Washington, D.C. 20549
(I.R.S. Employer Identification No.)
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
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.
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:
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 financial instruments categorized inas Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many financial 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.
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.
•Common shareholders’ equityequity of $4.7 billion and diluted$4.7 billion; book value per diluted common share of $55.33$54.75
(1)Operating income (loss) and operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measures, net income (loss) available (attributable) to common shareholders and earnings (loss) per diluted common share, respectively, and a discussion of the rationale for the presentation of these items are provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(2)Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss), the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations'.
(3)The debt to total capital ratio is calculated by dividing debt by total capital. Total capital represents the sum of total shareholders’ equity and debt.
| | |
(1) | Non-GAAP operating income (loss) and non-GAAP operating income (loss) per diluted common share are non-GAAP financial measures as defined in SEC Regulation G. 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's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
|
OVERVIEW
| | |
(2) | Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in SEC Regulation G. 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 'Results of Operations', which is included in the 'Executive Summary' section of this MD&A.
|
EXECUTIVE SUMMARY
Business Overview
We areAXIS Capital Holdings Limited ("AXIS Capital"), through its operating subsidiaries, is 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 toWe 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. OurThe execution on thisof our strategy for the first nine months of 2017 included: 2020 included the following:
continued growth•implementing a global response strategy to help manage and mitigate the impact of COVID-19, spanning underwriting, capital management, investments, operations and employee welfare;
•increasing our accidentrelevance in a select number of attractive specialty lines insurance and health lines, which is focused on specialty accidenttreaty reinsurance markets, and health products;
growth of our syndicate at Lloyd's which provides us with access to Lloyd's worldwide licenses and an extensive distribution network. Duringcontinuing 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 strategystrategy;
•continuing to grow a leadership position in the areas of our business with strong potential for profitable growth including U.S. excess and increased our scalesurplus lines, North America professional lines and relevance in key markets;Lloyd's specialty insurance business;
continued rebalancing of•continuing to re-balance our portfolio towards less volatile lines of business that carry attractive rates;
continued improvement•continuing to improve in the effectiveness and efficiency of our operating platforms and processes;
increased investment•investing in data and analytics;technology capabilities, and tools to empower our underwriters and enhance the service that we provide to our customers;
broadened•broadening risk-funding sources and developedthe development of vehicles that utilize third-party capital including:capital; and
Our investment in Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by AXIS Capital•growing our corporate citizenship program to give back to our communities and The Blackstone Group L.P. ("Blackstone"). Harrington Re’s strategy ishelp contribute 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 characteristics 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; andmore sustainable future.
AXIS Ventures Reinsurance Limited, which manages capital for investors interested in deploying funds directly into the property-catastrophe and other short-tail business.
On April 1, 2017, the Company acquired general aviation insurer and reinsurer Aviabel, increasing the Company's scale and relevance in the global aviation market. The Company will continue to maintain Aviabel's physical presence in Brussels and Amsterdam.
On April 17, 2017, the Company redeemed the remaining $351 million 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%.
Effective July 1, 2017, our reinsurance segment no longer writes derivative-based risk management products which address weather risks.
On July 5, 2017 the Company announced that it had agreed on the terms of a recommended offer 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 be included in the results of the Company's insurance and 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.
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.
Outlook
We are committed to being a leaderleadership in specialty risk, an area in whichinsurance and global reinsurance, where we already have depth of talent and experience, and have earned an outstanding reputation. Committedexpertise. We believe we are well-positioned to itssucceed in the rapidly evolving marketplace. Through our hybrid strategy, AXIS Capital haswe have developed substantial platforms, inproviding us with both insurance and reinsurance, providing it with balance and diversification. Management believes itsdiversification, enabling us to take advantage of positive opportunities in either market to generate the most attractive risk-return portfolio for our shareholders. We believe our market positioning, franchise, expert underwritersunderwriting expertise, best-in-class claims management capabilities, and strong relationships with our distributors and clients will provide opportunities in 2018,for increased profitability, with variances amongstdifferences among 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 abundant third party capital. Therefore, 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.
CompetitiveRates, terms and conditions continueacross virtually all insurance lines continued to impact worldwidesee accelerating improvement. While the insurance marketsmarket remains competitive with greatest pressures impacting catastrophe exposed propertycapacity and certain global specialty lines of business. We have observed greater competitiveness for large accounts comparedcapital willing to smaller risks. These competitive pressures have led to price reductions across most lines ofsupport business with decreasesa broad range of return hurdles in international markets generallycertain pockets, there has been more severe than those observed in the U.S. During the monthconsistent signs 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.firming. We believe markets conditionsexpect many specialty segments will remain uncertain through the end of the year and possibly beyondexperience further pricing improvements as carriers assess pricing, portfolio construction and account preferences.preferences through the course of the year. In this challengingcompetitive market environment, we are focusing on lines of business and marketsmarket segments that remainare adequately priced, and we are trading off growth for profitability in other areas.
The reinsurance market is also experiencing acceleration in rates, and improved terms and conditions, as well as restructuring of treaties and demand for more reinsurance. This is being driven by meaningful adjustments to both supply and demand given the significant losses in recent years and mounting pressure in the industry with uncertainty of future loss costs, record low interest rates, and pressure on reserves in long-tail lines. We believe this will contribute to a healthier, more profitable market that still requires strong underwriting discipline and portfolio management. During the last few years, we have repositioned our portfolio while emphasizing strong underwriting and, at the same time, have achieved increased relevance with our clients in the markets where we choose to compete. The external environment is dynamic with reinsurance markets improving quickly, and conditions now expected to be favorable in several areas. These conditions allow for profitable growth in some areas and continued discipline in others. Overall, we believe our business is well-positioned for the current market environment.
We are encouraged by the pricing improvements that we are seeing across both the insurance and reinsurance segments and – at the same time – maintain a disciplined approach to our underwriting. While there is positive rate momentum across most lines and markets, not all lines are at adequate levels and, in multiple cases, more rate is needed to deliver adequate returns, particularly given recent high loss experience in the market, COVID-19, and lower interest rates. Where prices appropriately reflect these trends to deliver adequate profitability we will look to grow within our risk and volatility guidelines. With the most balanced book in the history of our company, we believe AXIS is well positioned to drive profitable growth within the current market environment.
Recent Developments Related to COVID-19
On March 11, 2020, COVID-19, a novel coronavirus outbreak, was declared a pandemic by the World Health Organization. The COVID-19 crisis upended the marketplace and society on a global scale, and its impact is being felt within the insurance and reinsurance industry and at AXIS Capital.
COVID-19, and its related impacts, are an emerging and evolving risk to which we are exposed from an underwriting, investments, capital and liquidity, operations and employee welfare perspective. We have implemented a global response strategy to help manage and mitigate these risks.
Our team continues to track the situation closely, including stress and scenario testing on existing underwriting and investment exposures, taking into consideration among other assumptions, the possible severity and duration of the outbreak.
Reserving
At September 30, 2020 estimated pre-tax catastrophe and weather-related losses, net of reinstatement premiums, associated with first party coverages attributable to the COVID-19 pandemic, remains unchanged from the first quarter at $235 million. First party losses are primarily associated with property related coverages, but also includes event cancellation, and accident and health coverages.
The estimate of net reserves for losses and loss expenses related to the COVID-19 pandemic is subject to significant uncertainty. This uncertainty is driven by the inherent difficulty in making assumptions around the impact of the COVID-19 pandemic due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts to world-wide economies and the health of the global population.
The estimate does not include an explicit estimate of potential losses arising from the indirect impacts of COVID-19 which would primarily impact third party coverages such as professional lines, liability and credit lines. We expect that it may take several quarters, or potentially several years, for the full impact of COVID-19 and its economic repercussions on these lines of business to fully emerge.
While we believe the overall estimate of net reserves for losses and loss expenses is adequate for losses and loss adjustment expenses that have been incurred at September 30, 2020 based on current facts and circumstances, we will continue to assess pricing adequacymonitor the appropriateness of our assumptions as market conditionsnew information comes to light and trends evolve. Where necessary we also continuewill adjust the estimate of net reserves for losses and loss adjustment expenses, as appropriate. Refer to shift'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment' for further information.
Actual losses for this event may ultimately differ materially from current estimates.
Underwriting
As our business mix toward smaller, less volatile risk accounts which we believe will enable us to achieve better, more stable attritional loss experience. In addition, our recent acquisition of Novae increases our scaleindustry 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’s of London.
The reinsurance markets' trading environment remains challenging in the many of lines of business and geographical regions. The marketsociety continues to be influencednavigate the challenges brought on by excess capacity, strong balance sheetsCOVID-19, we are closely monitoring cash receipts from our customers and reinsurers, giving due consideration to related directives issued by certain government agencies. At September 30, 2020, we considered the potential financial impact of established market participantsCOVID-19 when determining allowances for expected credit losses for insurance and a consolidation of reinsurance purchasing. As noted above, our industry experienced substantial natural catastrophe loss activity during the month ofpremium balances receivable and reinsurance recoverable balances on unpaid losses. Based on facts and circumstances at that time, we did not adjust allowances for expected credit losses at 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.30, 2020. We will continue to protectmonitor the qualityappropriateness of allowances for expected credit losses as new information comes to light. Adjustments to allowances for expected credit losses in subsequent periods could be material.
Our underwriters are reassessing risk appetite in light of the COVID-19 pandemic, in particular as it relates to exposure to communicable diseases, viruses, pathogens and profitabilityother similar risks. We are taking appropriate steps to mitigate exposure to these types of risks, including increasing pricing and adding policy terms and conditions, including exclusions. During the remainder of 2020, premium volume may be adversely impacted due to the disruption to both society and the insurance and reinsurance marketplace on a global scale. Adjustments to premiums in subsequent periods could be material.
Capital and Liquidity
Following two debt issuances in 2019 that raised $725 million at favorable rates, we redeemed our Series D preferred shares of $225 million at par in January 2020 and we repaid unsecured senior notes of $500 million at maturity in June 2020. At September 30, 2020, no long-term debt will mature until the end of 2027. In addition, our common share repurchase plan expired in 2017 and has not been renewed. We continue to have capital above the level required by our group regulator, the Bermuda Monetary Authority.
We have a prudently constructed fixed maturity portfolio of $13 billion, with an average credit rating of AA-, which closely matches the duration of our existing book, targeting larger sharesliabilities. Unrestricted cash and cash equivalents of $1 billion and equity securities of 0.4 billion at September 30, 2020 provide additional liquidity.
In the first quarter, we reduced our 2020 expense budget by approximately $50 million based on the specific impacts of the more attractive treaties, managingCOVID-19 pandemic on our business. A significant amount of these temporary expense savings were realized in recent quarters by reducing performance related compensation and travel and entertainment costs, given remote working. In addition, we have deferred non-critical hires and delayed certain projects.
We expect cash flows generated from operations, combined with liquidity provided by our investment portfolio, will be sufficient to cover cash outflows and other contractual commitments that become due within one year after the overall volatility ofdate that the financial statements are issued. We review each claim on an individual basis and where our reinsurance book, and expandingpolicies provide coverage, we make payments to help our already strong group of strategic capital partners with whom to share our risks.insureds overcome financial setbacks.
52
CONSOLIDATED RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Underwriting revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 1,331,178 | | | (5%) | | $ | 1,406,506 | | | $ | 5,478,519 | | | (3%) | | $ | 5,637,491 | | |
| Net premiums written | 815,982 | | | (5%) | | 856,081 | | | 3,550,960 | | | (4%) | | 3,703,460 | | |
| Net premiums earned | 1,091,312 | | | (6%) | | 1,157,307 | | | 3,283,941 | | | (4%) | | 3,415,126 | | |
| Other insurance related income (loss) | 1,440 | | | (6%) | | 1,533 | | | (5,270) | | | nm | | 11,385 | | |
| Underwriting expenses: | | | | | | | | | | | | |
| Net losses and loss expenses | (879,677) | | | 3% | | (850,913) | | | (2,464,012) | | | 13% | | (2,187,403) | | |
| Acquisition costs | (230,564) | | | (11%) | | (260,026) | | | (697,716) | | | (9%) | | (762,807) | | |
| Underwriting-related general and administrative expenses(1) | (117,835) | | | (7%) | | (126,619) | | | (361,623) | | | (9%) | | (398,540) | | |
| Underwriting income (loss) | $ | (135,324) | | | | | $ | (78,718) | | | $ | (244,680) | | | | | $ | 77,761 | | |
| | | | | | | | | | | | | |
| Net investment income | 101,956 | | | (12%) | | 115,763 | | | 240,098 | | | (33%) | | 361,014 | | |
| Net investment gains | 55,609 | | | nm | | 14,527 | | | 45,777 | | | (6%) | | 48,522 | | |
| Corporate expenses(1) | (20,988) | | | (27%) | | (28,903) | | | (74,915) | | | (23%) | | (97,468) | | |
| Other (expenses) revenues, net | (76,308) | | | nm | | 41,501 | | | (68,401) | | | nm | | 15,323 | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Reorganization expenses | (1,413) | | | nm | | (11,215) | | | (822) | | | nm | | (29,310) | | |
| Amortization of value of business acquired | (1,028) | | | nm | | (4,368) | | | (4,111) | | | nm | | (24,666) | | |
| Amortization of intangible assets | (2,838) | | | —% | | (2,831) | | | (8,564) | | | (2%) | | (8,744) | | |
| | | | | | | | | | | | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | (80,334) | | | | | 45,756 | | | (115,618) | | | | | 342,432 | | |
| Income tax (expense) benefit | 12,056 | | | nm | | (8,147) | | | 6,030 | | | nm | | (23,850) | | |
| Interest in income (loss) of equity method investments | 2,896 | | | nm | | 792 | | | (13,579) | | | nm | | 5,645 | | |
| Net income (loss) | $ | (65,382) | | | | | $ | 38,401 | | | $ | (123,167) | | | | | $ | 324,227 | | |
| | | | | | | | | | | | | |
| Preferred share dividends | (7,563) | | | (29%) | | (10,656) | | | (22,688) | | | (29%) | | (31,969) | | |
| | | | | | | | | | | | | |
| Net income (loss) available (attributable) to common shareholders | $ | (72,945) | | | | | $ | 27,745 | | | $ | (145,855) | | | | | $ | 292,258 | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
nm – not meaningful
(1)Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP financial measure, also included corporate expenses of $20,988 and $28,903 for the three months ended September 30, 2020 and 2019, respectively, and $74,915 and $97,468 for the nine months ended September 30, 2020 and 2019, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for additional information on corporate expenses. Refer also to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial MeasureMeasures Reconciliation' for additional information.
We present our results
Underwriting Revenues
Underwriting revenues by segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Gross premiums written: | | | | | | | | | | | | |
| Insurance | $ | 935,817 | | | 5% | | $ | 894,902 | | | $ | 2,914,100 | | | 7% | | $ | 2,714,322 | | |
| Reinsurance | 395,361 | | | (23%) | | 511,604 | | | 2,564,419 | | | (12%) | | 2,923,169 | | |
| Total gross premiums written | $ | 1,331,178 | | | (5%) | | $ | 1,406,506 | | | $ | 5,478,519 | | | (3%) | | $ | 5,637,491 | | |
| | | | | | | | | | | | | |
| Percent of gross premiums written ceded | | | | | | | | | | | | |
| Insurance | 42% | | — pts | | 42% | | 41% | | 1 pt | | 40% | |
| Reinsurance | 31% | | (3) pts | | 34% | | 29% | | — pts | | 29% | |
| Total percent of gross premiums ceded | 39% | | — pts | | 39% | | 35% | | 1 pt | | 34% | |
| | | | | | | | | | | | | |
| Net premiums written: | | | | | | | | | | | | |
| Insurance | $ | 544,857 | | | 5% | | $ | 517,050 | | | $ | 1,729,268 | | | 6% | | $ | 1,638,197 | | |
| Reinsurance | 271,125 | | | (20%) | | 339,031 | | | 1,821,692 | | | (12%) | | 2,065,263 | | |
| Total net premiums written | $ | 815,982 | | | (5%) | | $ | 856,081 | | | $ | 3,550,960 | | | (4%) | | $ | 3,703,460 | | |
| | | | | | | | | | | | | |
| Net premiums earned: | | | | | | | | | | | | |
| Insurance | $ | 570,184 | | | 6% | | $ | 536,451 | | | $ | 1,709,268 | | | 5% | | $ | 1,630,473 | | |
| Reinsurance | 521,128 | | | (16%) | | 620,856 | | | 1,574,673 | | | (12%) | | 1,784,653 | | |
| Total net premiums earned | $ | 1,091,312 | | | (6%) | | $ | 1,157,307 | | | $ | 3,283,941 | | | (4%) | | $ | 3,415,126 | | |
| | | | | | | | | | | | | |
Refer to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are "non-GAAP financial measures" under Securities and Exchange Commission rules and regulations. In this 'Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related- Results by Segment' for additional information on underwriting revenues.
Underwriting Expenses
The components of the combined ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Point Change | | 2019 | | 2020 | | % Point Change | | 2019 | |
| | | | | | | | | | | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 58.5 | % | | (3.2) | | 61.7 | % | | 57.8 | % | | (2.3) | | 60.1 | % | |
| Catastrophe and weather-related losses ratio | 22.2 | % | | 8.1 | | 14.1 | % | | 17.5 | % | | 11.6 | | 5.9 | % | |
| Current accident year loss ratio | 80.7 | % | | 4.9 | | 75.8 | % | | 75.3 | % | | 9.3 | | 66.0 | % | |
| Prior year reserve development ratio | (0.1 | %) | | 2.2 | | (2.3 | %) | | (0.3 | %) | | 1.6 | | (1.9 | %) | |
| Net losses and loss expenses ratio | 80.6 | % | | 7.1 | | 73.5 | % | | 75.0 | % | | 10.9 | | 64.1 | % | |
| Acquisition cost ratio | 21.1 | % | | (1.4) | | 22.5 | % | | 21.2 | % | | (1.1) | | 22.3 | % | |
| General and administrative expense ratio(1) | 12.8 | % | | (0.6) | | 13.4 | % | | 13.4 | % | | (1.1) | | 14.5 | % | |
| Combined ratio | 114.5 | % | | 5.1 | | 109.4 | % | | 109.6 | % | | 8.7 | | 100.9 | % | |
| | | | | | | | | | | | | |
(1) The general and administrative expense ratio included corporate expenses consolidatednot allocated to underwriting income, non-GAAP operating income (in totalsegments of 1.9% and 2.5% for the three months ended September 30, 2020 and 2019, respectively, and 2.3% and 2.9% for the nine months endedSeptember 30, 2020 and 2019, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for further details.
Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment' for additional information on underwriting expenses.
RESULTS BY SEGMENT
Insurance Segment
Results for the insurance segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 935,817 | | | 5% | | $ | 894,902 | | | $ | 2,914,100 | | | 7% | | $ | 2,714,322 | | |
| Net premiums written | 544,857 | | | 5% | | 517,050 | | | 1,729,268 | | | 6% | | 1,638,197 | | |
| Net premiums earned | 570,184 | | | 6% | | 536,451 | | | 1,709,268 | | | 5% | | 1,630,473 | | |
| Other insurance related income | 688 | | | 6% | | 733 | | | 2,091 | | | 18% | | 1,779 | | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current accident year net losses and loss expenses | (443,659) | | | | | (353,575) | | | (1,257,090) | | | | | (1,004,293) | | |
| Prior year reserve development | 270 | | | | | 14,609 | | | 4,521 | | | | | 42,849 | | |
| Acquisition costs | (114,569) | | | | | (115,551) | | | (343,579) | | | | | (344,981) | | |
| Underwriting-related general and administrative expenses | (94,379) | | | | | (100,559) | | | (284,909) | | | | | (311,491) | | |
| | | | | | | | | | | | | |
| Underwriting income (loss) | $ | (81,465) | | | | | $ | (17,892) | | | $ | (169,698) | | | | | $ | 14,336 | | |
| | | | | | | | | | | | | |
| Ratios: | | | % Point Change | | | | | | % Point Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 54.7 | % | | (3.5) | | 58.2 | % | | 54.8 | % | | (2.9) | | 57.7 | % | |
| Catastrophe and weather-related losses ratio | 23.1 | % | | 15.4 | | 7.7 | % | | 18.7 | % | | 14.8 | | 3.9 | % | |
| Current accident year loss ratio | 77.8 | % | | 11.9 | | 65.9 | % | | 73.5 | % | | 11.9 | | 61.6 | % | |
| Prior year reserve development ratio | — | % | | 2.7 | | (2.7 | %) | | (0.2 | %) | | 2.4 | | (2.6 | %) | |
| Net losses and loss expenses ratio | 77.8 | % | | 14.6 | | 63.2 | % | | 73.3 | % | | 14.3 | | 59.0 | % | |
| Acquisition cost ratio | 20.1 | % | | (1.4) | | 21.5 | % | | 20.1 | % | | (1.1) | | 21.2 | % | |
| Underwriting-related general and administrative expense ratio | 16.5 | % | | (2.3) | | 18.8 | % | | 16.7 | % | | (2.3) | | 19.0 | % | |
| Combined ratio | 114.4 | % | | 10.9 | | 103.5 | % | | 110.1 | % | | 10.9 | | 99.2 | % | |
| | | | | | | | | | | | | |
nm – not meaningful
Gross Premiums Written
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Property | $ | 238,599 | | | 26 | % | | $ | 241,517 | | | 27 | % | | (1%) | | $ | 741,043 | | | 27 | % | | $ | 701,314 | | | 27 | % | | 6% | |
| Marine | 82,810 | | | 9 | % | | 91,161 | | | 10 | % | | (9%) | | 355,503 | | | 12 | % | | 337,529 | | | 12 | % | | 5% | |
| Terrorism | 14,767 | | | 2 | % | | 17,284 | | | 2 | % | | (15%) | | 42,296 | | | 1 | % | | 46,803 | | | 2 | % | | (10%) | |
| Aviation | 22,702 | | | 2 | % | | 17,623 | | | 2 | % | | 29% | | 63,725 | | | 2 | % | | 53,832 | | | 2 | % | | 18% | |
| Credit and political risk | 24,473 | | | 3 | % | | 32,528 | | | 4 | % | | (25%) | | 100,151 | | | 3 | % | | 114,511 | | | 4 | % | | (13%) | |
| Professional lines | 338,907 | | | 36 | % | | 272,362 | | | 30 | % | | 24% | | 943,635 | | | 32 | % | | 820,953 | | | 30 | % | | 15% | |
| Liability | 172,747 | | | 18 | % | | 186,253 | | | 21 | % | | (7%) | | 548,023 | | | 19 | % | | 518,925 | | | 19 | % | | 6% | |
| Accident and health | 39,262 | | | 4 | % | | 34,054 | | | 4 | % | | 15% | | 117,743 | | | 4 | % | | 113,228 | | | 4 | % | | 4% | |
| Discontinued lines - Novae | 1,550 | | | — | % | | 2,120 | | | — | % | | (27%) | | 1,981 | | | — | % | | 7,227 | | | — | % | | nm | |
| Total | $ | 935,817 | | | 100 | % | | $ | 894,902 | | | 100 | % | | 5% | | $ | 2,914,100 | | | 100 | % | | $ | 2,714,322 | | | 100 | % | | 7% | |
| | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Gross premiums written for the three months ended September 30, 2020, increased by $41 million, or 5%, ($31 million, or 3% on a per share basis)constant currency basis(1)), amountscompared to the three months ended September 30, 2019. The increase was primarily attributable to professional lines, accident and health, and aviation lines, partially offset by decreases in liability, marine, and credit and political risk lines.
