together with the ongoing impact of the Ogden rate change on our motor lines, and the adverse impact of rate and trend.
The increaseincreases in U.K. non-proportional motor business following the reduction in the current accident year loss ratio after adjusting forOgden Rate during the impactfirst quarter of the catastrophe and weather-related losses for the nine months ended September 30, 2017 compared to the same period in 2016 was principally due to a large risk loss in our property lines, the ongoing impact of the Ogden rate change on our motor lines, and the adverse impact of rate and trend.2017.
Refer ‘Prior Year Reserve Development’ for further details.
Acquisition Cost Ratio:Ratio:
The acquisition cost ratio decreased to 23.1%24.2% for the three months ended September 30, 2017March 31, 2018 compared to 26.1%24.8% for the three months ended September 30, 2016March 31, 2017 primarily attributable to changes in business mix and the impact of favorable reinstatement premiums.
The acquisition cost ratio decreased to 24.5% for the nine months ended September 30, 2017 compared to 25.6% for the nine months ended September 30, 2016, attributable to changes in business mix, partially offset by the impact of retrocessional contracts.mix..
General and Administrative Expense Ratio:Ratio:
The general and administrative expense ratio decreased to 4.2% and 5.6%6.3% for the three and nine months ended September 30, 2017, respectively,March 31, 2018 from 6.1% and 6.9%6.7% for the three and nine months ended September 30, 2016, respectively,March 31, 2017 reflecting a decrease performance-related compensationpersonnel costs, togetherpartially offset by general and administrative expenses associated with an increase in fees from strategic capital partners.the acquisition of Novae.
OTHER EXPENSES (REVENUES), NET
The following table provides a breakdown of our other expenses (revenues), net:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | % Change | | 2016 | | 2017 | | % Change | | 2016 | |
| | | | | | | | | | | | | |
| Corporate expenses | $ | 27,933 |
| | (3%) | | $ | 28,683 |
| | $ | 97,922 |
| | 13% | | $ | 86,922 |
| |
| Foreign exchange losses (gains) | 32,510 |
| | nm | | (13,795 | ) | | 90,093 |
| | nm | | (69,781 | ) | |
| Interest expense and financing costs | 12,835 |
| | —% | | 12,839 |
| | 38,377 |
| | (1%) | | 38,586 |
| |
| Income tax expense (benefit) | (25,877 | ) | | nm | | 9,352 |
| | (38,547 | ) | | nm | | 7,712 |
| |
| Total | $ | 47,401 |
| | nm | | $ | 37,079 |
| | $ | 187,845 |
| | nm | | $ | 63,439 |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Change | | 2017 | |
| | | | | | | |
| Corporate expenses | $ | 30,171 |
| | (24%) | | $ | 39,459 |
| |
| Foreign exchange losses | 37,860 |
| | 76% | | 21,465 |
| |
| Interest expense and financing costs | 16,763 |
| | 31% | | 12,791 |
| |
| Income tax benefit | (1,036 | ) | | nm | | (9,337 | ) | |
| Total | $ | 83,758 |
| | 30% | | $ | 64,378 |
| |
| | | | | | | |
nm – not meaningful
Corporate Expenses: 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 2.7% and 3.3%2.6% for the three and nine months ended September 30, 2017, respectively,March 31, 2018, compared to 3.1% and 3.1%4.2% for the same periodsperiod in 2016, respectively.2017.
The decrease in corporate expenses for the three months ended September 30, 2017March 31, 2018 was primarily driven byattributable to a decrease in performance related compensationpersonnel costs and executive transition costs, together with an increase in the allocation of corporate costs to theour insurance and reinsurance segments, and a decrease in professional fees, partially offset by higher personnel expenses.
The increase in corporate expenses for the nine months ended September 30, 2017 was primarily driven by an increase in personnel expenses and information technology costs, partially offset by an increase in the allocationinformation technology costs.
Foreign Exchange Losses (Gains):
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses of $33$38 million for the three months ended September 30, 2017March 31, 2018 were primarily attributable to the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro.
ForeignThe foreign exchange losses of $90$21 million for the ninethree months ended September 30,March 31, 2017 were primarily attributable to the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro and the reclass of a cumulative translation adjustment balance of $24 million related to the wind-down of AXIS Specialty Australia from accumulated other comprehensive income to foreign exchange losses.losses as the wind-down of this operation was substantially complete as of March 31, 2017. This loss was partially offset by foreign exchange gains related to the strengthening of the pound sterling and the euro against the U.S. dollar which positively impacted the remeasurement of premium receivable balances.
Foreign exchange gains $14 millionInterest Expense and $70Financing Costs
Interest expense and financing costs are related to interest due on 5.875% Senior Notes issued in 2010, 2.65% Senior Notes and the 5.15% Senior Notes issued in 2014, and 4.0% Senior Notes issued in 2017, as well as Dekania Notes issued by Novae in 2004. Interest expenses and financing costs increased by $4 million for the three and nine months ended September 30, 2016, respectively, wereMarch 31, 2018 compared to the same period in 2017, primarily attributable to costs associated with the impact the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.4.0% Senior Notes and Dekania Notes.
Income Tax Expense (Benefit):
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the U.S. and Europe. Our effective tax rate is calculated as income tax expense (benefit) divided by net income (loss) before tax including interest in lossincome (loss) of equity method investments. This effective rate can vary between periods depending on the distribution of net income (loss) amongst tax jurisdictions, as well as other factors.
The tax benefit of $26$1 million recognized infor the three months ended September 30, 2017March 31, 2018 was primarily driven by an underwriting loss associated with catastrophethe generation of pre-tax losses recognizedin our U.K. operations, largely offset by the generation of pre-tax income in our U.S. operations.
The tax benefit of $39$9 million recognized infor the ninethree months ended September 30,March 31, 2017 was primarily driven by an underwriting loss associated with catastrophe losses recognized in our U.S. operations,attributable to share based compensation excess tax benefits which were recognized in the income statement and a tax adjustment relateddue to the bargain purchase gainadoption of Accounting Standards Update ("ASU") ASU 2016-09, "Compensation-Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting", as well as underwriting losses recognized in connection with the acquisition of Aviabel.
Income tax expenses recognized in the threeour U.S. and nine months ended September 30, 2016 were primarily driven by the generation of consolidated pre-tax net income in our European operations.
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, | | Nine months ended September 30, | |
| | 2017 | | % Change | | 2016 | | 2017 | | % Change | | 2016 | |
| | | | | | | | | | | | | |
| Fixed maturities | $ | 74,978 |
| | (1%) | | $ | 75,827 |
| | $ | 230,603 |
| | 1% | | $ | 229,423 |
| |
| Other investments | 17,373 |
| | (55%) | | 38,248 |
| | 59,973 |
| | nm | | 25,770 |
| |
| Equity securities | 3,223 |
| | (30%) | | 4,633 |
| | 11,048 |
| | (14%) | | 12,843 |
| |
| Mortgage loans | 2,895 |
| | 32% | | 2,191 |
| | 7,970 |
| | 40% | | 5,683 |
| |
| Cash and cash equivalents | 3,111 |
| | (17%) | | 3,768 |
| | 9,640 |
| | 36% | | 7,071 |
| |
| Short-term investments | 698 |
| | nm | | 337 |
| | 1,797 |
| | nm | | 708 |
| |
| Gross investment income | 102,278 |
| | (18%) | | 125,004 |
| | 321,031 |
| | 14% | | 281,498 |
| |
| Investment expense | (7,109 | ) | | (12%) | | (8,081 | ) | | (21,132 | ) | | (11%) | | (23,680 | ) | |
| Net investment income | $ | 95,169 |
| | (19%) | | $ | 116,923 |
| | $ | 299,899 |
| | 16% | | $ | 257,818 |
| |
| | | | | | | | | | | | | |
| Pre-tax yield:(1) | | | | | | | | | | | | |
| Fixed maturities | 2.7 | % | | | | 2.7 | % | | 2.7 | % | | | | 2.6 | % | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | % Change | | 2017 | |
| | | | | | | |
| Fixed maturities | $ | 83,958 |
| | 8% | | $ | 77,407 |
| |
| Other investments | 13,704 |
| | (28%) | | 18,962 |
| |
| Equity securities | 1,758 |
| | (49%) | | 3,478 |
| |
| Mortgage loans | 3,125 |
| | 26% | | 2,477 |
| |
| Cash and cash equivalents | 4,153 |
| | 34% | | 3,095 |
| |
| Short-term investments | 875 |
| | 100% | | 438 |
| |
| Gross investment income | 107,573 |
| | 2% | | 105,857 |
| |
| Investment expense | (6,574 | ) | | (9%) | | (7,193 | ) | |
| Net investment income | $ | 100,999 |
| | 2% | | $ | 98,664 |
| |
| | | | | | | |
| Pre-tax yield:(1) | | | | | | |
| Fixed maturities | 2.7 | % | | | | 2.7 | % | |
| | | | | | | |
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
Net investment income attributable to fixed maturities for the three and nine months ended September 30,March 31, 2018 was $84 million compared to net investment income of $77 million for the three months ended March 31, 2017, an increase of $7 million. The increase was comparabledue to same periods in 2016.our acquisitions of Novae and Aviabel.
Other Investments
The following table provides a breakdown of total net investment income from other investments:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Hedge, direct lending, private equity and real estate funds | $ | 14,786 |
| | $ | 29,459 |
| | $ | 52,526 |
| | $ | 6,127 |
| |
| Other privately held investments | 1,185 |
| | 370 |
| | 3,517 |
| | 177 |
| |
| CLO - Equities | 1,402 |
| | 8,419 |
| | 3,930 |
| | 19,466 |
| |
| Total net investment income from other investments | $ | 17,373 |
| | $ | 38,248 |
| | $ | 59,973 |
| | $ | 25,770 |
| |
| | | | | | | | | |
| Pre-tax return on other investments(1) | 2.1 | % | | 4.5 | % | | 7.5 | % | | 3.1 | % | |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Hedge, direct lending, private equity and real estate funds | $ | 10,589 |
| | $ | 16,946 |
| |
| Other privately held investments | 1,499 |
| | 987 |
| |
| CLO-Equities | 1,616 |
| | 1,029 |
| |
| Total net investment income from other investments | $ | 13,704 |
| | $ | 18,962 |
| |
| | | | | |
| Pre-tax return on other investments(1) | 1.7 | % | | 2.4 | % | |
| | | | | |
| |
(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. |
Net investment income attributable to other investments was $17 million and $60$14 million for the three and nine months ended September 30, 2017, respectively,March 31, 2018, compared to net investment income of $38 million and $26$19 million for the three and nine months ended September 30, 2016, respectively,March 31, 2017, a decrease of $5 million. The decrease was due to lower returns from hedge funds as a result of the improvement in theweaker performance of the global equity and credit markets translated into higher valuations of our hedge and direct lending funds.markets.
Net Realized Investment Gains (Losses)Losses
The following table provides a breakdown of net realized investment gains (losses):losses: |
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| On sale of investments: | | | | | | | | |
| Fixed maturities and short-term investments | $ | 3,404 |
| | $ | 4,303 |
| | $ | (25,659 | ) | | $ | (22,869 | ) | |
| Equity securities | 17,935 |
| | 4,994 |
| | 33,536 |
| | 2,881 |
| |
| | 21,339 |
| | 9,297 |
| | 7,877 |
| | (19,988 | ) | |
| OTTI charges recognized in earnings | (5,412 | ) | | (4,247 | ) | | (13,493 | ) | | (20,346 | ) | |
| Change in fair value of investment derivatives | (1,295 | ) | | 155 |
| | (9,195 | ) | | 39 |
| |
| Net realized investment gains (losses) | $ | 14,632 |
| | $ | 5,205 |
| | $ | (14,811 | ) | | $ | (40,295 | ) | |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| On sale of investments: | | | | |
| Fixed maturities and short-term investments | $ | (11,907 | ) | | $ | (32,158 | ) | |
| Equity securities | 16,281 |
| | 15,594 |
| |
| | 4,374 |
| | (16,564 | ) | |
| OTTI charges recognized in net income | (414 | ) | | (6,553 | ) | |
| Change in fair value of investment derivatives | 2,023 |
| | (1,933 | ) | |
| Net unrealized gains (losses) on equity securities | (20,813 | ) | | — |
| |
| Net investment losses | $ | (14,830 | ) | | $ | (25,050 | ) | |
| | | | | |
On saleSale of investmentsInvestments
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 securities to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.