The increase in professional lines was due to new business and favorable rate changes. The increase in accident and health lines was due to new business. The increase in aviation lines was due to a timing difference and favorable rate changes. The decreases in liability and credit and political risk lines were due to a higher level of non-renewals and reduced business opportunities related to the current economic climate. The decrease in marine lines was due to a timing difference and non-renewals.
Gross premiums written for the nine months ended September 30, 2020, increased by $200 million, or 7%, compared to the nine months ended September 30, 2019. The increase was primarily attributable to professional lines, property, liability, marine, and aviation lines, partially offset by a decrease in credit and political risk lines.
The increases in professional lines, property, liability, and marine lines were due to new business and favorable rate changes. The increase in aviation lines was due to timing differences. The decrease in credit and political risk lines was due to non-renewals and reduced business opportunities related to the current economic climate.
Ceded Premiums Written
Ceded premiums written for the three months ended September 30, 2020, was $391 million, or 42% of gross premiums written, compared to $378 million, or 42% of gross premiums written for the three months ended September 30, 2019. The increase in ceded premiums written of $13 million or 3% was primarily driven by increases in professional lines and property lines, partially offset by decreases in liability, marine, and credit and political risk lines.
Ceded premiums written for the nine months ended September 30, 2020, was $1,185 million, or 41% of gross premiums written, compared to $1,076 million, or 40% of gross premiums written for the nine months ended September 30, 2019. The increase in ceded premiums written of $109 million, or 10%, was primarily driven by increases in professional lines, property, liability, and marine lines, partially offset by a decrease in credit and political risk lines.
(1) 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 Item10 (e) of SEC Regulation G. We believe that these non-GAAP 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 U.S. 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 3 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 general and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, includes corporate expenses.
S-K. The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP measure is presented in the '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 3 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 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 is excluded from consolidated underwriting income.
Transaction related expenses are driven by business decisions, the nature and timing of which are unrelated to the underwriting process and for this reason they 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 'Results of Operations'.
Non-GAAP Operating Income
Non-GAAP operating 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 related 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 isolation is 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 related expenses are primarily driven by business decisions, the nature and timing of which are unrelated to the underwriting process and which are not representative of underlying business performance.
Certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (losses), foreign exchange losses (gains), bargain purchase gain, and transaction related expenses to understand the profitability of recurring sources of income.
We believe that showing net income available to common shareholders exclusive of net realized gains (losses), foreign exchange losses (gains), bargain purchase gain, and transaction related 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 available to common shareholders, the most comparable GAAP measure is presented in the '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 areis 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 performance in a manner similar to how our management analyzes the underlying business performance. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in the '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 'Net Investment Income and Net Realized Investment Gains (Losses)'
balance.
Net Premiums Earned
section
Net premiums earned by line of this release. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investments.business were as follows:
Results of Operations
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Property | $ | 145,717 | | | 27 | % | | $ | 154,751 | | | 29 | % | | (6%) | | $ | 452,876 | | | 26 | % | | $ | 481,450 | | | 30 | % | | (6%) | |
| Marine | 76,544 | | | 13 | % | | 65,437 | | | 12 | % | | 17% | | 220,248 | | | 13 | % | | 209,629 | | | 13 | % | | 5% | |
| Terrorism | 11,728 | | | 2 | % | | 11,605 | | | 2 | % | | 1% | | 34,675 | | | 2 | % | | 35,635 | | | 2 | % | | (3%) | |
| Aviation | 19,039 | | | 3 | % | | 10,993 | | | 2 | % | | nm | | 51,236 | | | 3 | % | | 38,603 | | | 2 | % | | 33% | |
| Credit and political risk | 23,781 | | | 4 | % | | 19,432 | | | 4 | % | | 22% | | 77,721 | | | 5 | % | | 66,412 | | | 4 | % | | 17% | |
| Professional lines | 179,441 | | | 31 | % | | 172,280 | | | 32 | % | | 4% | | 530,651 | | | 31 | % | | 490,928 | | | 30 | % | | 8% | |
| Liability | 76,487 | | | 13 | % | | 68,002 | | | 13 | % | | 12% | | 234,522 | | | 14 | % | | 192,352 | | | 12 | % | | 22% | |
| Accident and health | 37,151 | | | 7 | % | | 32,368 | | | 6 | % | | 15% | | 106,015 | | | 6 | % | | 108,402 | | | 7 | % | | (2%) | |
| Discontinued lines - Novae | 296 | | | — | % | | 1,583 | | | — | % | | nm | | 1,324 | | | — | % | | 7,062 | | | — | % | | nm | |
| Total | $ | 570,184 | | | 100 | % | | $ | 536,451 | | | 100 | % | | 6% | | $ | 1,709,268 | | | 100 | % | | $ | 1,630,473 | | | 100 | % | | 5% | |
| | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
| |
(1) | Underwriting-related general and administrative expenses is a non-GAAP measure as defined in SEC Regulation G. The reconciliation to total general and administrative expenses, the most comparable GAAP measure, also included corporate expenses of ($27,933) and ($28,683) for the three months ended September 30, 2017 and 2016, respectively, and ($97,922) and ($86,922) for the nine months ended September 30, 2017 and 2016, respectively. Refer to 'Other (expenses) revenues, net' for additional information related to the corporate expenses. Also, refer to 'Non-GAAP Financial Measures' for additional information.
|
| |
(2) | Tax cost (benefit) of $2,657 and $2,479 for the three months ended September 30, 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) and $566 for the three months ended September 30, 2017 and 2016, 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.
|
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”), 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
| |
(1) | Refer to Item 1, Note 8 to our Consolidated Financial Statements 'Earnings per Common Share' for further details on the dilution calculation.
|
| |
(2) | Return on average common equity ("ROACE") is calculated by dividing annualized net income available to common shareholders for the period by the average shareholders' equity determined by using the common shareholders' equity balances at the beginning and end of the period. |
| |
(3) | Non-GAAP operating ROACE, a non-GAAP financial measure as defined in SEC Regulation G, is calculated by dividing annualized operating income for the period by the average common shareholders' equity. |
Underwriting Results
Total underwriting lossNet premiums earned for the three months ended September 30, 2017 was $513 million, a decrease of $617 million compared to the underwriting income of $104 million for the three months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, a 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 reinsurance segment underwriting loss2020, increased by $310$34 million, for the three months ended September 30, 2017,or 6%, ($27 million, or 5% on a constant currency basis), compared to the three months ended September 30, 2016.2019. The increase was primarily driven by increases in gross premiums earned in professional lines, liability, and marine lines, together with a decrease in underwriting incomeceded premiums earned in aviation lines, partially offset by increases in ceded premiums earned in professional lines and liability lines, and a decrease in gross premiums earned in property lines.
Net premiums earned for the nine months ended September 30, 2020, increased by $79 million, or 5%, compared to the nine months ended September 30, 2019. The increase was primarily driven by an increaseincreases in gross premiums earned in liability, professional lines, marine, and credit and political risk lines, together with decreases in ceded premiums earned in property and aviation lines, partially offset by increases in ceded premiums earned in liability and professional lines, and a decrease in gross premiums earned in property lines.
Loss Ratio
The components of the loss ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Point Change | | 2019 | | 2020 | | % Point Change | | 2019 | |
| | | | | | | | | | | | | |
| Current accident year | 77.8 | % | | 11.9 | | 65.9 | % | | 73.5 | % | | 11.9 | | 61.6 | % | |
| Prior year reserve development | — | % | | 2.7 | | (2.7 | %) | | (0.2 | %) | | 2.4 | | (2.6 | %) | |
| Loss ratio | 77.8 | % | | 14.6 | | 63.2 | % | | 73.3 | % | | 14.3 | | 59.0 | % | |
| | | | | | | | | | | | | |
Current Accident Year Loss Ratio
The current accident year loss ratio increased to 77.8% and 73.5% for the three and nine months ended September 30, 2020, respectively, from 65.9% and 61.6% for the three and nine months ended September 30, 2019, respectively.
During the three and nine months ended September 30, 2020, catastrophe and weather-related losses, an increasenet of reinstatement premiums, were $132 million, or 23.1 points, and $325 million, or 18.7 points, respectively. During the three months ended September 30, 2020, these losses were primarily attributable to Hurricanes Laura and Sally, the Beirut port explosion, wildfires across the West Coast of the United States, and other weather-related events. During the nine months ended September 30, 2020 catastrophe and weather-related losses included $137 million associated with first party coverages attributable to the COVID-19 pandemic. These losses were primarily associated with property-related coverages, but also included event cancellation coverages. The remaining losses of $188 million were primarily attributable to Hurricanes Laura and Sally, the Beirut port explosion, wildfires across the West Coast of the United States, and other weather-related events. Comparatively, during the three and nine months ended September 30, 2019, catastrophe and weather-related losses were $41 million, or 7.7 points, and $64 million, or 3.9 points, respectively.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 54.7% for the three months ended September 30, 2020, from 58.2% for the three months ended September 30, 2019. The decrease in the current accident year loss ratio excludingafter adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends, improved loss experience in property, marine, credit and apolitical risk, and aviation lines largely associated with the repositioning of the portfolio.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 54.8% for the nine months ended September 30, 2020, from 57.7% for the nine months ended September 30, 2019. The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends, improved loss experience in property, credit and political risk, marine and aviation lines, partially offset by changes in business mix.
Prior Year Reserve Development
The following table maps lines of business to reserve classes and the expected claim tails:
| | | | | | | | | | | | | | | | | | | | |
| Insurance segment | | | | | |
| Reserve class and tail |
| | | | | | |
| Property and other | Marine | Aviation | Credit and political risk | Professional lines | Liability |
| | | | | | |
| Short | Short | Short/Medium | Medium | Medium | Long |
| | | | | | |
| Reported lines of business | | | | | | |
| Property | X | | | | | |
| Marine | | X | | | | |
| Terrorism | X | | | | | |
| Aviation | | | X | | | |
| Credit and political risk | | | | X | | |
| Professional lines | | | | | X | |
| Liability | | | | | | X |
| Accident and health | X | | | | | |
| Discontinued lines - Novae | X | | | | X | X |
Prior year reserve development by reserve class were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Property and other | $ | 6,907 | | | $ | 11,427 | | | $ | 42,688 | | | $ | (4,426) | | |
| Marine | 4,095 | | | 2,119 | | | 633 | | | 23,753 | | |
| Aviation | (326) | | | 471 | | | 5,667 | | | 1,671 | | |
| Credit and political risk | 871 | | | 1,217 | | | (223) | | | 10,278 | | |
| Professional lines | (7,287) | | | 3,656 | | | (19,086) | | | 13,899 | | |
| Liability | (3,990) | | | (4,281) | | | (25,158) | | | (2,326) | | |
| Total | $ | 270 | | | $ | 14,609 | | | $ | 4,521 | | | $ | 42,849 | | |
| | | | | | | | | |
For the three months ended September 30, 2020, we recognized $0.3 million of net favorable prior year reserve development, the principal components of which were:
•$7 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence attributable to the 2019 catastrophe events.
•$4 million of net favorable prior year reserve development on marine business primarily due better than expected loss emergence mainly related to the 2018 accident year.
•$7 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the European professional indemnity and financial institutions books of business mainly related to the 2018 accident year and an increase in case reserves attributable to a specific large claim related to the 2009 accident year.
•$4 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the primary casualty, U.S. excess casualty and program books of business mainly related to 2017 and 2018 accident years.
For the three months ended September 30, 2019, we recognized $15 million of net favorable prior year reserve development, the principal components of which were:
•$11 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence attributable to the 2017 catastrophe events and SuperStorm Sandy.
•$4 million of net favorable prior year reserve development on professional lines business primarily due to better than expected loss emergence mainly related to the 2013 and 2014 accident years.
•$4 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the U.S. excess casualty book of business related to older accident years.
For the nine months ended September 30, 2020, we recognized $5 million of net favorable prior year reserve development, the principal components of which were:
•$43 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence mainly related to the 2018 and 2019 accident years, better than expected loss emergence attributable to the 2017, 2018 and 2019 catastrophe events, and decreases in case reserves attributable to specific claims related to the 2014 and 2016 accident years.
•$6 million of net favorable prior year reserve development on aviation business primarily due to better than expected loss emergence mainly related to the 2018 and 2019 accident years.
•$25 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the primary casualty, U.S. excess casualty and program books of business mainly related to the 2017 and 2018 accident years.
•$19 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the European professional indemnity and financial institutions books of business and the commercial management solutions book of business mainly related to the 2018 and 2019 accident year and an increase in case reserves attributable to a specific large claim related to the 2009 accident year.
For the nine months ended September 30, 2019, 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 marine business primarily due to better than expected loss emergence mainly related to the 2015 to 2017 accident years.
•$14 million of net favorable prior year reserve development on professional lines business primarily due to better than expected loss emergence mainly related to the 2013 to 2015 accident years.
•$10 million of net favorable prior year reserve development on credit and political risk business primarily due to better than expected loss emergence mainly related to the 2018 accident year.
•$4 million of net adverse prior year reserve development on property and other business primarily due to reserve strengthening within the international book of business mainly related to the 2018 accident year, partially offset by a decrease acquisition costs.better than expected loss emergence attributable to the 2017 catastrophe events and SuperStorm Sandy.
Acquisition Cost Ratio
The insurance segment underwriting loss increased by $307 millionacquisition cost ratio decreased to 20.1% for the three months ended September 30, 2017,2020, from 21.5% for the three months ended September 30, 2019, principally related to an increase in ceding commissions.
The acquisition cost ratio decreased to 20.1% for the nine months ended September 30, 2020, from 21.2% for the nine months ended September 30, 2019, associated with the acquisition of Novae and an increase in ceding commissions. At the acquisition date, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at that date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet as the value of policies in-force on that date are considered within value of business acquired ("VOBA"). Consequently, the absence of $1 million and $11 million of acquisition expense related to premiums earned in the nine months ended September 30, 2020 and 2019, respectively, benefited the acquisition cost by 0.1 points and 0.6 points, respectively. Adjusting the acquisition cost rate for these amounts, the acquisition cost ratio decreased by 1.6 points.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio decreased to 16.5%for thethree months ended September 30, 2020, from 18.8% for the three months ended September 30, 2019, mainly driven by a decrease in personnel costs and travel and entertainment expenses, together with an increase in net premiums earned.
The underwriting-related general and administrative expense ratio decreased to 16.7% for the nine months ended September 30, 2020, from 19.0% for the nine months ended September 30, 2019, mainly driven by decreases in travel and entertainment expenses, and professional fees, together with an increase in net premiums earned.
Reinsurance Segment
Results from the reinsurance segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 395,361 | | | (23%) | | $ | 511,604 | | | $ | 2,564,419 | | | (12%) | | $ | 2,923,169 | | |
| Net premiums written | 271,125 | | | (20%) | | 339,031 | | | 1,821,692 | | | (12%) | | 2,065,263 | | |
| Net premiums earned | 521,128 | | | (16%) | | 620,856 | | | 1,574,673 | | | (12%) | | 1,784,653 | | |
| Other insurance related income (loss) | 752 | | | (6%) | | 800 | | | (7,361) | | | nm | | 9,606 | | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current year net losses and loss expenses | (436,602) | | | | | (524,065) | | | (1,216,273) | | | | | (1,248,131) | | |
| Prior year reserve development | 314 | | | | | 12,118 | | | 4,830 | | | | | 22,172 | | |
| Acquisition costs | (115,995) | | | | | (144,475) | | | (354,137) | | | | | (417,826) | | |
| Underwriting-related general and administrative expenses | (23,456) | | | | | (26,060) | | | (76,714) | | | | | (87,049) | | |
| | | | | | | | | | | | | |
| Underwriting income (loss) | $ | (53,859) | | | | | $ | (60,826) | | | $ | (74,982) | | | | | $ | 63,425 | | |
| Ratios: | | | % Point Change | | | | | | % Point Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 62.7 | % | | (2.1) | | 64.8 | % | | 61.1 | % | | (1.2) | | 62.3 | % | |
| Catastrophe and weather-related losses ratio | 21.1 | % | | 1.5 | | 19.6 | % | | 16.1 | % | | 8.5 | | 7.6 | % | |
| Current accident year loss ratio | 83.8 | % | | (0.6) | | 84.4 | % | | 77.2 | % | | 7.3 | | 69.9 | % | |
| Prior year reserve development ratio | (0.1 | %) | | 1.8 | | (1.9 | %) | | (0.3 | %) | | 0.9 | | (1.2 | %) | |
| Net losses and loss expenses ratio | 83.7 | % | | 1.2 | | 82.5 | % | | 76.9 | % | | 8.2 | | 68.7 | % | |
| Acquisition cost ratio | 22.3 | % | | (1.0) | | 23.3 | % | | 22.5 | % | | (0.9) | | 23.4 | % | |
| Underwriting-related general and administrative expense ratio | 4.5 | % | | 0.4 | | 4.1 | % | | 4.9 | % | | — | | 4.9 | % | |
| Combined ratio | 110.5 | % | | 0.6 | | 109.9 | % | | 104.3 | % | | 7.3 | | 97.0 | % | |
| | | | | | | | | | | | | |
nm – not meaningful
Gross Premiums Written:
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | | Nine months ended September 30, | | | | |
| | 2020 | | | | 2019 | | | | % Change | | | 2020 | | | | 2019 | | | | % Change | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 74,656 | | | 18 | % | | $ | 94,833 | | | 18 | % | | (21%) | | | $ | 526,646 | | | 21 | % | | $ | 698,169 | | | 24 | % | | (25%) | | |
| Property | 58,907 | | | 15 | % | | 67,972 | | | 13 | % | | (13%) | | | 246,859 | | | 10 | % | | 283,849 | | | 10 | % | | (13%) | | |
| Professional lines | 31,752 | | | 8 | % | | 23,540 | | | 5 | % | | 35% | | | 267,047 | | | 10 | % | | 226,283 | | | 8 | % | | 18% | | |
| Credit and surety | 38,110 | | | 10 | % | | 50,989 | | | 10 | % | | (25%) | | | 189,180 | | | 7 | % | | 241,358 | | | 8 | % | | (22%) | | |
| Motor | (2,235) | | | (1 | %) | | 25,367 | | | 5 | % | | nm | | | 319,867 | | | 12 | % | | 313,614 | | | 11 | % | | 2% | | |
| Liability | 136,791 | | | 35 | % | | 146,690 | | | 29 | % | | (7%) | | | 505,322 | | | 20 | % | | 458,000 | | | 16 | % | | 10% | | |
| Agriculture | 7,455 | | | 2 | % | | 5,074 | | | 1 | % | | 47% | | | 69,599 | | | 3 | % | | 201,592 | | | 7 | % | | (65%) | | |
| Engineering | 1,408 | | | — | % | | 8,841 | | | 2 | % | | nm | | | 20,334 | | | 1 | % | | 39,207 | | | 1 | % | | (48%) | | |
| Marine and other | 6,341 | | | 2 | % | | 9,727 | | | 2 | % | | (35%) | | | 62,202 | | | 2 | % | | 68,104 | | | 2 | % | | (9%) | | |
| Accident and health | 41,820 | | | 11 | % | | 78,474 | | | 15 | % | | (47%) | | | 356,123 | | | 14 | % | | 393,789 | | | 13 | % | | (10%) | | |
| Discontinued lines - Novae | 356 | | | — | % | | 97 | | | — | % | | nm | | | 1,240 | | | — | % | | (796) | | | — | % | | nm | | |
| Total | $ | 395,361 | | | 100 | % | | $ | 511,604 | | | 100 | % | | (23%) | | | $ | 2,564,419 | | | 100 | % | | $ | 2,923,169 | | | 100 | % | | (12%) | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Gross premiums written for the three months ended September 30, 2020, decreased by $116 million, or 23%, ($109 million, or 21% on a constant currency basis), compared to the three months ended September 30, 2016. 2019. The decrease was primarily attributable to accident and health, motor, catastrophe, credit and surety, liability and property lines, partially offset by an increase in professional lines.
The decrease in underwriting incomeaccident and health lines was primarily driven by annon-renewals following the decision to exit the Middle East business. The decrease in motor lines was due to premium adjustments. The decrease in catastrophe lines was driven by a timing difference associated with a significant contract, non-renewals, and decreased line sizes on a number of treaties. The decrease in credit and surety lines was attributable to the current economic climate. The decrease in liability lines was due to a reduced line size on a significant contract, partially offset by new business due to favorable market conditions and timing differences. The decrease in property lines was due to non-renewals and a timing difference. The increase in catastrophe and weather-related losses, and a decrease in net favorable prior year reserve development.professional lines was due to premium adjustments.
Total underwriting loss inGross premiums written for 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 income2020, decreased by $352$359 million, in the nine months ended September 30, 2017,or 12%, compared to the nine months ended September 30, 2016. 2019. The decrease was primarily attributable to catastrophe, agriculture, credit and surety, accident and health, property, and engineering lines, partially offset by increases in liability and professional lines.
The decreases in catastrophe, agriculture, credit and surety, accident and health, property, and engineering lines were driven by non-renewals and decreased line sizes consistent with optimization of the segment's portfolio. The increases in liability and professional lines were driven by premium adjustments, and favorable market conditions associated with renewals and new business.
Ceded Premiums Written:
Ceded premiums written for the three months ended September 30, 2020 was $124 million, or 31% of gross premiums written, compared to $173 million, or 34% of gross premiums written for the three months ended September 30, 2019.
The decrease in underwriting incomeceded premiums written of $48 million, or 28%, was primarily driven by catastrophe, accident and health, credit and surety, and liability lines. The decrease in catastrophe lines was attributable to a non-renewal of a catastrophe bond and a decrease in premiums ceded to strategic capital partners. The decrease in accident and health lines was attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in credit and surety lines was attributable to a decrease in premiums ceded to an existing quota share retrocessional treaty. The decrease in liability lines was attributable to the restructuring of an existing quota share retrocessional treaty, partially offset 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 bypremiums ceded to a decrease in general and administrative expenses.new quota share retrocessional treaty.
The insurance segment underwriting loss increased by $300 million in
Ceded premiums written for the nine months ended September 30, 2017,2020, was $743 million, or 29% of gross premiums written, compared to $858 million, or 29% of gross premiums written for the nine months ended September 30, 2019.
The decrease in ceded premiums written of $115 million, or 13%, was primarily driven by catastrophe, credit and surety, accident and health, and agriculture lines, partially offset by increases in professional lines, liability, motor, and property lines.
The decrease in catastrophe lines was attributable to decreases in premiums ceded to strategic partners and a non-renewal of a catastrophe bond. The decrease in credit and surety lines was attributable to a decrease in premiums ceded to a quota share retrocessional treaty and the restructuring of existing quota share retrocessional treaties. The decrease in accident and health lines was attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in agriculture lines was attributable to a non-renewal of a large quota share retrocessional treaty.
The increases in liability and professional lines were attributable to an increase in premiums ceded to a new quota share retrocessional treaty, partially offset by the restructuring of an existing quota share retrocessional treaty. The increase in motor lines was attributable to an increase in premiums ceded to a new quota share retrocessional treaty. The increase in property lines was attributable to an increase in premiums ceded to a new aggregate excess of loss treaty.
Net Premiums Earned:
Net premiums earned by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 64,163 | | | 13 | % | | $ | 68,910 | | | 11 | % | | (7%) | | $ | 194,987 | | | 12 | % | | $ | 205,468 | | | 11 | % | | (5%) | |
| Property | 62,704 | | | 12 | % | | 78,271 | | | 13 | % | | (20%) | | 196,229 | | | 12 | % | | 226,515 | | | 13 | % | | (13%) | |
| Professional lines | 54,424 | | | 10 | % | | 50,966 | | | 8 | % | | 7% | | 154,482 | | | 10 | % | | 154,390 | | | 9 | % | | —% | |
| Credit and surety | 43,730 | | | 8 | % | | 55,625 | | | 9 | % | | (21%) | | 134,988 | | | 9 | % | | 154,638 | | | 9 | % | | (13%) | |
| Motor | 63,298 | | | 12 | % | | 107,930 | | | 17 | % | | (41%) | | 203,776 | | | 13 | % | | 301,622 | | | 17 | % | | (32%) | |
| Liability | 96,671 | | | 19 | % | | 95,632 | | | 15 | % | | 1% | | 293,918 | | | 19 | % | | 279,639 | | | 16 | % | | 5% | |
| Agriculture | 17,750 | | | 3 | % | | 47,519 | | | 8 | % | | (63%) | | 57,949 | | | 4 | % | | 131,746 | | | 7 | % | | (56%) | |
| Engineering | 14,548 | | | 3 | % | | 16,611 | | | 3 | % | | (12%) | | 43,742 | | | 3 | % | | 47,290 | | | 3 | % | | (8%) | |
| Marine and other | 14,742 | | | 3 | % | | 17,924 | | | 3 | % | | (18%) | | 37,275 | | | 2 | % | | 44,529 | | | 2 | % | | (16%) | |
| Accident and health | 89,087 | | | 17 | % | | 81,500 | | | 13 | % | | 9% | | 256,303 | | | 16 | % | | 239,388 | | | 13 | % | | 7% | |
| Discontinued lines - Novae | 11 | | | — | % | | (32) | | | — | % | | nm | | 1,024 | | | — | % | | (572) | | | — | % | | nm | |
| Total | $ | 521,128 | | | 100 | % | | $ | 620,856 | | | 100 | % | | (16%) | | $ | 1,574,673 | | | 100 | % | | $ | 1,784,653 | | | 100 | % | | (12%) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Net premiums earned for the three months ended September 30, 2020, decreased by $100 million, or 16% ($93 million, or 15% on a constant currency basis), compared to the three months ended September 30, 2019. The decrease was primarily driven by decreases in gross premiums earned in motor, agriculture, credit and surety, and property lines.
Net premiums earned for the nine months ended September 30, 2020, decreased by $210 million, or 12% ($186 million, or 10% on a constant currency basis), compared to the nine months ended September 30, 2016.2019. The increase in underwriting incomedecrease was primarily driven by decreases in gross premiums earned in agriculture, motor, catastrophe, property, and credit and surety lines, together with an increase in ceded premiums earned in liability lines, partially offset by decreases in ceded premiums earned in catastrophe, agriculture, and accident and health lines, and an increase in gross premiums earned in liability lines.
Other Insurance Related Income (Loss):
Other insurance related income was $1 million for the three months ended September 30, 2020, compared to other insurance related income of $1 million for the three months ended September 30, 2019.
Other insurance related loss was $7 million for the nine months ended September 30, 2020, compared to other insurance related income of $10 million for the nine months ended September 30, 2019. The decrease of $17 million was primarily due to the recognition of a full limit loss of $10 million associated with the WHO pandemic risk-linked swap and a decrease in fees associated with arrangements with strategic capital partners.
Loss Ratio:
The components of the loss ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Point Change | | 2019 | | 2020 | | % Point Change | | 2019 | |
| | | | | | | | | | | | | |
| Current accident year | 83.8 | % | | (0.6) | | 84.4 | % | | 77.2 | % | | 7.3 | | 69.9 | % | |
| Prior year reserve development | (0.1 | %) | | 1.8 | | (1.9 | %) | | (0.3 | %) | | 0.9 | | (1.2 | %) | |
| Loss ratio | 83.7 | % | | 1.2 | | 82.5 | % | | 76.9 | % | | 8.2 | | 68.7 | % | |
| | | | | | | | | | | | | |
Current Accident Year Loss Ratio:
The current accident year loss ratio decreased to 83.8% for the three months ended September 30, 2020, from 84.4% for the three months ended September 30, 2019. The current accident year loss ratio increased to 77.2% for the nine months ended September 30, 2020, from 69.9% for the nine months ended September 30, 2019.
During the three and nine months ended September 30, 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $108 million, or 21.1 points, and $251 million, or 16.1, respectively. During the three months ended September 30, 2020, these losses were primarily attributable to the Midwest derecho, wildfires across the West Coast of the United States, Hurricanes Laura and Sally, the Beirut port explosion, and other weather-related events. During the nine months ended September 30, 2020, catastrophe and weather-related losses included $98 million associated with first party coverages attributable to the COVID-19 pandemic. These losses were primarily associated with property-related coverages, but also included accident and health coverages. The remaining losses of $153 million were attributable to the Midwest derecho, wildfires across the West Coast of the United States, Hurricanes Laura and Sally, the Beirut port explosion and other weather-related events. Comparatively, during the three and nine months ended September 30, 2019, catastrophe and weather-related losses were $119 million, or 19.6 points, and $132 million, or 7.6, respectively.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 62.7% for the three months ended September 30, 2020 from 64.8% for the three months ended September 30, 2019. The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was principally due to changes in business mix and improved performance in aviation, professional lines and liability lines.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 61.1% for the nine months ended September 30, 2020 from 62.3% for the nine months ended September 30, 2019. The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was principally due to changes in business mix and improved performance in aviation, motor and liability lines.
Prior Year Reserve Development
The following table maps lines of business to reserve classes and the expected claim tails:
| | | | | | | | | | | | | | | | | |
| Reinsurance segment | | | | |
| Reserve class and tail |
| | | | | |
| Property and other | Credit and surety | Professional lines | Motor | Liability |
| | | | | |
| Short | Medium | Medium | Long | Long |
| | | | | |
| Reported lines of business | | | | | |
| Catastrophe | X | | | | |
| Property | X | | | | |
| Credit and surety | | X | | | |
| Professional lines | | | X | | |
| Motor | | | | X | |
| Liability | | | | | X |
| Engineering | X | | | | |
| Agriculture | X | | | | |
| Marine and other | X | | | | |
| Accident and health | X | | | | |
| Discontinued lines - Novae | X | | | X | X |
Prior year reserve development by reserve class were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Property and other | $ | 3,126 | | | $ | (12,283) | | | $ | (4,961) | | | $ | (71,227) | | |
| Credit and surety | 11,184 | | | 5,652 | | | 27,927 | | | 32,659 | | |
| Professional lines | (13,776) | | | (7,303) | | | (13,493) | | | 641 | | |
| Motor | 1,214 | | | 22,902 | | | 18,732 | | | 33,964 | | |
| Liability | (1,434) | | | 3,150 | | | (23,375) | | | 26,135 | | |
| Total | $ | 314 | | | $ | 12,118 | | | $ | 4,830 | | | $ | 22,172 | | |
| | | | | | | | | |
For the three months ended September 30, 2020, we recognized $0.3 million of net favorable prior year reserve development, the principal components of which were:
•$11 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence mainly related to 2017 and 2019 accident years.
•$14 million of net adverse prior year reserve development on professional lines business primarily due to an increase in case reserves attributable to a specific large claim related to the 2016 accident year and reserve strengthening within the European book of business mainly related to the 2016 to 2018 accident years.
For the three months ended September 30, 2019, we recognized $12 million of net favorable prior year reserve development, the principal components of which were:
•$23 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business related to recent accident years.
•$6 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence related to several accident years.
•$12 million of net adverse prior year reserve development on property and other business primarily due to reserve strengthening attributable to late reporting of claims bordereaux associated with the European proportional book of business related to the 2018 accident year.
•$7 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the European book of business mainly related to the 2015 and 2016 accident years.
For the nine months ended September 30, 2020, we recognized $5 million of net favorable prior year reserve development, the principal components of which were:
•$28 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence related to multiple accident years.
•$19 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business mainly related to the 2019 and older accident years.
•$23 million of net adverse prior year development on liability business primarily due to reserve strengthening within the U.S. casualty, the U.S. multiline/regional and the European books of business mainly related to the 2016 to 2019 accident years.
•$13 million of net adverse prior year reserve development on professional lines business primarily due to an increase in case reserves attributable to a specific large claim related to the 2016 accident year and reserve strengthening within the European book of business mainly related to the 2016 to 2018 accident years.
•$5 million of net adverse prior year development on property and other business primarily due to reserve strengthening within the engineering line of business mainly related to the 2016 to 2018 accident years, and the marine and other line of business mainly related to the 2017 accident years, partially offset by net favorable prior year reserve development within the property line of business due to better than expected loss emergence attributable to the 2019 catastrophe events.
For the nine months ended September 30, 2019, we recognized $22 million of net favorable prior year reserve development, the principal components of which were:
•$34 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business related to several accident years.
•$33 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence mainly related to the 2015 and 2016 accident years.
•$26 million of net favorable prior year reserve development on liability business primarily due to increased weight given by management to experience based indications on older accident years.
•$71 million of net adverse prior year reserve development on property and other business primarily due to an increase in loss estimates attributable to Typhoons Jebi and Trami consistent with updated industry insured loss estimates, an increase in loss estimates attributable to Hurricane Michael, and reserve strengthening attributable to late reporting of claims bordereaux associated within the European proportional book of business related to the 2018 accident year.
Acquisition Cost Ratio:
The acquisition costs.cost ratio decreased to 22.3% and 22.5% for the three and nine months ended September 30, 2020, respectively, from 23.3% and 23.4% for the three and nine months ended September 30, 2019, respectively, principally related to changes in business mix.
Underwriting-Related General and Administrative Expense Ratio:
The underwriting-related general and administrative expense ratio of 4.5% and 4.9% for the three and nine months ended September 30, 2020, respectively, was comparable to 4.1% and 4.9% for the three and nine months ended September 30, 2019, respectively.
NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)
Net Investment IncomeRESULTS BY SEGMENT
Insurance Segment
Results for the insurance segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 935,817 | | | 5% | | $ | 894,902 | | | $ | 2,914,100 | | | 7% | | $ | 2,714,322 | | |
| Net premiums written | 544,857 | | | 5% | | 517,050 | | | 1,729,268 | | | 6% | | 1,638,197 | | |
| Net premiums earned | 570,184 | | | 6% | | 536,451 | | | 1,709,268 | | | 5% | | 1,630,473 | | |
| Other insurance related income | 688 | | | 6% | | 733 | | | 2,091 | | | 18% | | 1,779 | | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current accident year net losses and loss expenses | (443,659) | | | | | (353,575) | | | (1,257,090) | | | | | (1,004,293) | | |
| Prior year reserve development | 270 | | | | | 14,609 | | | 4,521 | | | | | 42,849 | | |
| Acquisition costs | (114,569) | | | | | (115,551) | | | (343,579) | | | | | (344,981) | | |
| Underwriting-related general and administrative expenses | (94,379) | | | | | (100,559) | | | (284,909) | | | | | (311,491) | | |
| | | | | | | | | | | | | |
| Underwriting income (loss) | $ | (81,465) | | | | | $ | (17,892) | | | $ | (169,698) | | | | | $ | 14,336 | | |
| | | | | | | | | | | | | |
| Ratios: | | | % Point Change | | | | | | % Point Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 54.7 | % | | (3.5) | | 58.2 | % | | 54.8 | % | | (2.9) | | 57.7 | % | |
| Catastrophe and weather-related losses ratio | 23.1 | % | | 15.4 | | 7.7 | % | | 18.7 | % | | 14.8 | | 3.9 | % | |
| Current accident year loss ratio | 77.8 | % | | 11.9 | | 65.9 | % | | 73.5 | % | | 11.9 | | 61.6 | % | |
| Prior year reserve development ratio | — | % | | 2.7 | | (2.7 | %) | | (0.2 | %) | | 2.4 | | (2.6 | %) | |
| Net losses and loss expenses ratio | 77.8 | % | | 14.6 | | 63.2 | % | | 73.3 | % | | 14.3 | | 59.0 | % | |
| Acquisition cost ratio | 20.1 | % | | (1.4) | | 21.5 | % | | 20.1 | % | | (1.1) | | 21.2 | % | |
| Underwriting-related general and administrative expense ratio | 16.5 | % | | (2.3) | | 18.8 | % | | 16.7 | % | | (2.3) | | 19.0 | % | |
| Combined ratio | 114.4 | % | | 10.9 | | 103.5 | % | | 110.1 | % | | 10.9 | | 99.2 | % | |
| | | | | | | | | | | | | |
nm – not meaningful
Gross Premiums Written
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Property | $ | 238,599 | | | 26 | % | | $ | 241,517 | | | 27 | % | | (1%) | | $ | 741,043 | | | 27 | % | | $ | 701,314 | | | 27 | % | | 6% | |
| Marine | 82,810 | | | 9 | % | | 91,161 | | | 10 | % | | (9%) | | 355,503 | | | 12 | % | | 337,529 | | | 12 | % | | 5% | |
| Terrorism | 14,767 | | | 2 | % | | 17,284 | | | 2 | % | | (15%) | | 42,296 | | | 1 | % | | 46,803 | | | 2 | % | | (10%) | |
| Aviation | 22,702 | | | 2 | % | | 17,623 | | | 2 | % | | 29% | | 63,725 | | | 2 | % | | 53,832 | | | 2 | % | | 18% | |
| Credit and political risk | 24,473 | | | 3 | % | | 32,528 | | | 4 | % | | (25%) | | 100,151 | | | 3 | % | | 114,511 | | | 4 | % | | (13%) | |
| Professional lines | 338,907 | | | 36 | % | | 272,362 | | | 30 | % | | 24% | | 943,635 | | | 32 | % | | 820,953 | | | 30 | % | | 15% | |
| Liability | 172,747 | | | 18 | % | | 186,253 | | | 21 | % | | (7%) | | 548,023 | | | 19 | % | | 518,925 | | | 19 | % | | 6% | |
| Accident and health | 39,262 | | | 4 | % | | 34,054 | | | 4 | % | | 15% | | 117,743 | | | 4 | % | | 113,228 | | | 4 | % | | 4% | |
| Discontinued lines - Novae | 1,550 | | | — | % | | 2,120 | | | — | % | | (27%) | | 1,981 | | | — | % | | 7,227 | | | — | % | | nm | |
| Total | $ | 935,817 | | | 100 | % | | $ | 894,902 | | | 100 | % | | 5% | | $ | 2,914,100 | | | 100 | % | | $ | 2,714,322 | | | 100 | % | | 7% | |
| | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Gross premiums written for the three months ended September 30, 2020, increased by $41 million, or 5%, ($31 million, or 3% on a constant currency basis(1)), compared to the three months ended September 30, 2019. The increase was primarily attributable to professional lines, accident and health, and aviation lines, partially offset by decreases in liability, marine, and credit and political risk lines.
The increase in professional lines was due to new business and favorable rate changes. The increase in accident and health lines was due to new business. The increase in aviation lines was due to a timing difference and favorable rate changes. The decreases in liability and credit and political risk lines were due to a higher level of non-renewals and reduced business opportunities related to the current economic climate. The decrease in marine lines was due to a timing difference and non-renewals.
Gross premiums written for the nine months ended September 30, 2020, increased by $200 million, or 7%, compared to the nine months ended September 30, 2019. The increase was primarily attributable to professional lines, property, liability, marine, and aviation lines, partially offset by a decrease in credit and political risk lines.
The increases in professional lines, property, liability, and marine lines were due to new business and favorable rate changes. The increase in aviation lines was due to timing differences. The decrease in credit and political risk lines was due to non-renewals and reduced business opportunities related to the current economic climate.
Ceded Premiums Written
Ceded premiums written for the three months ended September 30, 2020, was $391 million, or 42% of gross premiums written, compared to $378 million, or 42% of gross premiums written for the three months ended September 30, 2019. The increase in ceded premiums written of $13 million or 3% was primarily driven by increases in professional lines and property lines, partially offset by decreases in liability, marine, and credit and political risk lines.
Ceded premiums written for the nine months ended September 30, 2020, was $1,185 million, or 41% of gross premiums written, compared to $1,076 million, or 40% of gross premiums written for the nine months ended September 30, 2019. The increase in ceded premiums written of $109 million, or 10%, was primarily driven by increases in professional lines, property, liability, and marine lines, partially offset by a decrease in credit and political risk lines.
(1) Amounts presented on a constant currency basis are non-GAAP financial measures as defined in Item10 (e) of SEC Regulation S-K. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.
Net investment incomePremiums Earned
Net premiums earned by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Property | $ | 145,717 | | | 27 | % | | $ | 154,751 | | | 29 | % | | (6%) | | $ | 452,876 | | | 26 | % | | $ | 481,450 | | | 30 | % | | (6%) | |
| Marine | 76,544 | | | 13 | % | | 65,437 | | | 12 | % | | 17% | | 220,248 | | | 13 | % | | 209,629 | | | 13 | % | | 5% | |
| Terrorism | 11,728 | | | 2 | % | | 11,605 | | | 2 | % | | 1% | | 34,675 | | | 2 | % | | 35,635 | | | 2 | % | | (3%) | |
| Aviation | 19,039 | | | 3 | % | | 10,993 | | | 2 | % | | nm | | 51,236 | | | 3 | % | | 38,603 | | | 2 | % | | 33% | |
| Credit and political risk | 23,781 | | | 4 | % | | 19,432 | | | 4 | % | | 22% | | 77,721 | | | 5 | % | | 66,412 | | | 4 | % | | 17% | |
| Professional lines | 179,441 | | | 31 | % | | 172,280 | | | 32 | % | | 4% | | 530,651 | | | 31 | % | | 490,928 | | | 30 | % | | 8% | |
| Liability | 76,487 | | | 13 | % | | 68,002 | | | 13 | % | | 12% | | 234,522 | | | 14 | % | | 192,352 | | | 12 | % | | 22% | |
| Accident and health | 37,151 | | | 7 | % | | 32,368 | | | 6 | % | | 15% | | 106,015 | | | 6 | % | | 108,402 | | | 7 | % | | (2%) | |
| Discontinued lines - Novae | 296 | | | — | % | | 1,583 | | | — | % | | nm | | 1,324 | | | — | % | | 7,062 | | | — | % | | nm | |
| Total | $ | 570,184 | | | 100 | % | | $ | 536,451 | | | 100 | % | | 6% | | $ | 1,709,268 | | | 100 | % | | $ | 1,630,473 | | | 100 | % | | 5% | |
| | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Net premiums earned for the three months ended September 30, 2020, increased by $34 million, or 6%, ($27 million, or 5% on a constant currency basis), compared to the three months ended September 30, 2019. The increase was primarily driven by increases in gross premiums earned in professional lines, liability, and marine lines, together with a decrease in ceded premiums earned in aviation lines, partially offset by increases in ceded premiums earned in professional lines and liability lines, and a decrease in gross premiums earned in property lines.
Net premiums earned for the nine months ended September 30, 2020, increased by $79 million, or 5%, compared to the nine months ended September 30, 2019. The increase was primarily driven by increases in gross premiums earned in liability, professional lines, marine, and credit and political risk lines, together with decreases in ceded premiums earned in property and aviation lines, partially offset by increases in ceded premiums earned in liability and professional lines, and a decrease in gross premiums earned in property lines.
Loss Ratio
The components of the loss ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Point Change | | 2019 | | 2020 | | % Point Change | | 2019 | |
| | | | | | | | | | | | | |
| Current accident year | 77.8 | % | | 11.9 | | 65.9 | % | | 73.5 | % | | 11.9 | | 61.6 | % | |
| Prior year reserve development | — | % | | 2.7 | | (2.7 | %) | | (0.2 | %) | | 2.4 | | (2.6 | %) | |
| Loss ratio | 77.8 | % | | 14.6 | | 63.2 | % | | 73.3 | % | | 14.3 | | 59.0 | % | |
| | | | | | | | | | | | | |
Current Accident Year Loss Ratio
The current accident year loss ratio increased to 77.8% and 73.5% for the three and nine months ended September 30, 2017 was $95 million2020, respectively, from 65.9% and $300 million, respectively, a decrease of $22 million and an increase of $42 million, respectively, compared to the three and nine months ended September 30, 2016 primarily attributable to our alternative investments portfolio.