Net realized investment gainslosses for the three months ended September 30, 2017March 31, 2018 were $15 million compared to net realized investment gainslosses of $5$25 million for the three months ended September 30, 2016, an increaseMarch 31, 2017, a decrease of $9$10 million. For the three months ended September 30, 2017,March 31, 2018, net realized investment gainslosses were primarily due to improved pricingthe adoption of ASU 2016-01 which resulted in net unrealized investment losses on equity securities.securities of $21 million being reported in net investment losses as opposed to other comprehensive income. For the three months ended September 30, 2016,March 31, 2017, the net realized investment gains were driven by improved pricing on fixed maturities and equity securities.
Net realized investment losses for the nine months ended September 30, 2017 were $15 million compared to net realized investment losses of $40 million for the nine months ended September 30, 2016, a decrease of $25 million. For the nine months ended September 30, 2017 and 2016, net realized investment losses were primarily due to foreign exchange losses on non-U.S. denominated securities.securities, as a result of the strengthening of the U.S. dollar.
OTTI chargesCharges
The OTTI charges for the three months ended September 30, 2017March 31, 2018 were $5$0.4 million compared to $4$7 million for the three months ended September 30, 2016,March 31, 2017, a decrease of $1over $6 million. The OTTI charges forFor the ninethree months ended September 30, 2017 were $13 million, compared to $20 million for the nine months ended September 30, 2016, a decrease of $7 million. For all periods presentedMarch 31, 2018, the OTTI charges were primarily due todriven by impairments on corporate debt securities. For the three months ended March 31, 2017, the OTTI charges were driven by impairments on corporate debt securities and losses on non-U.S. denominated securities as a resultdue of the decline in foreign exchange rates against the U.S. dollar.
Change in fair valueFair Value of investment derivativesInvestment 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 2017, we also introduced the use of interest rate swaps to reduce duration risk of our fixed income portfolio.
For the three months ended September 30,March 31, 2018, we recorded losses of $1 million relating to foreign exchange contracts and gains of $3 million relating to interest rates swaps. For the three months ended March 31, 2017, we recorded losses of $2 million relating to foreign exchange contracts and gains of less than $1 million relating to interest rates swaps. For the three months ended September 30, 2016 the fair value of foreign exchange contracts was unchanged.
For the nine months ended September 30, 2017, we recorded losses of $6 million relating to foreign exchange contracts and losses of $3 million relating to interest rates swaps. For the nine months ended September 30, 2016 the fair value of foreign exchange contracts was unchanged.
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, | | Nine months ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | |
| Net investment income | $ | 95,169 |
| | $ | 116,923 |
| | $ | 299,899 |
| | $ | 257,818 |
| |
| Net realized investments gains (losses) | 14,632 |
| | 5,205 |
| | (14,811 | ) | | (40,295 | ) | |
| Change in net unrealized gains (losses)(1) | 48,506 |
| | 35,075 |
| | 223,630 |
| | 303,573 |
| |
| Interest in loss of equity method investments | (661 | ) | | (2,434 | ) | | (8,402 | ) | | (2,434 | ) | |
| Total | $ | 157,646 |
| | $ | 154,769 |
| | $ | 500,316 |
| | $ | 518,662 |
| |
| | | | | | | | | |
| Average cash and investments(2) | $ | 14,533,027 |
| | $ | 14,470,231 |
| | $ | 14,519,902 |
| | $ | 14,457,978 |
| |
| | | | | | | | | |
| Total return on average cash and investments, pre-tax: | | | | | | | | |
| Inclusive of investment related foreign exchange movements | 1.1 | % | | 1.1 | % | | 3.4 | % | | 3.6 | % | |
| Exclusive of investment related foreign exchange movements(3) | 0.9 | % | | 1.1 | % | | 3.0 | % | | 3.9 | % | |
| | | | | | | | | |
|
| | | | | | | | | |
| | Three months ended March 31, | |
| | 2018 | | 2017 | |
| | | | | |
| Net investment income | $ | 100,999 |
| | $ | 98,664 |
| |
| Net investments losses | (14,830 | ) | | (25,050 | ) | |
| Change in net unrealized gains (losses)(1) | (107,265 | ) | | 96,131 |
| |
| Interest in loss of equity method investments | — |
| | (5,766 | ) | |
| Total | $ | (21,096 | ) | | $ | 163,979 |
| |
| | | | | |
| Average cash and investments(2) | $ | 15,679,134 |
| | $ | 14,632,701 |
| |
| | | | | |
| Total return on average cash and investments, pre-tax: | | | | |
| Inclusive of investment related foreign exchange movements | (0.1 | %) | | 1.1 | % | |
| Exclusive of investment related foreign exchange movements(3) | (0.4 | %) | | 1.0 | % | |
| | | | | |
| |
(1) | Change in net unrealized gains (losses) is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end. |
| |
(2) | The average cash and investments balance is calculated by taking the average of the month-end fair value balances held for the periods indicated. |
| |
(3) | Pre-tax return on cash and investments excluding foreign exchange movements is a non-GAAP financial measure as defined in SEC Regulation G.S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure included foreign exchange gains (losses) of $22$40 million and $(8)$12 million for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, and foreign exchange gains (losses) of $62 million and $(39) million for the nine months ended September 30, 2017 and 2016, respectively. |