Net Realized Investment Gains (Losses)
Net realized investment gains were $15 million for the three months ended September 30, 2017 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 million for the same period of 2016. The net realized investment losses for the nine months ended September 30, 2017 and 2016 were primarily attributable to foreign currency losses (net of forward contracts) on the sale of non-U.S. government and corporate debt securities as a result of the strengthening of the U.S. dollar and OTTI.
Corporate Expenses
Corporate expenses were $28 million for the three months ended September 30, 2017, compared to $29 million for the three months ended September 30, 2016. The decrease was primarily attributable to a decrease in performance related compensation costs and an
increase in the allocation of corporate costs to the insurance and reinsurance segments, largely offset by an increase in personnel expenses.
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 foreign exchange losses of $33 million and $90 million61.6% for the three and nine months ended September 30, 2017, respectively, 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.2019, respectively.
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, 2017 resulted in a tax benefit of $26 million and $39 million, respectively. The tax benefit of $26 million recognized in the three months ended September 30, 2017 was primarily driven by an underwriting loss recognized 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, share based compensation excess tax benefits which were recognized in the income statement, and a tax adjustment related to the bargain purchase gain recognized in connection with the acquisition 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 allocated 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, 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.
Interest in Loss of Equity Method Investments
Interest in loss of equity method investments was $1 million and $8 million for the three and nine months ended September 30, 2017, respectively. The nine months ended September 30, 2017 included impairment losses of $9 million related to an investment in a U.S. based insurance company, partially offset by income of $1 million related to the Company’s aggregate share of profits in a company in which it has 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 |
| |
| | | | | | | | | | |
nm – not meaningful
(1) Return on average common equity (“ROACE”) is calculated by dividing annualized net income available to common shareholders for the period by the average shareholders’ equity determined by using the common shareholders’ equity balances at the beginning and end of the period.
(2) Non-GAAP 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 defined 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 by the number of common shares and diluted common share equivalents outstanding, determined using the treasury stock method. Cash settled awards are excluded from the denominator.
Return on Equity
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.
The decrease in ROACE for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, was primarily driven by a decrease in underwriting income and net investment income together with foreign exchange losses, partially offset by a tax benefit compared to a tax expense in 2016 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.
Non-GAAP operating ROACE excludes the impact of net realized investment gains (losses), foreign exchange losses (gains), the bargain purchase gain and transaction related expenses.
The decrease in non-GAAP operating ROACE for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, was primarily driven by a decrease in underwriting income and net investment income partially offset by a tax benefit compared to a tax expense in 2016.
The decrease in non-GAAP operating 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, partially offset by a tax benefit compared to a tax expense in 2016 and an increase in net investment income.
Diluted Book Value per Common Share
Diluted book value per common share decreased by 7% to $55.33 at September 30, 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 million and common share dividends declared.
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 or 8% per common share for the three months ended September 30, 2017, by $1.80 or 3% per common share for the nine months ended September 30, 2017, and $2.92, or 5%, 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, the decrease in diluted book value per common share adjusted for dividends was primarily attributable to net loss generated in both periods and common share dividends declared, partially offset by an 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 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 |
| |
| | | | | | | | | | | | | | |
nm – not meaningful
| |
(1) | Underwriting-related general and administrative expenses is a non-GAAP measure as defined in SEC Regulation G. The reconciliation to general and administrative expenses, the most comparable GAAP measure, is presented in the '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 SEC Regulation G. The reconciliation to net income (loss before tax and interest in income (loss) of equity investments), the most comparable GAAP measure, is presented in the "Results of Operations', which is included in the 'Executive Summary' section of this MD&A.
|
UNDERWRITING 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 |
| |
| | | | | | | | | | | | | | |
| |
(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:
Gross premiums written for the three and nine months ended September 30, 2017 increased by $226 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, 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 due to an increase in both the insurance and reinsurance segments.
The reinsurance segment's gross premiums written increased by $157 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) for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.
The increase in the reinsurance segment gross premiums written for the three months ended September 30, 2017 compared to the same period of 2016, was primarily driven by our liability, catastrophe, property and motor lines. The increase in our liability lines was due to timing differences. 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. 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 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, together with the impact of foreign exchange movements. The decrease in our credit and surety lines was primarily due to a lower level of premiums written on a multi-year basis.
The insurance segment's gross premiums written increased by $69 million or 10% and $122 million or 6% ($133 million on a constant currency basis) for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.
The increase in the insurance segment gross premiums written for the three months ended September 30, 2017 was attributable to our liability lines, and our credit and political risk 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 operations last year.
The increase in the nine months ended September 30, 2017 was attributable 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 acquisition of Aviabel. These increases were partially offset by a decrease in premiums written in our property lines following our exit from some U.S. retail insurance operations last year.
Ceded Premiums Written:
Ceded premiums written for the three and nine months ended September 30, 2017 were $353 million or 30% and $1.2 billion or 26% of gross premiums written, respectively, compared to $365 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 written for the three months ended September 30, 2017 and 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.
The increase in the reinsurance segment ratio of ceded premiums written to gross premiums written for the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to an increase in premiums ceded in our catastrophe, agriculture, credit and surety lines as well as our liability lines, partially offset by an increase in gross premiums written.
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 to Northshore during the nine months ended September 30, 2017 was $27 million.
Net Premiums 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.
Net premiums earned for the three and nine months ended September 30, 2017 increased by $83 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, compared to the three and nine months ended September 30, 2016, respectively. The increases for both periods compared to the same periods in 2016, were driven by increases in both the insurance and reinsurance segments.
The increase in net premiums earned in the insurance segment for the three and nine months ended September 30, 2017 compared to the same periods in 2016, were 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 property lines in recent periods.
The increase in net premiums earned in the reinsurance segment for the three months ended September 30, 2017 compared to the same periods in 2016, was primarily driven by strong premium growth in our motor lines, as well as favorable reinstatement premiums impacting our catastrophe lines, and favorable premium estimate adjustments impacting our agriculture 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 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 | % | |
| | | | | | | | | | | | | | |
| |
(1) | The general and administrative expense ratio includes corporate expenses not allocated to reportable segments of 2.7% and 3.1% for the three months ended September 30, 2017 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 ‘Other Expenses (Revenues), Net’ section.
|
Current Accident Year Loss Ratio:
The current accident year loss ratio increased to 126.2% and 88.2% for the three and nine months ended September 30, 2017, respectively, from 65.1% and 67.8% for the three and nine months ended September 30, 2016, respectively.
The increase in the current accident year loss ratio for the three and nine months ended September 30, 2017 compared to the same period in 2016, was impacted by a higher level of catastrophe and weather-related losses. During the three and nine months ended September 30, 2017 we incurred pre-tax2020, catastrophe and weather-related losses, net of reinstatement premiums, of $617were $132 million, or 61.423.1 points, and $702$325 million, or 24.118.7 points, respectively,respectively. During the three months ended September 30, 2020, these losses were primarily attributable to Hurricanes Harvey, IrmaLaura and Maria,Sally, the two earthquakes in MexicoBeirut port explosion, wildfires across the West Coast of the United States, and U.S.other weather-related events. During the nine months ended September 30, 2020 catastrophe and weather-related losses included $137 million associated with first party coverages attributable to the COVID-19 pandemic. These losses were primarily associated with property-related coverages, but also included event cancellation coverages. The remaining losses of $188 million were primarily attributable to Hurricanes Laura and Sally, the Beirut port explosion, wildfires across the West Coast of the United States, and other weather-related events. Comparatively, during the three and nine months ended September 30, 2016 we incurred pre-tax2019, catastrophe and weather-related losses net of reinstatement premiums of $22were $41 million, or 2.37.7 points, and $145$64 million, or 5.33.9 points, respectively.
After adjusting for the impact of the catastrophe and weather-related losses, ourthe current accident year loss ratio decreased to 54.7% for the three and nine months ended September 30, 2017 was 64.8% and 64.1%, respectively, compared to 62.8% and 62.5% in2020, from 58.2% for the three and nine months ended September 30, 2016, respectively.
2019. The increasedecrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends, improved loss experience in property, marine, credit and political risk, and aviation lines largely associated with the repositioning of the portfolio.
After adjusting for the threeimpact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 54.8% for the nine months ended September 30, 2017 compared to2020, from 57.7% for the same period in 2016, was mainly due to higher attritional losses in our insurance property lines, higher mid-size loss experience in our reinsurance credit 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.
nine months ended September 30, 2019. The increasedecrease 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 comparedwas principally due to the same period in 2016, was mainly due to higherimpact of favorable pricing over loss trends, improved loss experience in our insuranceproperty, credit and reinsurance propertypolitical risk, marine and aviation lines, the adverse impact on rate and trend and the ongoing impact of the Ogden rate change on our reinsurance motor 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, 2017 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,partially offset by changes 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, inherently increases the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.
business mix.
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 breakdownmaps lines of priorbusiness to reserve classes and the expected claim tails:
| | | | | | | | | | | | | | | | | | | | |
| Insurance segment | | | | | |
| Reserve class and tail |
| | | | | | |
| Property and other | Marine | Aviation | Credit and political risk | Professional lines | Liability |
| | | | | | |
| Short | Short | Short/Medium | Medium | Medium | Long |
| | | | | | |
| Reported lines of business | | | | | | |
| Property | X | | | | | |
| Marine | | X | | | | |
| Terrorism | X | | | | | |
| Aviation | | | X | | | |
| Credit and political risk | | | | X | | |
| Professional lines | | | | | X | |
| Liability | | | | | | X |
| Accident and health | X | | | | | |
| Discontinued lines - Novae | X | | | | X | X |
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 |
| |
| | | | | | | | | | |
Overview
Our short tail business includes the underlying exposures in our property and other, marine and aviation reserve classes within our insurance segment, and the property and other reserve class within our reinsurance segment. Development from these classes contributed $5 million and $41 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 reflected the recognition of better than expected loss emergence.were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Property and other | $ | 6,907 | | | $ | 11,427 | | | $ | 42,688 | | | $ | (4,426) | | |
| Marine | 4,095 | | | 2,119 | | | 633 | | | 23,753 | | |
| Aviation | (326) | | | 471 | | | 5,667 | | | 1,671 | | |
| Credit and political risk | 871 | | | 1,217 | | | (223) | | | 10,278 | | |
| Professional lines | (7,287) | | | 3,656 | | | (19,086) | | | 13,899 | | |
| Liability | (3,990) | | | (4,281) | | | (25,158) | | | (2,326) | | |
| Total | $ | 270 | | | $ | 14,609 | | | $ | 4,521 | | | $ | 42,849 | | |
| | | | | | | | | |
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 contributed2020, we recognized $0.3 million of net favorable prior year reserve development of $9 million. For the nine months ended September 30, 2017, the professional insurance and reinsurance reserve classes 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 reserve 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 the 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 reserve 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.
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 sections provide further details on prior year reserve development by segment, reserving class and accident year.
Insurance 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 |
| |
| | | | | | | | | | |
For the three months endedSeptember 30, 2017 we recognized $3 million of net favorable prior year reserve development, the principal component of which was:
$2 million of net favorable prior year reserve development on marine business, primarily related to accident year 2015 and primarily driven by better than expected development.
For the three months ended September 30, 2016 we recognized $21 million of net favorable prior year reserve development, the principal componentscomponents of which were:
•$107 million of net favorable prior year reserve development on property and other business driven byprimarily due to 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 impacting accident year 2014.attributable to the 2019 catastrophe events.
•$54 million of net favorable prior year reserve development on marine business driven byprimarily due better than expected loss emergence mainly related to the 2018 accident year.
•$7 million of net adverse prior year reserve development on professional lines business primarily driven by reductions in mid-size loss estimates impactingdue to reserve strengthening within the European professional indemnity and financial institutions books of business mainly related to the 2018 accident year 2015.and an increase in case reserves attributable to a specific large claim related to the 2009 accident year.
•$4 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the primary casualty, U.S. excess casualty and program books of business mainly related to 2017 and 2018 accident years.
For the ninethree months ended September 30, 20172019, we recognized $31$15 million of net favorable prior year reserve development, the principal components of which were:
•$11 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence attributable to the 2017 catastrophe events and SuperStorm Sandy.
•$184 million of net favorable prior year reserve development on professional lines business primarily due to better than expected loss emergence mainly related to accident yearsthe 2013 and 2014 accident years.
•$4 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the recognitionU.S. excess casualty book of better than expected development.business related to older accident years.
For the nine months ended September 30, 2020, we recognized $5 million of net favorable prior year reserve development, the principal components of which were:
•$1843 million of net favorable prior year reserve development on marineproperty and other business primarily relateddue to accident years 2013, 2015 and 2016 driven by better than expected loss emergence.emergence mainly related to the 2018 and 2019 accident years, better than expected loss emergence attributable to the 2017, 2018 and 2019 catastrophe events, and decreases in case reserves attributable to specific claims related to the 2014 and 2016 accident years.
•$6 million of net favorable prior year reserve development on aviation business primarily due to better than expected loss emergence mainly related to the 2018 and 2019 accident years.
•$625 million of net adverse prior year reserve development on liability lines,business primarily attributabledue to reserve strengthening on two large claims within our run-off Bermudathe primary casualty, U.S. excess casualty and program books of business mainly related to the 2017 and 2018 accident years.
•$19 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the European professional indemnity and financial institutions books of business and the commercial management solutions book of business impacting 2014mainly related to the 2018 and prior2019 accident years.
year and an increase in case reserves attributable to a specific large claim related to the 2009 accident year.
For the nine months ended September 30, 20162019, 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:
|
| | | | | | | | | | | | | | | | | |
| | | 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 |
| |
| | | | | | | | | | |
For the three months endedSeptember 30, 2017 we recognized $45 million of net favorable prior year reserve development, the principal components of which were:
$17 million of net favorable prior year reserve development on credit 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 motor business, due to better than expected loss emergence emanating from allmainly related to the 2015 to 2017 accident years, partially offset by the adverse impact of the recent change in Ogden rate.years.
•$914 million of net favorable prior year reserve development on professional lines business primarily relateddue to earlier accident year 2009 for reasons discussed in the overview.
For the three months ended September 30, 2016 we recognized $55 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 millionmainly related to Storm Sandy.the 2013 to 2015 accident years.
•$10 million of net favorable prior year reserve development on liabilitycredit and political risk business primarily relateddue 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.emergence mainly related to the 2018 accident year.
For the nine months ended September 30, 2017 we recognized $113•$4 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 favorableadverse prior year reserve development on property and other business primarily due to reserve strengthening within the international book of business mainly related to 2013, 2014 and 2016the 2018 accident years drivenyear, partially offset by overall better than expected loss emergence.emergence attributable to the 2017 catastrophe events and SuperStorm Sandy.
Acquisition Cost Ratio
The acquisition cost ratio decreased to 20.1% for the three months ended September 30, 2020, from 21.5% for the three months ended September 30, 2019, principally related to an increase in ceding commissions.
The acquisition cost ratio decreased to 20.1% for the nine months ended September 30, 2020, from 21.2% for the nine months ended September 30, 2019, associated with the acquisition of Novae and an increase in ceding commissions. At the acquisition date, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at that date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet as the value of policies in-force on that date are considered within value of business acquired ("VOBA"). Consequently, the absence of $1 million and $11 million of acquisition expense related to premiums earned in the nine months ended September 30, 2020 and 2019, respectively, benefited the acquisition cost by 0.1 points and 0.6 points, respectively. Adjusting the acquisition cost rate for these amounts, the acquisition cost ratio decreased by 1.6 points.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio decreased to 16.5%for thethree months ended September 30, 2020, from 18.8% for the three months ended September 30, 2019, mainly driven by a decrease in personnel costs and travel and entertainment expenses, together with an increase in net premiums earned.
The underwriting-related general and administrative expense ratio decreased to 16.7% for the nine months ended September 30, 2020, from 19.0% for the nine months ended September 30, 2019, mainly driven by decreases in travel and entertainment expenses, and professional fees, together with an increase in net premiums earned.
Reinsurance Segment
Results from the reinsurance segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 395,361 | | | (23%) | | $ | 511,604 | | | $ | 2,564,419 | | | (12%) | | $ | 2,923,169 | | |
| Net premiums written | 271,125 | | | (20%) | | 339,031 | | | 1,821,692 | | | (12%) | | 2,065,263 | | |
| Net premiums earned | 521,128 | | | (16%) | | 620,856 | | | 1,574,673 | | | (12%) | | 1,784,653 | | |
| Other insurance related income (loss) | 752 | | | (6%) | | 800 | | | (7,361) | | | nm | | 9,606 | | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current year net losses and loss expenses | (436,602) | | | | | (524,065) | | | (1,216,273) | | | | | (1,248,131) | | |
| Prior year reserve development | 314 | | | | | 12,118 | | | 4,830 | | | | | 22,172 | | |
| Acquisition costs | (115,995) | | | | | (144,475) | | | (354,137) | | | | | (417,826) | | |
| Underwriting-related general and administrative expenses | (23,456) | | | | | (26,060) | | | (76,714) | | | | | (87,049) | | |
| | | | | | | | | | | | | |
| Underwriting income (loss) | $ | (53,859) | | | | | $ | (60,826) | | | $ | (74,982) | | | | | $ | 63,425 | | |
| Ratios: | | | % Point Change | | | | | | % Point Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 62.7 | % | | (2.1) | | 64.8 | % | | 61.1 | % | | (1.2) | | 62.3 | % | |
| Catastrophe and weather-related losses ratio | 21.1 | % | | 1.5 | | 19.6 | % | | 16.1 | % | | 8.5 | | 7.6 | % | |
| Current accident year loss ratio | 83.8 | % | | (0.6) | | 84.4 | % | | 77.2 | % | | 7.3 | | 69.9 | % | |
| Prior year reserve development ratio | (0.1 | %) | | 1.8 | | (1.9 | %) | | (0.3 | %) | | 0.9 | | (1.2 | %) | |
| Net losses and loss expenses ratio | 83.7 | % | | 1.2 | | 82.5 | % | | 76.9 | % | | 8.2 | | 68.7 | % | |
| Acquisition cost ratio | 22.3 | % | | (1.0) | | 23.3 | % | | 22.5 | % | | (0.9) | | 23.4 | % | |
| Underwriting-related general and administrative expense ratio | 4.5 | % | | 0.4 | | 4.1 | % | | 4.9 | % | | — | | 4.9 | % | |
| Combined ratio | 110.5 | % | | 0.6 | | 109.9 | % | | 104.3 | % | | 7.3 | | 97.0 | % | |
| | | | | | | | | | | | | |
nm – not meaningful
Gross Premiums Written:
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | | Nine months ended September 30, | | | | |
| | 2020 | | | | 2019 | | | | % Change | | | 2020 | | | | 2019 | | | | % Change | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 74,656 | | | 18 | % | | $ | 94,833 | | | 18 | % | | (21%) | | | $ | 526,646 | | | 21 | % | | $ | 698,169 | | | 24 | % | | (25%) | | |
| Property | 58,907 | | | 15 | % | | 67,972 | | | 13 | % | | (13%) | | | 246,859 | | | 10 | % | | 283,849 | | | 10 | % | | (13%) | | |
| Professional lines | 31,752 | | | 8 | % | | 23,540 | | | 5 | % | | 35% | | | 267,047 | | | 10 | % | | 226,283 | | | 8 | % | | 18% | | |
| Credit and surety | 38,110 | | | 10 | % | | 50,989 | | | 10 | % | | (25%) | | | 189,180 | | | 7 | % | | 241,358 | | | 8 | % | | (22%) | | |
| Motor | (2,235) | | | (1 | %) | | 25,367 | | | 5 | % | | nm | | | 319,867 | | | 12 | % | | 313,614 | | | 11 | % | | 2% | | |
| Liability | 136,791 | | | 35 | % | | 146,690 | | | 29 | % | | (7%) | | | 505,322 | | | 20 | % | | 458,000 | | | 16 | % | | 10% | | |
| Agriculture | 7,455 | | | 2 | % | | 5,074 | | | 1 | % | | 47% | | | 69,599 | | | 3 | % | | 201,592 | | | 7 | % | | (65%) | | |
| Engineering | 1,408 | | | — | % | | 8,841 | | | 2 | % | | nm | | | 20,334 | | | 1 | % | | 39,207 | | | 1 | % | | (48%) | | |
| Marine and other | 6,341 | | | 2 | % | | 9,727 | | | 2 | % | | (35%) | | | 62,202 | | | 2 | % | | 68,104 | | | 2 | % | | (9%) | | |
| Accident and health | 41,820 | | | 11 | % | | 78,474 | | | 15 | % | | (47%) | | | 356,123 | | | 14 | % | | 393,789 | | | 13 | % | | (10%) | | |
| Discontinued lines - Novae | 356 | | | — | % | | 97 | | | — | % | | nm | | | 1,240 | | | — | % | | (796) | | | — | % | | nm | | |
| Total | $ | 395,361 | | | 100 | % | | $ | 511,604 | | | 100 | % | | (23%) | | | $ | 2,564,419 | | | 100 | % | | $ | 2,923,169 | | | 100 | % | | (12%) | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Gross premiums written for the three months ended September 30, 2020, decreased by $116 million, or 23%, ($109 million, or 21% on a constant currency basis), compared to the three months ended September 30, 2019. The decrease was primarily attributable to accident and health, motor, catastrophe, credit and surety, liability and property lines, partially offset by an increase in professional lines.
The decrease in accident and health lines was driven by non-renewals following the decision to exit the Middle East business. The decrease in motor lines was due to premium adjustments. The decrease in catastrophe lines was driven by a timing difference associated with a significant contract, non-renewals, and decreased line sizes on a number of treaties. The decrease in credit and surety lines was attributable to the current economic climate. The decrease in liability lines was due to a reduced line size on a significant contract, partially offset by new business due to favorable market conditions and timing differences. The decrease in property lines was due to non-renewals and a timing difference. The increase in professional lines was due to premium adjustments.
Gross premiums written for the nine months ended September 30, 2020, decreased by $359 million, or 12%, compared to the nine months ended September 30, 2019. The decrease was primarily attributable to catastrophe, agriculture, credit and surety, accident and health, property, and engineering lines, partially offset by increases in liability and professional lines.
The decreases in catastrophe, agriculture, credit and surety, accident and health, property, and engineering lines were driven by non-renewals and decreased line sizes consistent with optimization of the segment's portfolio. The increases in liability and professional lines were driven by premium adjustments, and favorable market conditions associated with renewals and new business.
Ceded Premiums Written:
Ceded premiums written for the three months ended September 30, 2020 was $124 million, or 31% of gross premiums written, compared to $173 million, or 34% of gross premiums written for the three months ended September 30, 2019.
The decrease in ceded premiums written of $48 million, or 28%, was primarily driven by catastrophe, accident and health, credit and surety, and liability lines. The decrease in catastrophe lines was attributable to a non-renewal of a catastrophe bond and a decrease in premiums ceded to strategic capital partners. The decrease in accident and health lines was attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in credit and surety lines was attributable to a decrease in premiums ceded to an existing quota share retrocessional treaty. The decrease in liability lines was attributable to the restructuring of an existing quota share retrocessional treaty, partially offset by an increase in premiums ceded to a new quota share retrocessional treaty.
Ceded premiums written for the nine months ended September 30, 2020, was $743 million, or 29% of gross premiums written, compared to $858 million, or 29% of gross premiums written for the nine months ended September 30, 2019.
The decrease in ceded premiums written of $115 million, or 13%, was primarily driven by catastrophe, credit and surety, accident and health, and agriculture lines, partially offset by increases in professional lines, liability, motor, and property lines.
The decrease in catastrophe lines was attributable to decreases in premiums ceded to strategic partners and a non-renewal of a catastrophe bond. The decrease in credit and surety lines was attributable to a decrease in premiums ceded to a quota share retrocessional treaty and the restructuring of existing quota share retrocessional treaties. The decrease in accident and health lines was attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in agriculture lines was attributable to a non-renewal of a large quota share retrocessional treaty.
The increases in liability and professional lines were attributable to an increase in premiums ceded to a new quota share retrocessional treaty, partially offset by the restructuring of an existing quota share retrocessional treaty. The increase in motor lines was attributable to an increase in premiums ceded to a new quota share retrocessional treaty. The increase in property lines was attributable to an increase in premiums ceded to a new aggregate excess of loss treaty.
Net Premiums Earned:
Net premiums earned by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 64,163 | | | 13 | % | | $ | 68,910 | | | 11 | % | | (7%) | | $ | 194,987 | | | 12 | % | | $ | 205,468 | | | 11 | % | | (5%) | |
| Property | 62,704 | | | 12 | % | | 78,271 | | | 13 | % | | (20%) | | 196,229 | | | 12 | % | | 226,515 | | | 13 | % | | (13%) | |
| Professional lines | 54,424 | | | 10 | % | | 50,966 | | | 8 | % | | 7% | | 154,482 | | | 10 | % | | 154,390 | | | 9 | % | | —% | |
| Credit and surety | 43,730 | | | 8 | % | | 55,625 | | | 9 | % | | (21%) | | 134,988 | | | 9 | % | | 154,638 | | | 9 | % | | (13%) | |
| Motor | 63,298 | | | 12 | % | | 107,930 | | | 17 | % | | (41%) | | 203,776 | | | 13 | % | | 301,622 | | | 17 | % | | (32%) | |
| Liability | 96,671 | | | 19 | % | | 95,632 | | | 15 | % | | 1% | | 293,918 | | | 19 | % | | 279,639 | | | 16 | % | | 5% | |
| Agriculture | 17,750 | | | 3 | % | | 47,519 | | | 8 | % | | (63%) | | 57,949 | | | 4 | % | | 131,746 | | | 7 | % | | (56%) | |
| Engineering | 14,548 | | | 3 | % | | 16,611 | | | 3 | % | | (12%) | | 43,742 | | | 3 | % | | 47,290 | | | 3 | % | | (8%) | |
| Marine and other | 14,742 | | | 3 | % | | 17,924 | | | 3 | % | | (18%) | | 37,275 | | | 2 | % | | 44,529 | | | 2 | % | | (16%) | |
| Accident and health | 89,087 | | | 17 | % | | 81,500 | | | 13 | % | | 9% | | 256,303 | | | 16 | % | | 239,388 | | | 13 | % | | 7% | |
| Discontinued lines - Novae | 11 | | | — | % | | (32) | | | — | % | | nm | | 1,024 | | | — | % | | (572) | | | — | % | | nm | |
| Total | $ | 521,128 | | | 100 | % | | $ | 620,856 | | | 100 | % | | (16%) | | $ | 1,574,673 | | | 100 | % | | $ | 1,784,653 | | | 100 | % | | (12%) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Net premiums earned for the three months ended September 30, 2020, decreased by $100 million, or 16% ($93 million, or 15% on a constant currency basis), compared to the three months ended September 30, 2019. The decrease was primarily driven by decreases in gross premiums earned in motor, agriculture, credit and surety, and property lines.
Net premiums earned for the nine months ended September 30, 2020, decreased by $210 million, or 12% ($186 million, or 10% on a constant currency basis), compared to the nine months ended September 30, 2019. The decrease was primarily driven by decreases in gross premiums earned in agriculture, motor, catastrophe, property, and credit and surety lines, together with an increase in ceded premiums earned in liability lines, partially offset by decreases in ceded premiums earned in catastrophe, agriculture, and accident and health lines, and an increase in gross premiums earned in liability lines.
Other Insurance Related Income (Loss):
Other insurance related income was $1 million for the three months ended September 30, 2020, compared to other insurance related income of $1 million for the three months ended September 30, 2019.
Other insurance related loss was $7 million for the nine months ended September 30, 2020, compared to other insurance related income of $10 million for the nine months ended September 30, 2019. The decrease of $17 million was primarily due to the recognition of a full limit loss of $10 million associated with the WHO pandemic risk-linked swap and a decrease in fees associated with arrangements with strategic capital partners.
Loss Ratio:
The components of the loss ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Point Change | | 2019 | | 2020 | | % Point Change | | 2019 | |
| | | | | | | | | | | | | |
| Current accident year | 83.8 | % | | (0.6) | | 84.4 | % | | 77.2 | % | | 7.3 | | 69.9 | % | |
| Prior year reserve development | (0.1 | %) | | 1.8 | | (1.9 | %) | | (0.3 | %) | | 0.9 | | (1.2 | %) | |
| Loss ratio | 83.7 | % | | 1.2 | | 82.5 | % | | 76.9 | % | | 8.2 | | 68.7 | % | |
| | | | | | | | | | | | | |
Current Accident Year Loss Ratio:
The current accident year loss ratio decreased to 83.8% for the three months ended September 30, 2020, from 84.4% for the three months ended September 30, 2019. The current accident year loss ratio increased to 77.2% for the nine months ended September 30, 2020, from 69.9% for the nine months ended September 30, 2019.
During the three and nine months ended September 30, 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $108 million, or 21.1 points, and $251 million, or 16.1, respectively. During the three months ended September 30, 2020, these losses were primarily attributable to the Midwest derecho, wildfires across the West Coast of the United States, Hurricanes Laura and Sally, the Beirut port explosion, and other weather-related events. During the nine months ended September 30, 2020, catastrophe and weather-related losses included $98 million associated with first party coverages attributable to the COVID-19 pandemic. These losses were primarily associated with property-related coverages, but also included accident and health coverages. The remaining losses of $153 million were attributable to the Midwest derecho, wildfires across the West Coast of the United States, Hurricanes Laura and Sally, the Beirut port explosion and other weather-related events. Comparatively, during the three and nine months ended September 30, 2019, catastrophe and weather-related losses were $119 million, or 19.6 points, and $132 million, or 7.6, respectively.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 62.7% for the three months ended September 30, 2020 from 64.8% for the three months ended September 30, 2019. The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was principally due to changes in business mix and improved performance in aviation, professional lines and liability lines.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 61.1% for the nine months ended September 30, 2020 from 62.3% for the nine months ended September 30, 2019. The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was principally due to changes in business mix and improved performance in aviation, motor and liability lines.
Prior Year Reserve Development
The following table maps lines of business to reserve classes and the expected claim tails:
| | | | | | | | | | | | | | | | | |
| Reinsurance segment | | | | |
| Reserve class and tail |
| | | | | |
| Property and other | Credit and surety | Professional lines | Motor | Liability |
| | | | | |
| Short | Medium | Medium | Long | Long |
| | | | | |
| Reported lines of business | | | | | |
| Catastrophe | X | | | | |
| Property | X | | | | |
| Credit and surety | | X | | | |
| Professional lines | | | X | | |
| Motor | | | | X | |
| Liability | | | | | X |
| Engineering | X | | | | |
| Agriculture | X | | | | |
| Marine and other | X | | | | |
| Accident and health | X | | | | |
| Discontinued lines - Novae | X | | | X | X |
Prior year reserve development by reserve class were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Property and other | $ | 3,126 | | | $ | (12,283) | | | $ | (4,961) | | | $ | (71,227) | | |
| Credit and surety | 11,184 | | | 5,652 | | | 27,927 | | | 32,659 | | |
| Professional lines | (13,776) | | | (7,303) | | | (13,493) | | | 641 | | |
| Motor | 1,214 | | | 22,902 | | | 18,732 | | | 33,964 | | |
| Liability | (1,434) | | | 3,150 | | | (23,375) | | | 26,135 | | |
| Total | $ | 314 | | | $ | 12,118 | | | $ | 4,830 | | | $ | 22,172 | | |
| | | | | | | | | |
For the three months ended September 30, 2020, we recognized $180.3 million of net favorable prior year reserve development, the principal components of which were:
•$11 million of net favorable prior year reserve development on credit and surety business primarily relateddue to accident year 2012 driven by better than expected loss emergence.emergence mainly related to 2017 and 2019 accident years.
•$414 million of net adverse prior year reserve development on motorprofessional lines business primarily due to an increase in case reserves attributable to a specific large claim related to the impact2016 accident year and reserve strengthening within the European book of business mainly related to the recent change in Ogden rate, largely offset by continued better than expected loss emergence spanning multiple2016 to 2018 accident years.
For the ninethree months ended September 30, 20162019, we recognized $181$12 million of net favorable prior year reserve development, the principal components of which were:
•$8423 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business related to recent accident years.
•$6 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence related to several accident years.
•$12 million of net adverse prior year reserve development on property and other business primarily due to reserve strengthening attributable to late reporting of claims bordereaux associated with the European proportional book of business related to the 2010 through2018 accident year.
•$7 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the European book of business mainly related to the 2015 and 2016 accident years driven byyears.
For the nine months ended September 30, 2020, we recognized $5 million of net favorable prior year reserve development, the principal components of which were:
•$28 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence.emergence related to multiple accident years.
•$4019 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business mainly related to non-proportionalthe 2019 and older accident years.
•$23 million of net adverse prior year development on liability business spanning multipleprimarily due to reserve strengthening within the U.S. casualty, the U.S. multiline/regional and the European books of business mainly related to the 2016 to 2019 accident years.
•$13 million of net adverse prior year reserve development on professional lines business primarily due to an increase in case reserves attributable to a specific large claim related to the 2016 accident year and reserve strengthening within the European book of business mainly related to the 2016 to 2018 accident years.
•$5 million of net adverse prior year development on property and other business primarily due to reserve strengthening within the engineering line of business mainly related to the 2016 to 2018 accident years, drivenand the marine and other line of business mainly related to the 2017 accident years, partially offset by net favorable prior year reserve development within the property line of business due to better than expected loss emergence.emergence attributable to the 2019 catastrophe events.
For the nine months ended September 30, 2019, we recognized $22 million of net favorable prior year reserve development, the principal components of which were:
•$3234 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business related to several accident years.
•$33 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence mainly related to the 2015 and 2016 accident years.
•$26 million of net favorable prior year reserve development on liability business primarily relateddue to the 2006 through 2011increased weight given by management to experience based indications on older accident years, for reasons discussed in the overview.years.
•$1971 million of net favorableadverse prior year reserve development on professional linesproperty and other business primarily due to an increase in loss estimates attributable to Typhoons Jebi and Trami consistent with updated industry insured loss estimates, an increase in loss estimates attributable to Hurricane Michael, and reserve strengthening attributable to late reporting of claims bordereaux associated within the European proportional book of business related to the 2005 through 20102018 accident years, for reasons discussed in the overview.year.
Acquisition Cost Ratio:Ratio:
The acquisition cost ratio decreased to 19.1%22.3% and 20.0%22.5% for the three and nine months ended September 30, 2017,2020, respectively, from 20.3%23.3% and 20.1% in the three and nine months ended September 30, 2016, respectively, driven by our reinsurance segment and primarily attributable to changes in business mix.
General and Administrative Expense Ratio:
The general and administrative expense ratio decreased to 12.3% and 14.8%23.4% for the three and nine months ended September 30, 2017, from 15.3%2019, respectively, principally related to changes in business mix.
Underwriting-Related General and 15.8% inAdministrative Expense Ratio:
The underwriting-related general and administrative expense ratio of 4.5% and 4.9% for the three and nine months ended September 30, 20162020, respectively, primarily reflecting a decrease in performance related compensation costswas comparable to 4.1% and an increase in fees from strategic capital partners.4.9% for the three and nine months ended September 30, 2019, respectively.
69
NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)
RESULTS BY SEGMENT
INSURANCE SEGMENT
Insurance Segment
Results from ourfor the 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 September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 935,817 | | | 5% | | $ | 894,902 | | | $ | 2,914,100 | | | 7% | | $ | 2,714,322 | | |
| Net premiums written | 544,857 | | | 5% | | 517,050 | | | 1,729,268 | | | 6% | | 1,638,197 | | |
| Net premiums earned | 570,184 | | | 6% | | 536,451 | | | 1,709,268 | | | 5% | | 1,630,473 | | |
| Other insurance related income | 688 | | | 6% | | 733 | | | 2,091 | | | 18% | | 1,779 | | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current accident year net losses and loss expenses | (443,659) | | | | | (353,575) | | | (1,257,090) | | | | | (1,004,293) | | |
| Prior year reserve development | 270 | | | | | 14,609 | | | 4,521 | | | | | 42,849 | | |
| Acquisition costs | (114,569) | | | | | (115,551) | | | (343,579) | | | | | (344,981) | | |
| Underwriting-related general and administrative expenses | (94,379) | | | | | (100,559) | | | (284,909) | | | | | (311,491) | | |
| | | | | | | | | | | | | |
| Underwriting income (loss) | $ | (81,465) | | | | | $ | (17,892) | | | $ | (169,698) | | | | | $ | 14,336 | | |
| | | | | | | | | | | | | |
| Ratios: | | | % Point Change | | | | | | % Point Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 54.7 | % | | (3.5) | | 58.2 | % | | 54.8 | % | | (2.9) | | 57.7 | % | |
| Catastrophe and weather-related losses ratio | 23.1 | % | | 15.4 | | 7.7 | % | | 18.7 | % | | 14.8 | | 3.9 | % | |
| Current accident year loss ratio | 77.8 | % | | 11.9 | | 65.9 | % | | 73.5 | % | | 11.9 | | 61.6 | % | |
| Prior year reserve development ratio | — | % | | 2.7 | | (2.7 | %) | | (0.2 | %) | | 2.4 | | (2.6 | %) | |
| Net losses and loss expenses ratio | 77.8 | % | | 14.6 | | 63.2 | % | | 73.3 | % | | 14.3 | | 59.0 | % | |
| Acquisition cost ratio | 20.1 | % | | (1.4) | | 21.5 | % | | 20.1 | % | | (1.1) | | 21.2 | % | |
| Underwriting-related general and administrative expense ratio | 16.5 | % | | (2.3) | | 18.8 | % | | 16.7 | % | | (2.3) | | 19.0 | % | |
| Combined ratio | 114.4 | % | | 10.9 | | 103.5 | % | | 110.1 | % | | 10.9 | | 99.2 | % | |
| | | | | | | | | | | | | |
nm – not meaningful
53
Gross Premiums Written:Written
The following table provides grossGross premiums written by line of business:business were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Property | $ | 238,599 | | | 26 | % | | $ | 241,517 | | | 27 | % | | (1%) | | $ | 741,043 | | | 27 | % | | $ | 701,314 | | | 27 | % | | 6% | |
| Marine | 82,810 | | | 9 | % | | 91,161 | | | 10 | % | | (9%) | | 355,503 | | | 12 | % | | 337,529 | | | 12 | % | | 5% | |
| Terrorism | 14,767 | | | 2 | % | | 17,284 | | | 2 | % | | (15%) | | 42,296 | | | 1 | % | | 46,803 | | | 2 | % | | (10%) | |
| Aviation | 22,702 | | | 2 | % | | 17,623 | | | 2 | % | | 29% | | 63,725 | | | 2 | % | | 53,832 | | | 2 | % | | 18% | |
| Credit and political risk | 24,473 | | | 3 | % | | 32,528 | | | 4 | % | | (25%) | | 100,151 | | | 3 | % | | 114,511 | | | 4 | % | | (13%) | |
| Professional lines | 338,907 | | | 36 | % | | 272,362 | | | 30 | % | | 24% | | 943,635 | | | 32 | % | | 820,953 | | | 30 | % | | 15% | |
| Liability | 172,747 | | | 18 | % | | 186,253 | | | 21 | % | | (7%) | | 548,023 | | | 19 | % | | 518,925 | | | 19 | % | | 6% | |
| Accident and health | 39,262 | | | 4 | % | | 34,054 | | | 4 | % | | 15% | | 117,743 | | | 4 | % | | 113,228 | | | 4 | % | | 4% | |
| Discontinued lines - Novae | 1,550 | | | — | % | | 2,120 | | | — | % | | (27%) | | 1,981 | | | — | % | | 7,227 | | | — | % | | nm | |
| Total | $ | 935,817 | | | 100 | % | | $ | 894,902 | | | 100 | % | | 5% | | $ | 2,914,100 | | | 100 | % | | $ | 2,714,322 | | | 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. |
Gross premiums written for the three months ended September 30, 20172020, increased by $69$41 million, or 10%5%, ($31 million, or 3% on a constant currency basis(1)), compared to the three months ended September 30, 2016. 2019. The increase was primarily attributable to professional lines, accident and health, and aviation lines, partially offset by decreases in liability, marine, and credit and political risk lines.
The increase in gross premiums writtenprofessional lines was attributabledue to ournew business and favorable rate changes. The increase in accident and health lines was due to new business. The increase in aviation lines was due to a timing difference and favorable rate changes. The decreases in liability lines, and our credit and political risk lines driven by newwere due to a higher level of non-renewals and reduced business opportunities together with an increaserelated to the current economic climate. The decrease in our aviationmarine lines associated with our recent acquisition of Aviabel. These increases were partially offset bywas due to a reduction in premiums written in our property lines following our exit from some retail insurance operations in the U.S. last year.timing difference and non-renewals.
Gross premiums written for the nine months ended September 30, 20172020, increased by $122$200 million, or 6%7%, compared to the nine months ended September 30, 2016.2019. The increase in gross premiums written was primarily attributable to our liability, our accident and health lines, and our professional lines, primarily driven by new business opportunities, together with an increase in ourproperty, liability, marine, and aviation lines, associated with our recent acquisition of Aviabel. These increases were partially offset by a reductiondecrease in premiums writtencredit and political risk lines.
The increases in ourprofessional lines, property, liability, and marine lines following our exit from some U.S. retail insurance operations last year.were due to new business and favorable rate changes. The increase in aviation lines was due to timing differences. The decrease in credit and political risk lines was due to non-renewals and reduced business opportunities related to the current economic climate.
Ceded Premiums Written:Written
Ceded premiums written for the three months ended September 30, 2020, was $391 million, or 42% of gross premiums written, compared to $378 million, or 42% of gross premiums written for the three months ended September 30, 2019. The increase in ceded premiums written of $13 million or 3% was primarily driven by increases in professional lines and property lines, partially offset by decreases in liability, marine, and credit and political risk lines.
Ceded premiums written for the nine months ended September 30, 2017 were $2442020, was $1,185 million, or 33%41% of gross premiums written, and $701compared to $1,076 million, or 31% of gross premiums written, respectively, compared to $242 million or 36% of gross premiums written and $680 million or 32%40% of gross premiums written for the three and nine months ended September 30, 2016, respectively.
2019. The decreaseincrease in the ratio of ceded premiums written to gross premiums written for the three and nine months ended September 30, 2017 compared to the same periods in 2016,of $109 million, or 10%, was primarily due to an increasedriven by increases in gross premiums written together with a decrease in premiums ceded in our propertyprofessional lines, property, liability, and marine lines, partially offset by an increasea decrease in premiums cededcredit and political risk lines.
(1) Amounts presented on a constant currency basis are non-GAAP financial measures as defined in our liability lines.
Item10 (e) of SEC Regulation S-K. 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:Earned
The following table provides netNet premiums earned by line of business:business were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Property | $ | 145,717 | | | 27 | % | | $ | 154,751 | | | 29 | % | | (6%) | | $ | 452,876 | | | 26 | % | | $ | 481,450 | | | 30 | % | | (6%) | |
| Marine | 76,544 | | | 13 | % | | 65,437 | | | 12 | % | | 17% | | 220,248 | | | 13 | % | | 209,629 | | | 13 | % | | 5% | |
| Terrorism | 11,728 | | | 2 | % | | 11,605 | | | 2 | % | | 1% | | 34,675 | | | 2 | % | | 35,635 | | | 2 | % | | (3%) | |
| Aviation | 19,039 | | | 3 | % | | 10,993 | | | 2 | % | | nm | | 51,236 | | | 3 | % | | 38,603 | | | 2 | % | | 33% | |
| Credit and political risk | 23,781 | | | 4 | % | | 19,432 | | | 4 | % | | 22% | | 77,721 | | | 5 | % | | 66,412 | | | 4 | % | | 17% | |
| Professional lines | 179,441 | | | 31 | % | | 172,280 | | | 32 | % | | 4% | | 530,651 | | | 31 | % | | 490,928 | | | 30 | % | | 8% | |
| Liability | 76,487 | | | 13 | % | | 68,002 | | | 13 | % | | 12% | | 234,522 | | | 14 | % | | 192,352 | | | 12 | % | | 22% | |
| Accident and health | 37,151 | | | 7 | % | | 32,368 | | | 6 | % | | 15% | | 106,015 | | | 6 | % | | 108,402 | | | 7 | % | | (2%) | |
| Discontinued lines - Novae | 296 | | | — | % | | 1,583 | | | — | % | | nm | | 1,324 | | | — | % | | 7,062 | | | — | % | | nm | |
| Total | $ | 570,184 | | | 100 | % | | $ | 536,451 | | | 100 | % | | 6% | | $ | 1,709,268 | | | 100 | % | | $ | 1,630,473 | | | 100 | % | | 5% | |
| | | | | | | | | | | | | | | | | | | | | |
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, 20172020, increased by $51$34 million, or 12%6%, and $126 ($27 million, or 9% ($136 million or 10%5% on a constant currency basis), compared to the three and nine months ended September 30, 2016, respectively.