CASH AND INVESTMENTS
The table below provides a breakdown of our cash and investments:
|
| | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | |
| | | Fair Value | | | Fair Value | |
| | | | | | | |
| Fixed maturities | | $ | 11,086,386 |
| | | $ | 11,397,114 |
| |
| Equity securities | | 659,751 |
| | | 638,744 |
| |
| Mortgage loans | | 360,381 |
| | | 349,969 |
| |
| Other investments | | 830,253 |
| | | 830,219 |
| |
| Equity method investments | | 108,597 |
| | | 116,000 |
| |
| Short-term investments | | 15,282 |
| | | 127,461 |
| |
| Total investments | | $ | 13,060,650 |
| | | $ | 13,459,507 |
| |
| | | | | | | |
| Cash and cash equivalents(1) | | $ | 1,631,127 |
| | | $ | 1,241,507 |
| |
| | | | | | | |
|
| | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | |
| | | Fair Value | | | Fair Value | |
| | | | | | | |
| Fixed maturities | | $ | 11,801,396 |
| | | $ | 12,622,006 |
| |
| Equity securities | | 435,742 |
| | | 635,511 |
| |
| Mortgage loans | | 364,769 |
| | | 325,062 |
| |
| Other investments | | 1,009,587 |
| | | 1,009,373 |
| |
| Equity method investments | | 108,597 |
| | | 108,597 |
| |
| Short-term investments | | 56,246 |
| | | 83,661 |
| |
| Total investments | | $ | 13,776,337 |
| | | $ | 14,784,210 |
| |
| | | | | | | |
| Cash and cash equivalents(1) | | $ | 1,644,580 |
| | | $ | 1,363,786 |
| |
| | | | | | | |
| |
(1) | Includes restricted cash and cash equivalents of $281$417 million and $202415 million at September 30, 2017March 31, 2018 and at December 31, 2016,2017, respectively. |
Overview
The fair value of total investments decreased by $399 million$1 billion for the ninethree months ended September 30, 2017,March 31, 2018, driven by the settlement of the RITC agreement of the 2015 and prior years of account of Syndicate 2007, funding of operating activities and the decline in market value of fixed maturities due to the funding of financing and operating activities, partially offset by the improvementrise in valuations of fixed income and equity securities.U.S. Treasury rates.
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, 2017 | | December 31, 2016 | |
| | Fair Value | | % of Total | | Fair Value | | % of Total | |
| | | | | | | | | |
| Fixed maturities: | | | | | | | | |
| U.S. government and agency | $ | 1,547,318 |
| | 14 | % | | $ | 1,656,069 |
| | 15 | % | |
| Non-U.S. government | 573,640 |
| | 5 | % | | 565,834 |
| | 5 | % | |
| Corporate debt | 4,503,967 |
| | 41 | % | | 4,600,743 |
| | 40 | % | |
| Agency RMBS | 2,306,822 |
| | 21 | % | | 2,465,135 |
| | 22 | % | |
| CMBS | 669,736 |
| | 6 | % | | 666,237 |
| | 6 | % | |
| Non-Agency RMBS | 43,817 |
| | — | % | | 56,921 |
| | — | % | |
| ABS | 1,288,870 |
| | 12 | % | | 1,222,214 |
| | 11 | % | |
| Municipals(1) | 152,216 |
| | 1 | % | | 163,961 |
| | 1 | % | |
| Total | $ | 11,086,386 |
| | 100 | % | | $ | 11,397,114 |
| | 100 | % | |
| | | | | | | | | |
| Credit ratings: | | | | | | | | |
| U.S. government and agency | $ | 1,547,318 |
| | 14 | % | | $ | 1,656,069 |
| | 15 | % | |
| AAA(2) | 4,381,049 |
| | 40 | % | | 4,165,226 |
| | 36 | % | |
| AA | 875,668 |
| | 8 | % | | 1,124,167 |
| | 10 | % | |
| A | 1,659,488 |
| | 15 | % | | 1,747,857 |
| | 15 | % | |
| BBB | 1,602,395 |
| | 14 | % | | 1,563,352 |
| | 14 | % | |
| Below BBB(3) | 1,020,468 |
| | 9 | % | | 1,140,443 |
| | 10 | % | |
| Total | $ | 11,086,386 |
| | 100 | % | | $ | 11,397,114 |
| | 100 | % | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | |
| | Fair Value | | % of Total | | Fair Value | | % of Total | |
| | | | | | | | | |
| Fixed maturities: | | | | | | | | |
| U.S. government and agency | $ | 1,796,965 |
| | 15 | % | | $ | 1,712,469 |
| | 14 | % | |
| Non-U.S. government | 661,224 |
| | 6 | % | | 806,299 |
| | 6 | % | |
| Corporate debt | 4,640,431 |
| | 39 | % | | 5,297,866 |
| | 43 | % | |
| Agency RMBS | 1,914,845 |
| | 16 | % | | 2,395,152 |
| | 19 | % | |
| CMBS | 1,030,621 |
| | 9 | % | | 777,728 |
| | 6 | % | |
| Non-Agency RMBS | 41,397 |
| | 1 | % | | 46,831 |
| | — | % | |
| ABS | 1,566,698 |
| | 13 | % | | 1,436,281 |
| | 11 | % | |
| Municipals(1) | 149,215 |
| | 1 | % | | 149,380 |
| | 1 | % | |
| Total | $ | 11,801,396 |
| | 100 | % | | $ | 12,622,006 |
| | 100 | % | |
| | | | | | | | | |
| Credit ratings: | | | | | | | | |
| U.S. government and agency | $ | 1,796,965 |
| | 15 | % | | $ | 1,712,469 |
| | 14 | % | |
| AAA(2) | 4,745,363 |
| | 40 | % | | 4,990,848 |
| | 39 | % | |
| AA | 879,762 |
| | 7 | % | | 1,050,631 |
| | 8 | % | |
| A | 1,761,064 |
| | 15 | % | | 2,090,632 |
| | 17 | % | |
| BBB | 1,634,628 |
| | 14 | % | | 1,758,291 |
| | 14 | % | |
| Below BBB(3) | 983,614 |
| | 9 | % | | 1,019,135 |
| | 8 | % | |
| Total | $ | 11,801,396 |
| | 100 | % | | $ | 12,622,006 |
| | 100 | % | |
| | | | | | | | | |
| |
(1) | Includes bonds issued by states, municipalities, and political subdivisions. |
| |
(2) | Includes U.S. government-sponsored agency RMBSResidential mortgage-backed securities ("RMBS") and CMBS.Commercial mortgage-backed securities ("CMBS"). |
| |
(3) | Non-investment grade and non-rated securities. |
At September 30, 2017,March 31, 2018, fixed maturities had a weighted average credit rating of AA- (2016:(2017: AA-) and an average duration of 3.33.2 years (2016: 3.5(2017: 3.3 years), and a duration inclusive of interest rate swaps of 3.1 years (2017: 3.2 years.years). At September 30, 2017,March 31, 2018, inclusive of the short-term investments and cash and cash equivalents, the average credit rating was AA- (2016:(2017: AA-) and duration (includinginclusive of interest rate swaps)swaps was 2.8 years (2016: 3.2(2017: 2.9 years).
NetAt March 31, 2018, net unrealized investment gainslosses on fixed maturities were $43$97 million, at September 30, 2017 compared to net unrealized investment lossesgains of $126$11 million at December 31, 2016, primarily2017, a decrease of $108 million due to the strengthening of the pound sterling and the euro againstrise in U.S. dollar which positively impacted valuations of non-U.S. denominated fixed maturity securities, together with the impact of the tightening of credit spreads on investment grade and high yield corporate debt.Treasury rates.
Equity Securities
NetAt March 31, 2018, net unrealized investment gains on equity securities were $41$62 million, compared to $83 million at December 31, 2016 compared to $972017, a decrease of $21 million at September 30, 2017, an increasedriven by sales of $56 million due to an improvement in valuations reflective of performance of the global equity markets.securities.
Mortgage Loans
During the ninethree months ended September 30, 2017,March 31, 2018, our investment in commercial mortgage loans was comparable to December 31, 2016.increased by $40 million. The commercial mortgage loans are high quality and collateralized by a variety of commercial properties and are diversified both geographically throughout the U. S.U.S. and by property type to reduce the risk of concentration. At September 30, 2017,March 31, 2018, there were no credit losses associated with our commercial mortgage loans portfolio.
Other Investments
The composition of our other investments portfolio is summarized as follows:
|
| | | | | | | | | | | | | | | |
| | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | |
| | | | | | | | | |
| Hedge funds | | | | | | | | |
| Long/short equity funds | $ | 64,067 |
| | 8 | % | | $ | 118,619 |
| | 14 | % | |
| Multi-strategy funds | 286,452 |
| | 35 | % | | 285,992 |
| | 34 | % | |
| Event-driven funds | 48,578 |
| | 6 | % | | 93,539 |
| | 11 | % | |
| Total hedge funds | 399,097 |
| | 49 | % | | 498,150 |
| | 59 | % | |
| | | | | | | | | |
| Direct lending funds | 232,389 |
| | 28 | % | | 134,650 |
| | 16 | % | |
| Private equity funds | 71,896 |
| | 9 | % | | 81,223 |
| | 10 | % | |
| Real estate funds | 46,691 |
| | 6 | % | | 13,354 |
| | 2 | % | |
| Total hedge, direct lending, private equity and real estate funds | 750,073 |
| | 92 | % | | 727,377 |
| | 87 | % | |
| | | | | | | | | |
| Other privately held investments | 43,398 |
| | 5 | % | | 42,142 |
| | 5 | % | |
| CLO - Equities | 36,782 |
| | 3 | % | | 60,700 |
| | 8 | % | |
| Total other investments | $ | 830,253 |
| | 100 | % | | $ | 830,219 |
| | 100 | % | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | |
| | | | | | | | | |
| Hedge funds | | | | | | | | |
| Long/short equity funds | $ | 25,489 |
| | 3 | % | | $ | 38,470 |
| | 4 | % | |
| Multi-strategy funds | 283,298 |
| | 28 | % | | 286,164 |
| | 28 | % | |
| Event-driven funds | 37,680 |
| | 4 | % | | 39,177 |
| | 4 | % | |
| Total hedge funds | 346,467 |
| | 35 | % | | 363,811 |
| | 36 | % | |
| | | | | | | | | |
| Direct lending funds | 261,902 |
| | 26 | % | | 250,681 |
| | 25 | % | |
| Private equity funds | 65,811 |
| | 7 | % | | 68,812 |
| | 7 | % | |
| Real estate funds | 54,720 |
| | 5 | % | | 50,009 |
| | 5 | % | |
| Total hedge, direct lending, private equity and real estate funds | 728,900 |
| | 73 | % | | 733,313 |
| | 73 | % | |
| | | | | | | | | |
| Other privately held investments | 48,787 |
| | 5 | % | | 46,430 |
| | 5 | % | |
| CLO-Equities | 28,556 |
| | 2 | % | | 31,413 |
| | 2 | % | |
| Overseas deposits | 203,344 |
| | 20 | % | | 198,217 |
| | 20 | % | |
| Total other investments | $ | 1,009,587 |
| | 100 | % | | $ | 1,009,373 |
| | 100 | % | |
| | | | | | | | | |
TheDuring the three month period ended March 31, 2018, the fair value of total hedge funds decreased by $99$17 million during the nine month period ended September 30, 2017 driven by $127$20 million of net redemptions offset by $28$3 million of price appreciation. Certain of these funds may be subject to restrictions on redemptions which may limit our ability to liquidate these investments in the short term. See Note 4(c)3(c) to the Consolidated Financial Statements 'Investments' for further details on these restrictions and details on unfunded commitments relating to our other investment portfolio.