2019. The increase for the three and nine months ended September 30, 2017 compared to the same periods in 2016, was primarily driven by strong premium growthincreases in our accidentgross premiums earned in professional lines, liability, and healthmarine lines, as well as our aviation lines in recent periods, together with a decrease in ceded premiums earned in ouraviation lines, partially offset by increases in ceded premiums earned in professional lines and liability lines, and a decrease in gross premiums earned in property lines.
Net premiums earned for the nine months ended September 30, 2017,2020, increased by $79 million, or 5%, compared to the nine months ended September 30, 2019. The increase was also impactedprimarily driven by strong premium growthincreases in ourgross premiums earned in liability, professional lines, marine, and credit and political risk lines, together with decreases in ceded premiums earned in property and aviation lines, partially offset by increases in recent periods.ceded premiums earned in liability and professional lines, and a decrease in gross premiums earned in property lines.
Loss 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 | % | |
| | | | | | | | | | | | | | |
Loss Ratio
CurrentThe components of the loss ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Point Change | | 2019 | | 2020 | | % Point Change | | 2019 | |
| | | | | | | | | | | | | |
| Current accident year | 77.8 | % | | 11.9 | | 65.9 | % | | 73.5 | % | | 11.9 | | 61.6 | % | |
| Prior year reserve development | — | % | | 2.7 | | (2.7 | %) | | (0.2 | %) | | 2.4 | | (2.6 | %) | |
| Loss ratio | 77.8 | % | | 14.6 | | 63.2 | % | | 73.3 | % | | 14.3 | | 59.0 | % | |
| | | | | | | | | | | | | |
Current Accident Year Loss Ratio:Ratio
The current accident year loss ratiosratio increased to 127.3%77.8% and 87.8%73.5% for the three and nine months ended September 30, 2017,2020, respectively, from 66.1%65.9% and 67.8%61.6% for the three and nine months ended September 30, 2016,2019, respectively.
The increase in the current accident year loss ratios for the three and nine months ended September 30, 2017 compared to the same period in 2016, was impacted by a higher level of catastrophe and weather-related losses. During the three and nine months ended September 30, 2017 we incurred $317 million, or 64.0 points, and $379 million, or 26.1 points, respectively, in pre-tax2020, catastrophe and weather-related losses, net of reinstatement premiums, were $132 million, or 23.1 points, and $325 million, or 18.7 points, respectively. During the three months ended September 30, 2020, these losses were primarily attributable to Hurricanes Harvey, IrmaLaura and MariaSally, the Beirut port explosion, wildfires across the West Coast of the United States, and other weather-related events. During the two earthquakes in Mexiconine months ended September 30, 2020 catastrophe and U.S.weather-related losses included $137 million associated with first party coverages attributable to the COVID-19 pandemic. These losses were primarily associated with property-related coverages, but also included event cancellation coverages. The remaining losses of $188 million were primarily attributable to Hurricanes Laura and Sally, the Beirut port explosion, wildfires across the West Coast of the United States, and other weather-related events. Comparatively, during the three and nine months ended September 30, 2016, we incurred $152019, catastrophe and weather-related losses were $41 million, or 3.37.7 points, and $73$64 million, or 5.53.9 points, respectively.
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, 2017 was 63.3% and 61.7%, respectively, compared to 62.8% and 62.3% for the three and nine months ended September 30, 2016, respectively.
The increase in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related lossesdecreased to 54.7% for the three months ended September 30, 2017 compared to2020, from 58.2% for the same period in 2016, was principally due to 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.
three months ended September 30, 2019. 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 recognitionimpact of better than expected attritionalfavorable pricing over loss trends, improved loss experience in our professionalproperty, marine, credit and political risk, and aviation lines partially offset by the adverse impact of rate and trend.
Refer to the ‘Prior Year Reserve Development’ section for further details.
Acquisition Cost Ratio:
The acquisition cost ratio increased to 15.0% and 15.4% for the three and nine months ended September 30, 2017, respectively, from 13.9% and 14.0% for the three and nine months ended September 30, 2016, respectively, 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.
General and Administrative Expense 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, from 19.1% and 19.0% for the three and nine months ended September 30, 2016, respectively, reflecting a decrease in performance-related compensation costs and an increase in net premiums earned, partially offset by increases in the allocation of certain corporate expenses and information technology fees.
REINSURANCE 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 | % | |
| | | | | | | | | | | | | | |
nm – not meaningful
Gross Premiums 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% | |
| | | | | | | | | | | | | | | | | | | | | | |
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 million, or 55% (56% on a constant currency basis), for the three months ended September 30, 2017 compared to the same period in 2016. The increase was attributable to our liability, catastrophe, property and motor lines. The increase in our liability 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, together with the impact of foreign exchange movements as the strengtheningrepositioning of the U.S. dollar drove comparative premium decreases in treaties denominated in foreign currencies. The decrease in our credit and surety lines was primarily due to a lower level of premiums written on a multi-year basis.portfolio.
Ceded Premiums Written:
Ceded premiums written for the three and nine months ended September 30, 2017 were $108 million or 25% of gross premiums written and $461 million or 21% 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, 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, due to the timing of premiums ceded to the retrocessional cover entered into with Harrington Re Ltd., in the same period in 2016, partially offset by an increase in premiums ceded in our catastrophe 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:
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% | |
| | | | | | | | | | | | | | | | | | | | | | |
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 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), for the three and nine months ended September 30, 2017, compared to the same periods in 2016, respectively.
The increase in net premiums earned for the three months ended September 30, 2017 compared to the same period in 2016, was primarily driven by strong premium growth in our motor lines, as well as favorable reinstatement premiums impacting our catastrophe lines, and favorable premium estimate adjustments impacting our agriculture lines. These increases were 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 losses was $4 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 of $10 million for the three months ended September 30, 2017 compared to the same period in 2016, reflected a decrease in profit commissions associated withretrocessional agreements with strategic capital partners 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, partially offset by fees from our strategic capital partners.
Loss 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 | % | |
| | | | | | | | | | | | | | |
Current Accident Year Loss Ratio:
The current accident year loss ratio increased to 125.0% and 88.6% for the three and nine months ended September 30, 2017, respectively, from 64.2% and 67.8% for the three and nine months ended September 30, 2016, respectively.
The increase in the current accident year loss ratios for the three and nine months ended September 30, 2017 compared to the same period in 2016, was impacted by a higher level of catastrophe and weather-related losses. During the three and nine months ended September 30, 2017, we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $299 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.
After adjusting for the impact of the catastrophe and weather-related losses, ourthe current accident year loss ratio decreased to 54.8% for the three and nine months ended September 30, 2017 was 66.3% and 66.4%, respectively, compared to 62.7% and 62.8%2020, from 57.7% for the three and nine months ended September 30, 2016, respectively.2019. The increasedecrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends, improved loss experience in property, credit and political risk, marine and aviation lines, partially offset by changes in business mix.
Prior Year Reserve Development
The following table maps lines of business to reserve classes and the expected claim tails:
| | | | | | | | | | | | | | | | | | | | |
| Insurance segment | | | | | |
| Reserve class and tail |
| | | | | | |
| Property and other | Marine | Aviation | Credit and political risk | Professional lines | Liability |
| | | | | | |
| Short | Short | Short/Medium | Medium | Medium | Long |
| | | | | | |
| Reported lines of business | | | | | | |
| Property | X | | | | | |
| Marine | | X | | | | |
| Terrorism | X | | | | | |
| Aviation | | | X | | | |
| Credit and political risk | | | | X | | |
| Professional lines | | | | | X | |
| Liability | | | | | | X |
| Accident and health | X | | | | | |
| Discontinued lines - Novae | X | | | | X | X |
Prior year reserve development by reserve class were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Property and other | $ | 6,907 | | | $ | 11,427 | | | $ | 42,688 | | | $ | (4,426) | | |
| Marine | 4,095 | | | 2,119 | | | 633 | | | 23,753 | | |
| Aviation | (326) | | | 471 | | | 5,667 | | | 1,671 | | |
| Credit and political risk | 871 | | | 1,217 | | | (223) | | | 10,278 | | |
| Professional lines | (7,287) | | | 3,656 | | | (19,086) | | | 13,899 | | |
| Liability | (3,990) | | | (4,281) | | | (25,158) | | | (2,326) | | |
| Total | $ | 270 | | | $ | 14,609 | | | $ | 4,521 | | | $ | 42,849 | | |
| | | | | | | | | |
For the three months ended September 30, 2020, we recognized $0.3 million of net favorable prior year reserve development, the principal components of which were:
•$7 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence attributable to the 2019 catastrophe events.
•$4 million of net favorable prior year reserve development on marine business primarily due better than expected loss emergence mainly related to the 2018 accident year.
•$7 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the European professional indemnity and financial institutions books of business mainly related to the 2018 accident year and an increase in case reserves attributable to a specific large claim related to the 2009 accident year.
•$4 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the primary casualty, U.S. excess casualty and program books of business mainly related to 2017 and 2018 accident years.
For the three months ended September 30, 2019, we recognized $15 million of net favorable prior year reserve development, the principal components of which were:
•$11 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence attributable to the 2017 catastrophe events and SuperStorm Sandy.
•$4 million of net favorable prior year reserve development on professional lines business primarily due to better than expected loss emergence mainly related to the 2013 and 2014 accident years.
•$4 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the U.S. excess casualty book of business related to older accident years.
For the nine months ended September 30, 2020, we recognized $5 million of net favorable prior year reserve development, the principal components of which were:
•$43 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence mainly related to the 2018 and 2019 accident years, better than expected loss emergence attributable to the 2017, 2018 and 2019 catastrophe events, and decreases in case reserves attributable to specific claims related to the 2014 and 2016 accident years.
•$6 million of net favorable prior year reserve development on aviation business primarily due to better than expected loss emergence mainly related to the 2018 and 2019 accident years.
•$25 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the primary casualty, U.S. excess casualty and program books of business mainly related to the 2017 and 2018 accident years.
•$19 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the European professional indemnity and financial institutions books of business and the commercial management solutions book of business mainly related to the 2018 and 2019 accident year and an increase in case reserves attributable to a specific large claim related to the 2009 accident year.
For the nine months ended September 30, 2019, 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 marine business primarily due to better than expected loss emergence mainly related to the 2015 to 2017 accident years.
•$14 million of net favorable prior year reserve development on professional lines business primarily due to better than expected loss emergence mainly related to the 2013 to 2015 accident years.
•$10 million of net favorable prior year reserve development on credit and political risk business primarily due to better than expected loss emergence mainly related to the 2018 accident year.
•$4 million of net adverse prior year reserve development on property and other business primarily due to reserve strengthening within the international book of business mainly related to the 2018 accident year, partially offset by better than expected loss emergence attributable to the 2017 catastrophe events and SuperStorm Sandy.
Acquisition Cost Ratio
The acquisition cost ratio decreased to 20.1% for the three months ended September 30, 2017 compared to2020, from 21.5% for the same period in 2016, wasthree months ended September 30, 2019, principally duerelated to an increase in mid-size loss experienceceding commissions.
The acquisition cost ratio decreased to 20.1% for the nine months ended September 30, 2020, from 21.2% for the nine months ended September 30, 2019, associated with the acquisition of Novae and an increase in ourceding commissions. At the acquisition date, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at that date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet as the value of policies in-force on that date are considered within value of business acquired ("VOBA"). Consequently, the absence of $1 million and $11 million of acquisition expense related to premiums earned in the nine months ended September 30, 2020 and 2019, respectively, benefited the acquisition cost by 0.1 points and 0.6 points, respectively. Adjusting the acquisition cost rate for these amounts, the acquisition cost ratio decreased by 1.6 points.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio decreased to 16.5%for thethree months ended September 30, 2020, from 18.8% for the three months ended September 30, 2019, mainly driven by a decrease in personnel costs and travel and entertainment expenses, together with an increase in net premiums earned.
The underwriting-related general and administrative expense ratio decreased to 16.7% for the nine months ended September 30, 2020, from 19.0% for the nine months ended September 30, 2019, mainly driven by decreases in travel and entertainment expenses, and professional fees, together with an increase in net premiums earned.
Reinsurance Segment
Results from the reinsurance segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Gross premiums written | $ | 395,361 | | | (23%) | | $ | 511,604 | | | $ | 2,564,419 | | | (12%) | | $ | 2,923,169 | | |
| Net premiums written | 271,125 | | | (20%) | | 339,031 | | | 1,821,692 | | | (12%) | | 2,065,263 | | |
| Net premiums earned | 521,128 | | | (16%) | | 620,856 | | | 1,574,673 | | | (12%) | | 1,784,653 | | |
| Other insurance related income (loss) | 752 | | | (6%) | | 800 | | | (7,361) | | | nm | | 9,606 | | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Current year net losses and loss expenses | (436,602) | | | | | (524,065) | | | (1,216,273) | | | | | (1,248,131) | | |
| Prior year reserve development | 314 | | | | | 12,118 | | | 4,830 | | | | | 22,172 | | |
| Acquisition costs | (115,995) | | | | | (144,475) | | | (354,137) | | | | | (417,826) | | |
| Underwriting-related general and administrative expenses | (23,456) | | | | | (26,060) | | | (76,714) | | | | | (87,049) | | |
| | | | | | | | | | | | | |
| Underwriting income (loss) | $ | (53,859) | | | | | $ | (60,826) | | | $ | (74,982) | | | | | $ | 63,425 | | |
| Ratios: | | | % Point Change | | | | | | % Point Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 62.7 | % | | (2.1) | | 64.8 | % | | 61.1 | % | | (1.2) | | 62.3 | % | |
| Catastrophe and weather-related losses ratio | 21.1 | % | | 1.5 | | 19.6 | % | | 16.1 | % | | 8.5 | | 7.6 | % | |
| Current accident year loss ratio | 83.8 | % | | (0.6) | | 84.4 | % | | 77.2 | % | | 7.3 | | 69.9 | % | |
| Prior year reserve development ratio | (0.1 | %) | | 1.8 | | (1.9 | %) | | (0.3 | %) | | 0.9 | | (1.2 | %) | |
| Net losses and loss expenses ratio | 83.7 | % | | 1.2 | | 82.5 | % | | 76.9 | % | | 8.2 | | 68.7 | % | |
| Acquisition cost ratio | 22.3 | % | | (1.0) | | 23.3 | % | | 22.5 | % | | (0.9) | | 23.4 | % | |
| Underwriting-related general and administrative expense ratio | 4.5 | % | | 0.4 | | 4.1 | % | | 4.9 | % | | — | | 4.9 | % | |
| Combined ratio | 110.5 | % | | 0.6 | | 109.9 | % | | 104.3 | % | | 7.3 | | 97.0 | % | |
| | | | | | | | | | | | | |
nm – not meaningful
Gross Premiums Written:
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | | Nine months ended September 30, | | | | |
| | 2020 | | | | 2019 | | | | % Change | | | 2020 | | | | 2019 | | | | % Change | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 74,656 | | | 18 | % | | $ | 94,833 | | | 18 | % | | (21%) | | | $ | 526,646 | | | 21 | % | | $ | 698,169 | | | 24 | % | | (25%) | | |
| Property | 58,907 | | | 15 | % | | 67,972 | | | 13 | % | | (13%) | | | 246,859 | | | 10 | % | | 283,849 | | | 10 | % | | (13%) | | |
| Professional lines | 31,752 | | | 8 | % | | 23,540 | | | 5 | % | | 35% | | | 267,047 | | | 10 | % | | 226,283 | | | 8 | % | | 18% | | |
| Credit and surety | 38,110 | | | 10 | % | | 50,989 | | | 10 | % | | (25%) | | | 189,180 | | | 7 | % | | 241,358 | | | 8 | % | | (22%) | | |
| Motor | (2,235) | | | (1 | %) | | 25,367 | | | 5 | % | | nm | | | 319,867 | | | 12 | % | | 313,614 | | | 11 | % | | 2% | | |
| Liability | 136,791 | | | 35 | % | | 146,690 | | | 29 | % | | (7%) | | | 505,322 | | | 20 | % | | 458,000 | | | 16 | % | | 10% | | |
| Agriculture | 7,455 | | | 2 | % | | 5,074 | | | 1 | % | | 47% | | | 69,599 | | | 3 | % | | 201,592 | | | 7 | % | | (65%) | | |
| Engineering | 1,408 | | | — | % | | 8,841 | | | 2 | % | | nm | | | 20,334 | | | 1 | % | | 39,207 | | | 1 | % | | (48%) | | |
| Marine and other | 6,341 | | | 2 | % | | 9,727 | | | 2 | % | | (35%) | | | 62,202 | | | 2 | % | | 68,104 | | | 2 | % | | (9%) | | |
| Accident and health | 41,820 | | | 11 | % | | 78,474 | | | 15 | % | | (47%) | | | 356,123 | | | 14 | % | | 393,789 | | | 13 | % | | (10%) | | |
| Discontinued lines - Novae | 356 | | | — | % | | 97 | | | — | % | | nm | | | 1,240 | | | — | % | | (796) | | | — | % | | nm | | |
| Total | $ | 395,361 | | | 100 | % | | $ | 511,604 | | | 100 | % | | (23%) | | | $ | 2,564,419 | | | 100 | % | | $ | 2,923,169 | | | 100 | % | | (12%) | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Gross premiums written for the three months ended September 30, 2020, decreased by $116 million, or 23%, ($109 million, or 21% on a constant currency basis), compared to the three months ended September 30, 2019. The decrease was primarily attributable to accident and health, motor, catastrophe, credit and surety, liability and property lines, partially offset by an increase in professional lines.
The decrease in accident and health lines was driven by non-renewals following the decision to exit the Middle East business. The decrease in motor lines was due to premium adjustments. The decrease in catastrophe lines was driven by a timing difference associated with a significant contract, non-renewals, and decreased line sizes on a number of treaties. The decrease in credit and surety lines was attributable to the ongoingcurrent economic climate. The decrease in liability lines was due to a reduced line size on a significant contract, partially offset by new business due to favorable market conditions and timing differences. The decrease in property lines was due to non-renewals and a timing difference. The increase in professional lines was due to premium adjustments.
Gross premiums written for the nine months ended September 30, 2020, decreased by $359 million, or 12%, compared to the nine months ended September 30, 2019. The decrease was primarily attributable to catastrophe, agriculture, credit and surety, accident and health, property, and engineering lines, partially offset by increases in liability and professional lines.
The decreases in catastrophe, agriculture, credit and surety, accident and health, property, and engineering lines were driven by non-renewals and decreased line sizes consistent with optimization of the segment's portfolio. The increases in liability and professional lines were driven by premium adjustments, and favorable market conditions associated with renewals and new business.
Ceded Premiums Written:
Ceded premiums written for the three months ended September 30, 2020 was $124 million, or 31% of gross premiums written, compared to $173 million, or 34% of gross premiums written for the three months ended September 30, 2019.
The decrease in ceded premiums written of $48 million, or 28%, was primarily driven by catastrophe, accident and health, credit and surety, and liability lines. The decrease in catastrophe lines was attributable to a non-renewal of a catastrophe bond and a decrease in premiums ceded to strategic capital partners. The decrease in accident and health lines was attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in credit and surety lines was attributable to a decrease in premiums ceded to an existing quota share retrocessional treaty. The decrease in liability lines was attributable to the restructuring of an existing quota share retrocessional treaty, partially offset by an increase in premiums ceded to a new quota share retrocessional treaty.
Ceded premiums written for the nine months ended September 30, 2020, was $743 million, or 29% of gross premiums written, compared to $858 million, or 29% of gross premiums written for the nine months ended September 30, 2019.
The decrease in ceded premiums written of $115 million, or 13%, was primarily driven by catastrophe, credit and surety, accident and health, and agriculture lines, partially offset by increases in professional lines, liability, motor, and property lines.
The decrease in catastrophe lines was attributable to decreases in premiums ceded to strategic partners and a non-renewal of a catastrophe bond. The decrease in credit and surety lines was attributable to a decrease in premiums ceded to a quota share retrocessional treaty and the restructuring of existing quota share retrocessional treaties. The decrease in accident and health lines was attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in agriculture lines was attributable to a non-renewal of a large quota share retrocessional treaty.
The increases in liability and professional lines were attributable to an increase in premiums ceded to a new quota share retrocessional treaty, partially offset by the restructuring of an existing quota share retrocessional treaty. The increase in motor lines was attributable to an increase in premiums ceded to a new quota share retrocessional treaty. The increase in property lines was attributable to an increase in premiums ceded to a new aggregate excess of loss treaty.
Net Premiums Earned:
Net premiums earned by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | | |
| | 2020 | | | | 2019 | | | | % Change | | 2020 | | | | 2019 | | | | % Change | |
| | | | | | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 64,163 | | | 13 | % | | $ | 68,910 | | | 11 | % | | (7%) | | $ | 194,987 | | | 12 | % | | $ | 205,468 | | | 11 | % | | (5%) | |
| Property | 62,704 | | | 12 | % | | 78,271 | | | 13 | % | | (20%) | | 196,229 | | | 12 | % | | 226,515 | | | 13 | % | | (13%) | |
| Professional lines | 54,424 | | | 10 | % | | 50,966 | | | 8 | % | | 7% | | 154,482 | | | 10 | % | | 154,390 | | | 9 | % | | —% | |
| Credit and surety | 43,730 | | | 8 | % | | 55,625 | | | 9 | % | | (21%) | | 134,988 | | | 9 | % | | 154,638 | | | 9 | % | | (13%) | |
| Motor | 63,298 | | | 12 | % | | 107,930 | | | 17 | % | | (41%) | | 203,776 | | | 13 | % | | 301,622 | | | 17 | % | | (32%) | |
| Liability | 96,671 | | | 19 | % | | 95,632 | | | 15 | % | | 1% | | 293,918 | | | 19 | % | | 279,639 | | | 16 | % | | 5% | |
| Agriculture | 17,750 | | | 3 | % | | 47,519 | | | 8 | % | | (63%) | | 57,949 | | | 4 | % | | 131,746 | | | 7 | % | | (56%) | |
| Engineering | 14,548 | | | 3 | % | | 16,611 | | | 3 | % | | (12%) | | 43,742 | | | 3 | % | | 47,290 | | | 3 | % | | (8%) | |
| Marine and other | 14,742 | | | 3 | % | | 17,924 | | | 3 | % | | (18%) | | 37,275 | | | 2 | % | | 44,529 | | | 2 | % | | (16%) | |
| Accident and health | 89,087 | | | 17 | % | | 81,500 | | | 13 | % | | 9% | | 256,303 | | | 16 | % | | 239,388 | | | 13 | % | | 7% | |
| Discontinued lines - Novae | 11 | | | — | % | | (32) | | | — | % | | nm | | 1,024 | | | — | % | | (572) | | | — | % | | nm | |
| Total | $ | 521,128 | | | 100 | % | | $ | 620,856 | | | 100 | % | | (16%) | | $ | 1,574,673 | | | 100 | % | | $ | 1,784,653 | | | 100 | % | | (12%) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
nm – not meaningful
Net premiums earned for the three months ended September 30, 2020, decreased by $100 million, or 16% ($93 million, or 15% on a constant currency basis), compared to the three months ended September 30, 2019. The decrease was primarily driven by decreases in gross premiums earned in motor, agriculture, credit and surety, and property lines.