Overseas deposits include investments in private funds held by Syndicate 2007 where the underlying investments are primarily U.S. government, non-U.S. government and corporate debt securities. The funds do not trade on an exchange therefore are not included within the available for sale investments category.
Equity Method Investments
During 2016, we paid $108 million including direct transactions costs to acquire 19% of the common equity of Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by AXIS Capital and Blackstone.The Blackstone Group L.P. ("Blackstone"). Harrington is not a variable interest entity. Given that we exercise significant influence over this investee we account for our ownership in Harrington under the equity method of accounting.
During the nine months ended September 30, 2017, we recorded an impairment charge of $9 million, related to a U.S. based insurance company, which reduced its carrying value to $nil. This charge is included in interest in income (loss) of equity method investments in the Consolidated Statement of Operations.
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, 20162017 for a general discussion of our liquidity and capital resources. During the nine months ended September 30, 2017, we:
redeemed the remaining $351 million of 6.875% Series C preferred shares on April 17, 2017; and
suspended our open market share repurchase program following the announcement of the offer to acquire Novae on July 5, 2017.
The following table summarizes our consolidated capital at:
|
| | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | |
| | | | | |
| Senior notes | $ | 993,797 |
| | $ | 992,950 |
| |
| | | | | |
| Preferred shares | 775,000 |
| | 1,126,074 |
| |
| Common equity | 4,679,699 |
| | 5,146,296 |
| |
| Shareholders’ equity | 5,454,699 |
| | 6,272,370 |
| |
| Total capital | $ | 6,448,496 |
| | $ | 7,265,320 |
| |
| | | | | |
| Ratio of debt to total capital | 15.4 | % | | 13.7 | % | |
| | | | | |
| Ratio of debt and preferred equity to total capital | 27.4 | % | | 29.2 | % | |
| | | | | |
|
| | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 | |
| | | | | |
| Debt | $ | 1,376,835 |
| | $ | 1,376,529 |
| |
| | | | | |
| Preferred shares | 775,000 |
| | 775,000 |
| |
| Common equity | 4,489,395 |
| | 4,566,264 |
| |
| Shareholders’ equity | 5,264,395 |
| | 5,341,264 |
| |
| Total capital | $ | 6,641,230 |
| | $ | 6,717,793 |
| |
| | | | | |
| Ratio of debt to total capital | 20.7 | % | | 20.5 | % | |
| | | | | |
| Ratio of debt and preferred equity to total capital | 32.4 | % | | 32.0 | % | |
| | | | | |
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, 2017 reflected a decrease in preferred equity due to redemption of the remaining $351 million of 6.875% Series C preferred shares on April 17, 2017.
We believe that our financial flexibility remains strong.
Secured Letter of Credit FacilitiesFacility
On March 27, 2017, the $250 million credit facility entered into by AXIS Capital and certain of its subsidiaries and a syndication of lenders expired.
On March 27, 2017,28, 2018, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing $250 million secured letter of credit facility with Citibank Europe plc (the "$250 Million Facility") under their aggregate $750 million secured letter of credit facility with Citibank Europe plc (the "$750 Million Facility") to extend the expiration date to March 31, 2019.
The terms and conditions of the additional $500 million secured letter of credit facility (the “LOC Facility”) with Citibank Europe plc (“Citibank”) to include an additional
$250under the $750 Million Facility remain unchanged. The $500 million of secured letter of credit capacity (the “$250 Million Facility”) pursuant to a Committed Facility Letter and an amendment to the Master Reimbursement Agreement (the “LOC Facility Documents”). Under the terms of the $250 Million Facility, lettersfacility expires December 31, 2019.
Letters of credit to a maximum aggregate amount of $250 million are available for issuance on behalf ofissued under the Participating Subsidiaries. These letters of credit$750 Million Facility will principally be used to support the reinsurance obligations of the Participating Subsidiaries. The $250 Million Facility isParticipating Subsidiaries are subject to certain covenants, including the requirement to maintain sufficient collateral as defined in the LOC Facility Documents, to cover all of the obligations outstanding under the LOC$750 Million Facility.
Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the LOC$750 Million Facility to any or all of the Participating Subsidiaries. The $250 million Facility expires March 31, 2018. The terms and conditions
Common Equity
During the ninethree months ended September 30, 2017March 31, 2018, our common equity decreased by $46779 million. The following table reconciles our opening and closing common equity positions: |
| | | | | |
| Nine months ended September 30, | 2017 | |
| | | |
| Common equity - opening | $ | 5,146,296 |
| |
| Net loss | (341,541 | ) | |
| Shares repurchased for treasury | (285,659 | ) | |
| Change in unrealized appreciation on available for sale investments, net of tax | 216,630 |
| |
| Common share dividends | (98,273 | ) | |
| Preferred share dividends | (36,154 | ) | |
| Share-based compensation expense recognized in equity | 30,692 |
| |
| Foreign currency translation adjustment | 46,824 |
| |
| Cost of treasury shares reissued | 884 |
| |
| Common equity - closing | $ | 4,679,699 |
| |
| | | |
|
| | | | | |
| Three months ended March 31, | 2018 | |
| | | |
| Common equity - opening | $ | 4,566,264 |
| |
| Treasury shares reissued | 1,661 |
| |
| Share-based compensation expense | 9,603 |
| |
| Change in unrealized appreciation on available for sale investments, net of tax | (111,406 | ) | |
| Foreign currency translation adjustment | 1,270 |
| |
| Net income | 73,202 |
| |
| Preferred share dividends | (10,656 | ) | |
| Common share dividends | (33,380 | ) | |
| Treasury shares repurchased | (7,163 | ) | |
| Common equity - closing | $ | 4,489,395 |
| |
| | | |
During the ninethree months ended September 30, 2017,March 31, 2018, we repurchased 4.30.1 million common shares repurchased for a total of $286$7 million (including $261 million pursuant to our Board-authorized share repurchase program and $25 million relating to shares purchased in connection with the vesting of restricted stock awards granted under our 2007 Long-Term Equity Compensation Plan).Plan.