Net premiums earned for the nine months ended September 30, 2020, decreased by $210 million, or 12% ($186 million, or 10% on a constant currency basis), compared to the nine months ended September 30, 2019. The decrease was primarily driven by decreases in gross premiums earned in agriculture, motor, catastrophe, property, and credit and surety lines, together with an increase in ceded premiums earned in liability lines, partially offset by decreases in ceded premiums earned in catastrophe, agriculture, and accident and health lines, and an increase in gross premiums earned in liability lines.
Other Insurance Related Income (Loss):
Other insurance related income was $1 million for the three months ended September 30, 2020, compared to other insurance related income of $1 million for the three months ended September 30, 2019.
Other insurance related loss was $7 million for the nine months ended September 30, 2020, compared to other insurance related income of $10 million for the nine months ended September 30, 2019. The decrease of $17 million was primarily due to the recognition of a full limit loss of $10 million associated with the WHO pandemic risk-linked swap and a decrease in fees associated with arrangements with strategic capital partners.
Loss Ratio:
The components of the loss ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Point Change | | 2019 | | 2020 | | % Point Change | | 2019 | |
| | | | | | | | | | | | | |
| Current accident year | 83.8 | % | | (0.6) | | 84.4 | % | | 77.2 | % | | 7.3 | | 69.9 | % | |
| Prior year reserve development | (0.1 | %) | | 1.8 | | (1.9 | %) | | (0.3 | %) | | 0.9 | | (1.2 | %) | |
| Loss ratio | 83.7 | % | | 1.2 | | 82.5 | % | | 76.9 | % | | 8.2 | | 68.7 | % | |
| | | | | | | | | | | | | |
Current Accident Year Loss Ratio:
The current accident year loss ratio decreased to 83.8% for the three months ended September 30, 2020, from 84.4% for the three months ended September 30, 2019. The current accident year loss ratio increased to 77.2% for the nine months ended September 30, 2020, from 69.9% for the nine months ended September 30, 2019.
During the three and nine months ended September 30, 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $108 million, or 21.1 points, and $251 million, or 16.1, respectively. During the three months ended September 30, 2020, these losses were primarily attributable to the Midwest derecho, wildfires across the West Coast of the United States, Hurricanes Laura and Sally, the Beirut port explosion, and other weather-related events. During the nine months ended September 30, 2020, catastrophe and weather-related losses included $98 million associated with first party coverages attributable to the COVID-19 pandemic. These losses were primarily associated with property-related coverages, but also included accident and health coverages. The remaining losses of $153 million were attributable to the Midwest derecho, wildfires across the West Coast of the United States, Hurricanes Laura and Sally, the Beirut port explosion and other weather-related events. Comparatively, during the three and nine months ended September 30, 2019, catastrophe and weather-related losses were $119 million, or 19.6 points, and $132 million, or 7.6, respectively.
After adjusting for the impact of the Ogden rate change on our motor lines,catastrophe and weather-related losses, the adverse impact of rate and trend.
current accident year loss ratio decreased to 62.7% for the three months ended September 30, 2020 from 64.8% for the three months ended September 30, 2019. The increasedecrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was principally due to changes in business mix and improved performance in aviation, professional lines and liability lines.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 61.1% for the nine months ended September 30, 2017 compared to2020 from 62.3% for the same periodnine months ended September 30, 2019. The decrease in 2016the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was principally due to a large risk losschanges in our property lines, the ongoing impactbusiness mix and improved performance in aviation, motor and liability lines.
Refer ‘Prior Year Reserve Development’ for further details.
The following table maps lines of business to reserve classes and the expected claim tails:
| | | | | | | | | | | | | | | | | |
| Reinsurance segment | | | | |
| Reserve class and tail |
| | | | | |
| Property and other | Credit and surety | Professional lines | Motor | Liability |
| | | | | |
| Short | Medium | Medium | Long | Long |
| | | | | |
| Reported lines of business | | | | | |
| Catastrophe | X | | | | |
| Property | X | | | | |
| Credit and surety | | X | | | |
| Professional lines | | | X | | |
| Motor | | | | X | |
| Liability | | | | | X |
| Engineering | X | | | | |
| Agriculture | X | | | | |
| Marine and other | X | | | | |
| Accident and health | X | | | | |
| Discontinued lines - Novae | X | | | X | X |
Prior year reserve development by reserve class were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Property and other | $ | 3,126 | | | $ | (12,283) | | | $ | (4,961) | | | $ | (71,227) | | |
| Credit and surety | 11,184 | | | 5,652 | | | 27,927 | | | 32,659 | | |
| Professional lines | (13,776) | | | (7,303) | | | (13,493) | | | 641 | | |
| Motor | 1,214 | | | 22,902 | | | 18,732 | | | 33,964 | | |
| Liability | (1,434) | | | 3,150 | | | (23,375) | | | 26,135 | | |
| Total | $ | 314 | | | $ | 12,118 | | | $ | 4,830 | | | $ | 22,172 | | |
| | | | | | | | | |
For the three months ended September 30, 2020, we recognized $0.3 million of net favorable prior year reserve development, the principal components of which were:
•$11 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence mainly related to 2017 and 2019 accident years.
•$14 million of net adverse prior year reserve development on professional lines business primarily due to an increase in case reserves attributable to a specific large claim related to the 2016 accident year and reserve strengthening within the European book of business mainly related to the 2016 to 2018 accident years.
For the three months ended September 30, 2019, we recognized $12 million of net favorable prior year reserve development, the principal components of which were:
•$23 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business related to recent accident years.
•$6 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence related to several accident years.
•$12 million of net adverse prior year reserve development on property and other business primarily due to reserve strengthening attributable to late reporting of claims bordereaux associated with the European proportional book of business related to the 2018 accident year.
•$7 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the European book of business mainly related to the 2015 and 2016 accident years.
For the nine months ended September 30, 2020, we recognized $5 million of net favorable prior year reserve development, the principal components of which were:
•$28 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence related to multiple accident years.
•$19 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business mainly related to the 2019 and older accident years.
•$23 million of net adverse prior year development on liability business primarily due to reserve strengthening within the U.S. casualty, the U.S. multiline/regional and the European books of business mainly related to the 2016 to 2019 accident years.
•$13 million of net adverse prior year reserve development on professional lines business primarily due to an increase in case reserves attributable to a specific large claim related to the 2016 accident year and reserve strengthening within the European book of business mainly related to the 2016 to 2018 accident years.
•$5 million of net adverse prior year development on property and other business primarily due to reserve strengthening within the engineering line of business mainly related to the 2016 to 2018 accident years, and the marine and other line of business mainly related to the 2017 accident years, partially offset by net favorable prior year reserve development within the property line of business due to better than expected loss emergence attributable to the 2019 catastrophe events.
For the nine months ended September 30, 2019, we recognized $22 million of net favorable prior year reserve development, the principal components of which were:
•$34 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business related to several accident years.
•$33 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence mainly related to the 2015 and 2016 accident years.
•$26 million of net favorable prior year reserve development on liability business primarily due to increased weight given by management to experience based indications on older accident years.
•$71 million of net adverse prior year reserve development on property and other business primarily due to an increase in loss estimates attributable to Typhoons Jebi and Trami consistent with updated industry insured loss estimates, an increase in loss estimates attributable to Hurricane Michael, and reserve strengthening attributable to late reporting of claims bordereaux associated within the European proportional book of business related to the 2018 accident year.
Acquisition Cost Ratio:Ratio:
The acquisition cost ratio decreased to 23.1% for the three months ended September 30, 2017 compared to 26.1% for the three months ended September 30, 2016 attributable to changes in business mix22.3% 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.
General and Administrative Expense Ratio:
The general and administrative expense ratio decreased to 4.2% and 5.6%22.5% for the three and nine months ended September 30, 2017,2020, respectively, from 6.1%23.3% and 6.9%23.4% for the three and nine months ended September 30, 2016,2019, respectively, reflecting a decrease performance-related compensation costs, together with an increaseprincipally related to changes in fees from strategic capital partners.business mix.
Underwriting-Related General and Administrative Expense Ratio:
OTHER EXPENSES (REVENUES), NET
The following table provides a breakdownunderwriting-related general and administrative expense ratio 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 |
| |
| | | | | | | | | | | | | | |
nm – not meaningful
Corporate Expenses:
Our corporate expenses include holding company costs necessary to support our worldwide insurance4.5% 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%4.9% for the three and nine months ended September 30, 2017,2020, respectively, comparedwas comparable to 3.1%4.1% and 3.1% for the same periods in 2016, respectively.
The decrease in corporate expenses for the three months ended September 30, 2017 was primarily driven by a decrease in performance related compensation costs, an increase in the allocation of corporate costs to the 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 allocation of corporate expenses to the insurance and reinsurance segments and a decrease in performance related compensation costs.
Foreign Exchange Losses (Gains):
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses of $33 million for the three months ended September 30, 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.
Foreign exchange losses of $90 million for the nine months ended September 30, 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.
Foreign exchange gains $14 million and $70 million4.9% for the three and nine months ended September 30, 2016, respectively, were primarily attributable to the impact the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.2019, respectively.
78
Income Tax Expense (Benefit):
Income tax primarily results from income generated by our foreign operations in the U.S. and Europe. Our effective tax rate is calculated as income tax expense divided by net income before tax including interest in loss of equity method investments. This effective rate can vary between periods depending on the distribution of net income amongst tax jurisdictions, as well as other factors.
The tax benefit of $26 million recognized in the three months ended September 30, 2017 was primarily driven by an underwriting loss associated with catastrophe losses recognized 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 associated with catastrophe losses recognized in our U.S. operations, share based compensation excess tax benefits which were recognized in the income statement, and a tax adjustment related to the bargain purchase gain recognized in connection with the acquisition of Aviabel.
Income tax expenses recognized in the three 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 ofNet investment income earned from our cash and investment portfolio by major asset class:class was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 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 September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Fixed maturities | $ | 73,992 | | (23%) | | $ | 96,311 | | $ | 244,394 | | (14%) | | $ | 285,062 | |
| Other investments | 25,125 | | nm | | 11,143 | | (14,574) | | nm | | 49,271 | |
| Equity securities | 1,871 | | (16%) | | 2,232 | | 6,258 | | (19%) | | 7,757 | |
| Mortgage loans | 3,609 | | (9%) | | 3,984 | | 11,322 | | 5% | | 10,735 | |
| Cash and cash equivalents | 2,491 | | (65%) | | 7,034 | | 9,814 | | (53%) | | 20,974 | |
| Short-term investments | 440 | | (55%) | | 973 | | 2,303 | | (61%) | | 5,975 | |
| Gross investment income | 107,528 | | (12%) | | 121,677 | | 259,517 | | (32%) | | 379,774 | |
| Investment expense | (5,572) | | (6%) | | (5,914) | | (19,419) | | 4% | | (18,760) | |
| Net investment income | $ | 101,956 | | (12%) | | $ | 115,763 | | $ | 240,098 | | (33%) | | $ | 361,014 | |
| | | | | | | | | | | | | |
| Pre-tax yield:(1) | | | | | | | | | | | | |
| Fixed maturities | 2.5 | % | | | | 3.1 | % | | 2.7 | % | | | | 3.2 | % | |
| | | | | | | | | | | | | |
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. |
(1) Pre-tax yield is calculated by dividing annualized net investment income by the average month-end amortized cost balances.
Fixed Maturities
Net investment income attributable to fixed maturities for the three and nine months ended September 30, 20172020 was comparable$74 million and $244 million, respectively, compared to same periods in 2016.
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 | % | |
| | | | | | | | | | |
| |
(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 $17of $96 million and $60$285 million for the three and nine months ended September 30, 2017,2019, respectively. The decrease for the three and nine months ended September 30, 2020, compared to the same period in 2019, was due to the decrease in yields.
Other Investments
Net investment income from other investments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Hedge, direct lending, private equity and real estate funds | $ | 24,982 | | $ | 10,411 | | $ | (11,552) | | $ | 32,665 | |
| Other privately held investments | 565 | | 2,040 | | 570 | | 16,666 | |
| CLO-Equities | (422) | | (1,308) | | (3,592) | | (60) | |
| Net investment income (loss) from other investments (1) | $ | 25,125 | | $ | 11,143 | | $ | (14,574) | | $ | 49,271 | |
| | | | | | | | | |
| Pre-tax return on other investments(2) | 3.5 | % | | 1.6 | % | | (2.0 | %) | | 7.0 | % | |
| | | | | | | | | |
(1)Excluding overseas deposits.
(2)The pre-tax return on other investments is calculated by dividing total net investment income from other investments (non-annualized) by the average month-end fair value balances held for the periods indicated, excluding overseas deposits.
Net investment income (loss) attributable to other investments for the three and nine months ended September 30, 2020 was $25 million and $(15) million, respectively, compared to net investment income of $38$11 million and $26$49 million for the three and nine months ended September 30, 2016, respectively, as2019, respectively. The increase for the improvementthree months ended September 30, 2020, compared to the same period in 2019, was due to higher returns from direct lending funds. The decrease for the nine months ended September 30, 2020, compared to the same period in 2019, was attributable to negative returns from direct lending and real estate funds and a realized gain of $13 million associated with the sale of a privately held investment in the performance of the global equity and credit markets translated into higher valuations of our hedge and direct lending funds.nine months ended September 30, 2019.
Net Realized Investment Gains (Losses)
The following table provides a breakdownNet investment gains were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| On sale of investments: | | | | | | | | |
| Fixed maturities and short-term investments | $ | 29,532 | | | $ | 17,918 | | | $ | 42,658 | | | $ | 17,069 | | |
| Equity securities | 519 | | | 1,745 | | | 18,675 | | | 3,221 | | |
| | 30,051 | | | 19,663 | | | 61,333 | | | 20,290 | | |
| Allowance for expected credit losses | 3,759 | | | — | | | (2,498) | | | — | | |
| Impairment losses | (184) | | | — | | | (1,486) | | | — | | |
| OTTI losses | — | | | (1,458) | | | — | | | (6,328) | | |
| Change in fair value of investment derivatives | (1,346) | | | 2,592 | | | 1,970 | | | 287 | | |
| Net unrealized gains (losses) on equity securities | 23,329 | | | (6,270) | | | (13,542) | | | 34,273 | | |
| Net investment gains | $ | 55,609 | | | $ | 14,527 | | | $ | 45,777 | | | $ | 48,522 | | |
| | | | | | | | | |
Net investment gains for the three months ended September 30, 2020 were $56 million compared to net investment gains of
$15 million for the three months ended September 30, 2019, an increase of $41 million. For the three months ended September 30, 2020, the net investment gains were primarily due to net realized
gains on the sale of corporate debt and U.S. government securities and net unrealized gains on equity securities. For the three months ended September 30, 2019, the net investment gains
(losses):were primarily due to net realized gains on the sale of U.S. government and agency RMBS securities partially offset by net unrealized losses on equity securities. |
| | | | | | | | | | | | | | | | | |
| | | 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 | ) | |
| | | | | | | | | | |
Net investment gains for the nine months ended September 30, 2020 were $46 million, compared to net investment gains of $49 million for the nine months ended September 30, 2019, a decrease of $3 million. For the nine months ended September 30, 2020, the net investment gains were primarily due to net realized gains on the sale of U.S. government, agency RMBS and equity securities partially offset by net unrealized losses on equity securities. For the nine months ended September 30, 2019, the net investment gains were primarily due to net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency RMBS securities.
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 gainsImpairment and OTTI Losses
The impairment losses for the three months ended September 30, 2017 were $15 million compared to net realized investment gains of $5 million for the three months ended September 30, 2016, an increase of $9 million. For the three months ended September 30, 2017, net realized investment gains were primarily due to improved pricing on equity securities. For the three months ended September 30, 2016, 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, 20172020 were $15$nil and $1 million, respectively, compared to net realized investmentOTTI losses of $40$1 million and $6 million for the three and nine months ended September 30, 2016, a decrease of $25 million.2019. For the three and nine months ended September 30, 2017 and 2016, net realized investment2020, these losses were primarilyprincipally due to foreign exchange losses on non-U.S. denominated securities.
OTTI charges
The OTTI charges forimpairments of non-investment grade corporate debt securities that we intend to sell or more likely than not will be required to sell. For the three months ended September 30, 2017 were $5 million, compared to $4 million for the three months ended September 30, 2016, a decrease of $1 million. The OTTI charges for theand nine months ended September 30, 20172019, these losses were $13 million, compared to $20 million for the nine months ended September 30, 2016, a decrease of $7 million. For all periods presented the OTTI charges were primarilyprincipally due to impairments onof non-U.S. denominated securities as a resultdue to the impact of the decline in foreign exchange rates againststrengthening of 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 forwardand interest rate risk with derivative 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, 2017, we recorded losses of $2 million relating to foreign exchange contracts and gains of $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, we2020, we recorded losses of $6$1 million and gains of $2 million, respectively, related to foreign exchange contracts. For the three and nine months ended September 30, 2019, we recorded gains of $3 million and $4 million, respectively relating to foreign exchange contracts and losses of $3$nil and $4 million, relatingrespectively, related to interest rates swaps. For the nine months ended September 30, 2016 the fair value of foreign exchange contracts was unchanged.
Total Return
Total return on cash and investments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Net investment income | $ | 101,956 | | $ | 115,763 | | $ | 240,098 | | $ | 361,014 | |
| Net investments gains | 55,609 | | 14,527 | | 45,777 | | 48,522 | |
| Change in net unrealized gains (losses) on fixed maturities (1) | 73,050 | | 29,493 | | 204,828 | | 388,939 | |
| Interest in income (loss) of equity method investments | 2,896 | | 792 | | (13,579) | | 5,645 | |
| Total | $ | 233,511 | | $ | 160,575 | | $ | 477,124 | | $ | 804,120 | |
| | | | | | | | | |
| Average cash and investments(2) | $ | 15,512,967 | | $ | 15,492,106 | | $ | 15,523,879 | | $ | 15,199,356 | |
| | | | | | | | | |
| Total return on average cash and investments, pre-tax: | | | | | | | | |
| Including investment related foreign exchange movements | 1.5 | % | | 1.0 | % | | 3.1 | % | | 5.3 | % | |
| Excluding investment related foreign exchange movements(3) | 1.2 | % | | 1.2 | % | | 3.1 | % | | 5.5 | % | |
| | | | | | | | | |
(1)Change in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
(2)The following table provides a breakdownaverage cash and investments balance is calculated by taking the average of the period end fair value balances.
(3)Pre-tax 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 | % | |
| | | | | | | | | | |
| |
(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.excluding foreign exchange movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation 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 million and $(8) million for the three months ended September 30, 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 |
| |
| | | | | | | | |
| |
(1) | Includes restricted cash and cash equivalents of $281 million and $202 million at September 30, 2017 and at December 31, 2016, respectively.
|
Overview
The fair value$42 million and $(31) million for the three months ended September 30, 2020, and 2019, respectively, and foreign exchange (losses) gains of total investments decreased by $399$(6) million and $(28) million for the nine months ended September 30, 2020 and 2019, respectively.
OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | % Change | | 2019 | | 2020 | | % Change | | 2019 | |
| | | | | | | | | | | | | |
| Corporate expenses | $ | 20,988 | | | (27%) | | $ | 28,903 | | | $ | 74,915 | | | (23%) | | $ | 97,468 | | |
| Foreign exchange losses (gains) | 60,734 | | | nm | | (59,543) | | | 8,760 | | | nm | | (64,868) | | |
| Interest expense and financing costs | 15,574 | | | (14%) | | 18,042 | | | 59,641 | | | 20% | | 49,545 | | |
| Income tax expense (benefit) | (12,056) | | | nm | | 8,147 | | | (6,030) | | | nm | | 23,850 | | |
| Total | $ | 85,240 | | | | | $ | (4,451) | | | $ | 137,286 | | | | | $ | 105,995 | | |
| | | | | | | | | | | | | |
nm – not meaningful
Corporate Expenses
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses decreased to 1.9% and 2.3% for the three and nine months ended September 30, 2020, respectively, from 2.5% and 2.9% for the three and nine months ended September 30, 2019, respectively.
The decrease in corporate expenses for the three months ended September 30, 2020, was primarily related to decreases in personnel costs and professional fees. The decrease in corporate expenses for the nine months ended September 30, 2020, was primarily related to decreases in personnel costs, professional fees, travel and entertainment costs, and information technology costs.
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses of $61 million for the three months ended September 30, 2020, were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in euro and in pound sterling.
Foreign exchange losses of $9 million for the nine months ended September 30, 2020, were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.
Foreign exchange gains of $60 million and $65 million for the three and nine months ended September 30, 2019, respectively, were primarily attributable to the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and euro.