At November 8, 2017, the remaining authorization under the common share repurchase program approved by our Board of Directors was $739 million (refer to Part II, Item 2 'Unregistered Sales of Equity Securities and Use of Proceeds' for additional information).
However, followingFollowing the Company's announcement of the offer to acquire Novae on July 5, 2017, the Company suspended its open market share repurchase program. On December 31, 2017, authorization under the Board-authorized share repurchase plan for common share repurchases through 2017 expired. A common share repurchase plan has not been authorized for 2018.
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 20162017 Annual Report on Form 10-K, we believe that the material items requiring such subjective and complex estimates are our:
reserves for losses and loss expenses;
reinsurance recoverable balances;
premiums;
fair value measurements for our financial assets and liabilities; and
assessments of other-than-temporary impairments.
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, 20162017, continues to describe the significant estimates and judgments included in the preparation of our Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Item 1, Note 1 'Basis of Presentation and Significant Accounting Policies' to the Consolidated Financial Statements and Item 8, Note 2 'Significant Accounting Policies' to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, for a discussion of recently issued accounting pronouncements that we have not yet adopted.pronouncements.
OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
At September 30, 2017March 31, 2018, we have not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Item 7A included in our 2016Annual Report on Form 10-K. With10-K for the year ended December 31, 2017. There have been no material changes to this item since December 31, 2017, 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, 2016.below.
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, 2017 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | (29,134 | ) | | $ | (9,733 | ) | | $ | 85,047 |
| | $ | (177,485 | ) | | $ | 167,796 |
| | $ | 38,025 |
| | $ | 156,473 |
| | $ | 230,989 |
| |
| Foreign currency derivatives, net | 12,702 |
| | 7,221 |
| | (101,930 | ) | | 249,587 |
| | 89,740 |
| | (8,879 | ) | | 9,880 |
| | 258,321 |
| |
| Net managed foreign currency exposure | (16,432 | ) | | (2,512 | ) | | (16,883 | ) | | 72,102 |
| | 257,536 |
| | 29,146 |
| | 166,353 |
| | 489,310 |
| |
| Other net foreign currency exposure | 1 |
| | — |
| | (49 | ) | | 1,558 |
| | 1,049 |
| | — |
| | 83,283 |
| | 85,842 |
| |
| Total net foreign currency exposure | $ | (16,431 | ) | | $ | (2,512 | ) | | $ | (16,932 | ) | | $ | 73,660 |
| | $ | 258,585 |
| | $ | 29,146 |
| | $ | 249,636 |
| | $ | 575,152 |
| |
| Net foreign currency exposure as a percentage of total shareholders’ equity | (0.3 | %) | | — | % | | (0.3 | %) | | 1.4 | % | | 4.7 | % | | 0.5 | % | | 4.6 | % | | 10.5 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | (1,643 | ) | | $ | (251 | ) | | $ | (1,693 | ) | | $ | 7,366 |
| | $ | 25,859 |
| | $ | 2,915 |
| | $ | 24,964 |
| | $ | 57,517 |
| |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | AUD | | NZD | | CAD | | EUR | | GBP | | JPY | | Other | | Total | |
| | | | | | | | | | | | | | | | | |
| At March 31, 2018 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | (21,320 | ) | | $ | (3,847 | ) | | $ | (35,289 | ) | | $ | 156,039 |
| | $ | 59,505 |
| | $ | 2,079 |
| | $ | 138,642 |
| | $ | 295,809 |
| |
| Foreign currency derivatives, net | (62,260 | ) | | 7,236 |
| | (136,357 | ) | | 238,506 |
| | (63,860 | ) | | (5,931 | ) | | 3,795 |
| | (18,871 | ) | |
| Net managed foreign currency exposure | (83,580 | ) | | 3,389 |
| | (171,646 | ) | | 394,545 |
| | (4,355 | ) | | (3,852 | ) | | 142,437 |
| | 276,938 |
| |
| Other net foreign currency exposure | 1 |
| | — |
| | 6 |
| | 85 |
| | 75 |
| | — |
| | 85,813 |
| | 85,980 |
| |
| Total net foreign currency exposure | $ | (83,579 | ) | | $ | 3,389 |
| | $ | (171,640 | ) | | $ | 394,630 |
| | $ | (4,280 | ) | | $ | (3,852 | ) | | $ | 228,250 |
| | $ | 362,918 |
| |
| Net foreign currency exposure as a percentage of total shareholders’ equity | (1.6 | %) | | 0.1 | % | | (3.3 | %) | | 7.5 | % | | (0.1 | %) | | (0.1 | %) | | 4.3 | % | | 6.9 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | (8,358 | ) | | $ | 339 |
| | $ | (17,164 | ) | | $ | 39,463 |
| | $ | (428 | ) | | $ | (385 | ) | | $ | 22,825 |
| | $ | 36,292 |
| |
| | | | | | | | | | | | | | | | | |
| |
(1) | Assumes 10% change in underlying currencies relative to the U.S. dollar. |
Total Net Foreign Currency Exposure
At September 30, 2017,March 31, 2018, our total net foreign currency exposure was $575$363 million net long, driven by increases in our exposures to the euro pound sterling, Japanese yen and other non-core currencies primarily due to new business written during the ninethree months ended September 30, 2017. In addition, our pound sterling exposure was increased to fundMarch 31, 2018 associated with the acquisition of Novae. Managed exposure in Other is primarily Indian rupee, UAE Dirham (pegged to USD) and Israeli shekel. Other net exposure of $83 million is driven by our emerging markets debt fixed income portfolio.January 2018 renewal season.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure 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”"Exchange Act")) as ofat September 30, 2017March 31, 2018. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as ofat September 30, 2017March 31, 2018, 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.
Changes in Internal Control Over Financial Reporting
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, 2017March 31, 2018. Based upon that evaluation, there were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we arethe Company is 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 usthe Company in the ordinary course of insurance or reinsurance operations; estimatedoperations. Estimated amounts payable under such proceedings are included in the reserve for losses and loss expenses in the Consolidated Balance Sheets.
We areThe Company is not a party to any material legal proceedings arising outside the ordinary course of business.
ITEM 1A. RISK FACTORS
Other than the additional risk factor disclosed in our Quarterly Report on Form 10-Q for the period ended June 30, 2017, there have beenThere were no material changes tofrom the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information regarding the number of shares we repurchased during the three months ended September 30, 2017March 31, 2018:
ISSUER PURCHASES OF EQUITY SECURITIES
Common Shares
|
| | | | | | | | | |
Period | Total Number of Shares Repurchased | Average Price Paid Per Share | Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Repurchased Under the Announced Plans or Programs(2) | |
| | | | | |
July 1-31, 2017 | 51 |
|
| $65.74 |
| 49 |
| $739.0 million | |
August 1-31, 2017
| — |
|
| $— |
| — |
| $739.0 million | |
September 1-30, 2017
| — |
|
| $— |
| — |
| $739.0 million | |
Total | 51 |
| | 49 |
| $739.0 million | |
| | | | | |
|
| | | | | | | | | | |
Period | Total Number of Shares Repurchased(a) | Average Price Paid Per Share | Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Repurchased Under the Announced Plans or Programs(b) | |
| | | | | |
January 1-31, 2018 | 22 |
|
| $49.27 |
| — |
| — |
| |
February 1-28, 2018
| 1 |
|
| $50.04 |
| — |
| — |
| |
March 1-31, 2018
| 126 |
|
| $47.87 |
| — |
| — |
| |
Total | 149 |
| | — |
| — |
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| | | | | |
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(1)(a) | From timeShares are repurchased from employees to time, we purchase shares in connection withsatisfy withholding tax liabilities upon 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.units. |
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(2)(b) | On July 5, 2017, following the offer to acquire Novae Group plc ("Novae"), the Company suspended its open market share repurchase program. On October 2, 2017, AXIS Capital acquired the shares of Novae. On December 9, 2016, our Board of Directors authorized a31, 2017, authorization under the Board-authorized share repurchase plan to repurchase up to $1 billion of ourfor common sharesshare repurchases through to December 31, 2017. The2017 expired. A common share repurchase authorization which became effective on January 1, 2017, replaced the previous plan which had $253 million available through the end of 2016. Share repurchases may be effected from time to time in the open market or privately negotiated transactions, depending on market conditions.has not been authorized for 2018. |
ITEM 5. OTHER INFORMATION
Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934
Section 13(r) of the Securities Exchange Act of 1934, as amended, requires issuers to disclose in their annual and quarterly reports whether they or any of their affiliates knowingly engaged in certain activities with Iran or with individuals or entities that are subject to certain sanctions under U.S. law. Issuers are required to provide this disclosure even where the activities, transactions or dealings are conducted outside of the U.S. in compliance with applicable law.
As and when allowed by the applicable law and regulations, certain of our non-U.S. subsidiaries provide treaty reinsurance coverage to non-U.S. insurers on a worldwide basis, including insurers of liability, marine, aviation and energy risks, and as a result, these underlying reinsurance portfolios may have some exposure to Iran. In addition, we underwrite insurance and facultative reinsurance on a global basis to non-U.S. insureds and insurers, including for liability, marine, aviation and energy risks. Coverage provided to non-Iranian business may indirectly cover an exposure in Iran. For example, certain of our operations underwrite global marine hull and cargo policies that provide coverage for vessels navigating into and out of ports worldwide, including Iran. For the quarter ended September 30, 2017,March 31, 2018, there has been no material amount of premium allocated or apportioned to activities relating to Iran. As we believe these activities are permitted under applicable laws and regulations, we intend for our non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.
ITEM 6. EXHIBITS
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| Rule 2.7 Announcement, dated July 5, 2017 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 6, 2017). |
| Rule 2.7 Announcement, dated August 24, 2017 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on August 25, 2017). |
| 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). |
| 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). |
| 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). |
| 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). |
| Certificate of Designations establishing the specific rights, preferences, limitations and other terms of the Series E Preferred Shares (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on November 7, 2016). |
| Separation Agreement by and between Chris DiSipio and AXIS Specialty U.S. Services, Inc. dated March 14, 2018. |
| Form of Employee Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K filed on February 28, 2018). |
| Form of Employee Restricted Stock Unit Award Agreement (Performance Vesting). |
| 2018 Directors Annual Compensation Program.Program (incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K filed on February 28, 2018). |
| Amendment dated March 28, 2018 to Committed Facility Letter dated March 27, 2017, by and among AXIS Specialty Limited, AXIS Re SE, AXIS Specialty Europe SE, AXIS Insurance Company, AXIS Reinsurance Company, AXIS Surplus Insurance Company and Citibank Europe plc (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 3, 2018). |
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| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 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, 2017March 31, 2018 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2017March 31, 2018 and December 31, 2016;2017; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2018 and 2016;2017; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017March 31, 2018 and 2016;2017; (iv) Consolidated Statements of Changes in Shareholders' Equity for the ninethree months ended September 30, 2017March 31, 2018 and 2016;2017; (v) Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2018 and 2016;2017; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. |
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* | ExhibitExhibits 10.1 representsthrough 10.4 represent 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.
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: November 8, 2017May 9, 2018
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AXIS CAPITAL HOLDINGS LIMITED |
By: | /S/ S/ ALBERT BENCHIMOL |
| Albert Benchimol |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| /S/ JOSEPH HENRY
|
| Joseph Henry/S/ PETER VOGT |
| Executive Vice President and Peter Vogt |
| Chief Financial Officer |
| (Principal Financial Officer) |