Interest Expense and Financing Costs
Interest expense and financing costs are related to interest due on the 5.875% senior unsecured notes ("5.875% Senior Notes") issued in 2010 and repaid in June 2020, the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% senior unsecured notes ("3.900% Senior Notes"), and the 4.900% fixed-rate reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Interest expense and financing costs decreased by $2 million for the three months ended September 30, 2020, compared to the same period in 2019, due to the fundingrepayment of the 5.875% Senior Notes on June 1, 2020. Interest expense and financing costs increased by $10 million for the nine months ended September 30, 2020, compared to the same period in 2019, due to the issuance of the 3.900% Senior Notes on June 19, 2019 and operating activities,the issuance of the Junior Subordinated Notes on December 10, 2019, partially offset by the improvementrepayment of the 2.650% Senior Notes on April 1, 2019 and the repayment of the 5.875% Senior Notes on June 1, 2020.
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in valuationsthe U.S. and Europe. Our effective tax rate is calculated as income tax expense (benefit) divided by income (loss) before tax including interest in income (loss) of equity method investments. This effective rate can vary between periods depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors.
The tax benefit of $12 million a for the three months ended September 30, 2020, was principally due to the generation of pre-tax losses in our U.S. operations.
The tax benefit of $6 million for the nine months ended September 30, 2020, was principally due to the generation of pre-tax losses in our U.S. and U.K. operations.
The tax expense of $8 million and $24 million for the three and nine months ended September 30, 2019, respectively, was attributable to the generation of pre-tax income in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.
FINANCIAL MEASURES
We believe the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for common shareholders:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | |
| | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | |
| Annualized return on average common equity(1) | (6.2 | %) | | 2.3 | % | | (4.1 | %) | | 8.6 | % | |
| Annualized operating return on average common equity(2) | (5.5 | %) | | (2.7 | %) | | (4.4 | %) | | 6.1 | % | |
| | | | | | | | | |
| Book value per diluted common share(3) | $ | 54.75 | | $ | 56.26 | | $ | 54.75 | | $ | 56.26 | |
| Cash dividends declared per common share | $ | 0.41 | | $ | 0.40 | | $ | 1.23 | | $ | 1.20 | |
| Increase (decrease) in book value per diluted common share adjusted for dividends | $ | 0.07 | | $ | 0.67 | | $ | 0.13 | | $ | 5.16 | |
| | | | | | | | | |
(1)Annualized return on average common equity ("ROACE") is calculated by dividing annualized net income (loss) available (attributable) to common shareholders for the period by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the period.
(2)Annualized operating return on average common equity ("operating ROACE") is a non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, annualized ROACE, and a discussion of the rationale for the presentation of this item is provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures Reconciliation'.
(3)Book value per diluted common share represents total common shareholders’ equity divided by diluted common shares outstanding, determined using the treasury stock method. Cash-settled restricted stock units are excluded.
Return on Average Common Equity
Our objective is to generate superior returns on capital that appropriately reward 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.
ROACE reflects the impact of net income (loss) available (attributable) to common shareholders including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in ROACE for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was primarily driven by the foreign exchange losses and an increase in the underwriting loss, together with a decrease in net investment income, partially offset by an increase in net investment gains, the income tax benefit, and decreases in reorganization expenses and corporate expenses.
The decrease in ROACE for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily driven by the underwriting loss, a decrease in net investment income, and the foreign exchange losses, together with the interest in loss of equity method investments, partially offset by the income tax benefit, and decreases in reorganization expenses, corporate expenses, and the amortization of value of business acquired ("VOBA") associated with the acquisition of Novae. In addition, ROACE was impacted by an increase in average common shareholders' equity.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in operating ROACE for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was primarily driven by an increase in the underwriting loss, together with a decrease in net investment income, partially offset by the income tax benefit and a decrease in corporate expenses.
The decrease in operating ROACE for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily driven by the underwriting loss and a decrease in investment income, partially offset by the income tax benefit, and a decrease in corporate expenses and a decrease in the amortization of VOBA associated with the acquisition of Novae.
Book Value per Diluted Common Share
We consider book value per diluted common share to be an appropriate measure of returns to common shareholders, as we believe growth in book value on a diluted basis will ultimately translate into appreciation of stock price.
During the three months ended September 30, 2020, book value per diluted common share decreased to $54.75 from $55.09, a decrease of 0.6%, due to the net loss generated and common dividends declared, partially offset by net unrealized gains reported in accumulated other comprehensive income.
During the nine months ended September 30, 2020, book value per diluted common share decreased to $54.75 from $55.79, a decrease of 1.9%, due to the net loss generated and common dividends declared, partially offset by net unrealized gains reported in accumulated other comprehensive income.
Cash Dividends Declared per Common Share
We believe in returning excess capital to shareholders by way of dividends and share repurchases. Accordingly, dividend policy is an integral part of the value we create for shareholders. Our cumulative strong earnings have permitted our Board of Directors to approve sixteen successive annual increases in quarterly common share dividends.
Book Value per Diluted Common Share Adjusted for Dividends
Book value per diluted common share adjusted for dividends increased by $0.07 for the three months ended September 30, 2020, and increased by $0.19 for the nine months ended September 30, 2020.
Taken together, we believe that growth in book value per diluted common share and common share dividends declared represent the total value created for common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe investors use the book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.
During the three months ended September 30, 2020, the increase in total value was driven by unrealized investment gains reported in accumulated other comprehensive income, partially offset by the net loss generated in the period.
During the nine months ended September 30, 2020, the increase in total value was driven by net unrealized investment gains recognized in accumulated other comprehensive income, partially offset by the net loss generated in the period.
Book value per diluted common share adjusted for dividends increased by $0.67, or 1% for the three months ended September 30, 2019 and increased by $7.53, or 15.0% for the nine months ended September 30, 2019.
During the three and nine months ended September 30, 2019, total value created was driven by the net income generated in the quarter and unrealized investment gains reported in accumulated other comprehensive income.
NON-GAAP FINANCIAL MEASURES RECONCILIATION
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| | | | | | | |
| Net income (loss) available (attributable) to common shareholders | $ | (72,945) | | $ | 27,745 | | $ | (145,855) | | $ | 292,258 |
Net investment (gains) losses(1) | (55,609) | | (14,527) | | (45,777) | | (48,522) |
Foreign exchange losses (gains)(2) | 60,734 | | (59,543) | | 8,760 | | (64,868) |
| | | | | | | |
Reorganization expenses(3) | 1,413 | | 11,215 | | 822 | | 29,310 |
| | | | | | | |
Interest in (income) loss of equity method investments(4) | (2,896) | | (792) | | 13,579 | | (5,645) |
| Income tax expense | 4,235 | | 3,361 | | 10,494 | | 6,524 |
| | | | | | | |
| Operating income (loss) | $ | (65,068) | | $ | (32,541) | | $ | (157,977) | | $ | 209,057 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Earnings (loss) per diluted common share | $ | (0.87) | | $ | 0.33 | | $ | (1.73) | | $ | 3.46 |
| Net investment (gains) losses | (0.66) | | (0.17) | | (0.54) | | (0.57) |
| Foreign exchange losses (gains) | 0.72 | | (0.71) | | 0.10 | | (0.77) |
| | | | | | | |
| Reorganization expenses | 0.02 | | 0.13 | | 0.01 | | 0.35 |
| | | | | | | |
| Interest in (income) loss of equity method investments | (0.03) | | (0.01) | | 0.16 | | (0.07) |
| Income tax expense | 0.05 | | 0.04 | | 0.12 | | 0.08 |
| | | | | | | |
Operating income (loss) per diluted common share(5) | $ | (0.77) | | $ | (0.39) | | $ | (1.88) | | $ | 2.48 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average diluted common shares outstanding(6) | 84,308 | | 83,947 | | 84,235 | | 84,420 |
| | | | | | | |
| Average common shareholders' equity | $ | 4,731,858 | | $ | 4,801,174 | | $ | 4,742,452 | | $ | 4,532,971 |
| | | | | | | |
| Annualized return on average common equity | (6.2 | %) | | 2.3 | % | | (4.1 | %) | | 8.6 | % |
| | | | | | | |
| | | | | | | |
Annualized operating return on average common equity(7) | (5.5 | %) | | (2.7 | %) | | (4.4 | %) | | 6.1 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1)Tax cost (benefit) of $6,667 and $897 for the three months ended September 30, 2020 and 2019, respectively, and $9,104 and $6,667 for the nine months ended September 30, 2020 and 2019, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(2)Tax cost (benefit) of ($2,245) and $4,784 for the three months ended September 30, 2020 and 2019, respectively, and $1,366 and $5,372 for the nine months ended September 30, 2020 and 2019, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(3)Tax cost (benefit) of ($187) and ($2,320) for the three months ended September 30, 2020 and 2019, respectively, and $24 and ($5,515) for the nine months ended September 30, 2020 and 2019, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(4)Tax cost (benefit) of $nil for the three and nine months ended September 30, 2020 and 2019, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(5)Loss per diluted common share and operating loss per diluted common share for the three and nine months ended September 30, 2020 were calculated using weighted average common shares outstanding due to the net loss attributable to common shareholders and the operating loss recognized in these periods.
(6)Refer to Item 1, Note 7 to our Consolidated Financial Statements 'Earnings per Common Share' for further details.
(7)Annualized operating ROACE is calculated by dividing annualized operating income (loss) for the period by the average common shareholders' equity balances determined using the common shareholders' equity balances at the beginning and end of the period. The reconciliation to ROACE, the most comparable GAAP financial measure is provided in the table above, and a discussion of the rationale for its presentation is provided below.
Rationale for the Use of Non-GAAP Financial Measures
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 considered non-GAAP financial measures under SEC 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 (loss), operating income (loss) (in total and on a per share basis), annualized operating return on average common equity ("operating ROACE"), amounts presented on a constant currency basis and pre-tax total return on cash and investments excluding foreign exchange movements which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation 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").
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 underwriting operations. While this measure is presented in Item 1, Note 2 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 underwriting operations, these costs are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss). General 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 financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations'.
Consolidated Underwriting Income (Loss)
Consolidated underwriting income (loss) 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 expenses as expenses. While this measure is presented in Item 1, Note 2 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 a result, we believe it is appropriate to exclude net investment income and net investment gains (losses) from our underwriting profitability measure.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on 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, therefore, foreign exchange losses (gains) are excluded from consolidated underwriting income (loss).
Interest expense and financing costs primarily relate to interest payable on our debt. As these expenses are not incremental and/or directly attributable to our underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).
Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
We believe that the presentation of underwriting-related general and administrative expenses and consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities. The reconciliation of consolidated underwriting income (loss) to net income (loss), the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations'.
Operating Income (Loss)
Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
Although the investment of premiums to generate income and 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 primarily relate to the impact of foreign exchange rate movements on net insurance-related liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized on the sale of our available for sale investments and equity securities in net investment gains (losses). We also recognize unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss). These unrealized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported in net income (loss), thereby minimizing the impact of foreign exchange rate movements on total shareholders' equity. As a result, foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a fair representation of the performance of our business.
Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss).
Interest in income (loss) of equity method investments is primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income (loss).
Certain users of our financial statements evaluate performance exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments to understand the profitability of recurring sources of income.
We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments 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 operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented above.
We also present operating income (loss) per diluted common share and annualized operating ROACE, which are derived from the operating income (loss) measure and are reconciled above to the most comparable GAAP financial measures, earnings (loss) per diluted common share and annualized return on average common equity ("ROACE"), respectively.
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 growth in gross premiums written, net premiums written and net premiums earned on a constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment'.
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 investments gains (losses), interest in income (loss) of equity method investments, and change in unrealized gains (losses) generated by average cash and investment balances. The reconciliation of pre-tax total return on cash and investments excluding foreign exchange movements to pre-tax total return on cash and investments, the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Investment Income and Net Investment Gains (Losses)'. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investment portfolio.
Acquisition of Novae
On October 2, 2017, we acquired Novae. At the acquisition date, we identified value of business acquired ("VOBA") which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction. In addition, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet at the acquisition date as the value of policies in-force on that date are considered within VOBA. Consequently, underwriting income (loss) for the three and nine months ended September 30, 2019, included the recognition of premiums attributable to Novae's balance sheet at the acquisition date without the recognition of the associated acquisition costs.
CASH AND INVESTMENTS
Details of cash and investments are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | | December 31, 2019 | |
| | | Fair Value | | | | Fair Value | |
| | | | | | | | |
| Fixed maturities | | $ | 12,609,241 | | | | | $ | 12,468,205 | | |
| Equity securities | | 417,886 | | | | | 474,207 | | |
| Mortgage loans | | 544,095 | | | | | 432,748 | | |
| Other investments | | 760,206 | | | | | 770,923 | | |
| Equity method investments | | 104,242 | | | | | 117,821 | | |
| Short-term investments | | 69,996 | | | | | 38,471 | | |
| Total investments | | $ | 14,505,666 | | | | | $ | 14,302,375 | | |
| | | | | | | | |
| Cash and cash equivalents(1) | | $ | 1,440,816 | | | | | $ | 1,576,457 | | |
| | | | | | | | |
(1)Includes restricted cash and cash equivalents of $440 million and $335 million at September 30, 2020 and at December 31, 2019, respectively.
Overview
The fair value of total investments increased by $203 million in the nine months ended September 30, 2020, driven by cash inflows from operations and the increase in market value of fixed incomematurities due to the decline in yields, partially offset by the repayment of $500 million 5.875% Senior Notes and equity securities.the redemption of $225 million of 5.50% Series D preferred shares.
The following provides a furtherAn analysis onof our investment portfolio by asset classes:class is detailed below:
Fixed Maturities
The following provides a breakdownDetails of our investment in fixed maturities:maturities portfolio are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | |
| | Fair Value | | % of Total | | Fair Value | | % of Total | |
| | | | | | | | | |
| Fixed maturities: | | | | | | | | |
| U.S. government and agency | $ | 1,991,466 | | | 16 | % | | $ | 2,112,881 | | | 17 | % | |
| Non-U.S. government | 673,801 | | | 5 | % | | 576,592 | | | 5 | % | |
| Corporate debt | 4,796,731 | | | 39 | % | | 4,930,254 | | | 38 | % | |
| Agency RMBS | 1,677,106 | | | 13 | % | | 1,592,584 | | | 13 | % | |
| CMBS | 1,380,738 | | | 11 | % | | 1,365,052 | | | 11 | % | |
| Non-agency RMBS | 133,530 | | | 1 | % | | 84,922 | | | 1 | % | |
| ABS | 1,672,175 | | | 13 | % | | 1,598,693 | | | 13 | % | |
| Municipals(1) | 283,694 | | | 2 | % | | 207,227 | | | 2 | % | |
| Total | $ | 12,609,241 | | | 100 | % | | $ | 12,468,205 | | | 100 | % | |
| | | | | | | | | |
| Credit ratings: | | | | | | | | |
| U.S. government and agency | $ | 1,991,466 | | | 16 | % | | $ | 2,112,881 | | | 17 | % | |
| AAA(2) | 5,012,547 | | | 40 | % | | 4,896,833 | | | 38 | % | |
| AA | 934,983 | | | 7 | % | | 865,601 | | | 7 | % | |
| A | 1,973,829 | | | 16 | % | | 1,848,331 | | | 15 | % | |
| BBB | 1,690,837 | | | 13 | % | | 1,684,589 | | | 14 | % | |
| Below BBB(3) | 1,005,579 | | | 8 | % | | 1,059,970 | | | 9 | % | |
| Total | $ | 12,609,241 | | | 100 | % | | $ | 12,468,205 | | | 100 | % | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | 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 | % | |
| | | | | | | | | | |
| |
(1) | Includes bonds issued by states, municipalities, and political subdivisions. |
| |
(2) | Includes U.S. government-sponsored agency RMBS and CMBS. |
| |
(3) | Non-investment grade and non-rated securities. |
(2)Includes U.S. government-sponsored agencies, residential mortgage-backed securities ("RMBS") and commercial mortgage-backed securities ("CMBS").
(3)Non-investment grade and non-rated securities.
At September 30, 2017,2020, fixed maturities had a weighted average credit rating of AA- (2016:(2019: AA-), a book yield of 2.3% (2019: 2.8%) and an average duration of 3.4 years (2019: 3.2 years). At September 30, 2020, fixed maturities together with short-term investments, and cash and cash equivalents (i.e. total investments of $14.1 billion), had an average credit rating of AA- (2019: AA-) and an average duration of 3.33.2 years (2016: 3.5(2019: 2.9 years), and duration inclusive of interest rate swaps of 3.2 years. .
At September 30, 2017, inclusive of the short-term investments and cash and cash equivalents, the average credit rating was AA- (2016: AA-) and duration (including interest rate swaps) was 2.8 years (2016: 3.2 years).
Net2020, net unrealized investment gains on fixed maturities were $43$407 million, at September 30, 2017 compared to net unrealized investment lossesgains of $126$205 million at December 31, 2016, primarily2019, an increase of $202 million due to the strengthening of the pound sterling and the euro against 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.decline in yields.
Equity Securities
NetAt September 30, 2020, net unrealized investment gains on equity securities were $41$62 million, compared to unrealized gains of $75 million at December 31, 2016 compared to $972019, a decrease of $13 million at September 30, 2017, an increase of $56 million due to an improvement in valuations reflective of performance ofdriven by realized gains taken during the global equity markets.
year.
Mortgage Loans
During the nine months ended September 30, 2017,2020, our investment in commercial mortgage loans was comparable to December 31, 2016.increased by $111 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, 2017,2020, there were no credit losses or past due amounts associated with our commercial mortgage loans portfolio.
Other Investments
The compositionDetails of our other investments portfolio is summarizedare as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | |
| | Fair Value | | % of Total | | Fair Value | | % of Total | |
| | | | | | | | | |
| Hedge funds | | | | | | | | |
| Long/short equity funds | $ | 24,815 | | | 3 | % | | $ | 31,248 | | | 4 | % | |
| Multi-strategy funds | 111,980 | | | 15 | % | | 136,542 | | | 18 | % | |
| | | | | | | | | |
| | | | | | | | | |
| Total hedge funds | 136,795 | | | 18 | % | | 167,790 | | | 22 | % | |
| | | | | | | | | |
| Direct lending funds | 269,783 | | | 35 | % | | 277,395 | | | 36 | % | |
| Private equity funds | 106,701 | | | 14 | % | | 80,412 | | | 10 | % | |
| Real estate funds | 153,163 | | | 20 | % | | 130,112 | | | 17 | % | |
| Total hedge, direct lending, private equity and real estate funds | 666,442 | | | 87 | % | | 655,709 | | | 85 | % | |
| | | | | | | | | |
| CLO-Equities | 9,189 | | | 2 | % | | 14,328 | | | 2 | % | |
| Other privately held investments | 39,493 | | | 5 | % | | 36,934 | | | 5 | % | |
| Overseas deposits | 45,082 | | | 6 | % | | 63,952 | | | 8 | % | |
| Total other investments | $ | 760,206 | | | 100 | % | | $ | 770,923 | | | 100 | % | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | 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 | % | |
| | | | | | | | | | |
The fair value of total hedge funds decreased by $99 million during the nine month period ended September 30, 2017 driven by $127 million of net redemptions offset by $28 million of price appreciation. Certain of these funds may be subjectRefer 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..
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. Givenentity that we exercise significant influence over this investee weis required to be included in our consolidated financial statements. We account for our ownership interest 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 chargeIn our consolidated results, our ownership interest in Harrington is includedreported in interest in income (loss) of equity method investments.
Interest in income (loss) of equity method investments was $3 million and $(14) million for the three and nine months ended September 30, 2020, respectively, compared to interest in income of equity method investments of $1 million and $6 million for the Consolidated Statement of Operations.three and nine months ended September 30, 2019, respectively. The income for the three months ended September 30, 2020, was attributable to positive investment returns realized by Harrington. The loss for the nine months ended September 30, 2020 was attributable to negative investment returns realized by Harrington.
84
LIQUIDITY AND CAPITAL RESOURCES
Refer to the ‘Liquidity and Capital Resources’ section included underin Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20162019 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:capital:
| | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | |
| | | | | |
| Debt | $ | 1,309,384 | | | $ | 1,808,157 | | |
| | | | | |
| Preferred shares | 550,000 | | | 775,000 | | |
| Common equity | 4,715,895 | | | 4,769,008 | | |
| Shareholders’ equity | 5,265,895 | | | 5,544,008 | | |
| Total capital | $ | 6,575,279 | | | $ | 7,352,165 | | |
| | | | | |
| Ratio of debt to total capital | 19.9 | % | | 24.6 | % | |
| | | | | |
| Ratio of debt and preferred equity to total capital | 28.3 | % | | 35.1 | % | |
| | | | | |
|
| | | | | | | | | |
| | | 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 | % | |
| | | | | | |
We finance our operations with a combination of debt and equity capital. Our debtDebt 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
While 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 redemptionimpact of the remaining $351 million of 6.875% Series C preferred shares on April 17, 2017.
WeCOVID-19 pandemic and catastrophe and weather-related losses have reduced common shareholders' equity, we believe that our financial flexibility remains strong.strong, and we will make adjustments as necessary, if the outlook and impact changes. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Recent Developments related to COVID-19' for further information on the impact of the COVID-19 pandemic.
Debt
On June 1, 2020, AXIS Specialty Finance LLC, a 100% owned finance subsidiary, repaid $500 million aggregate principal amount of 5.875% Senior Notes at their stated maturity.
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, 2020, 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") to extend the expiration date to March 31, 2021.
The terms and conditions of the $500 million secured letter of credit facility (the “LOC Facility”"$500 million Facility") with Citibank Europe plc (“Citibank”) to include an additionalremain unchanged.
$250 million of secured letter
Letters 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 ofissued under the $250 Millionmillion Facility letters of credit to a maximum aggregate amount of $250and the $500 million Facility are available for issuance on behalf of the Participating Subsidiaries. These letters of credit 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 Facility.
facilities. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank.Citibank Europe plc. 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 Facilityfacility to any or all of the Participating Subsidiaries. The $250 million Facility expires March 31, 2018. The terms and conditions
Common Equity
During the nine months endedSeptember 30, 2017, our common equity decreased by $467 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 |
| |
| | | | |
During the nine months ended September 30, 2017,2020, common equity decreased by $53 million. The following table reconciles opening and closing common equity positions:
| | | | | | | | | | | |
| Nine months ended September 30, | 2020 | |
| | | |
| Common equity - opening | $ | 4,769,008 | | |
| Treasury shares reissued | 1,888 | | |
| | | |
| Share-based compensation expense | 27,332 | | |
| Change in unrealized gains (losses) on available for sale investments, net of tax | 179,982 | | |
| Foreign currency translation adjustment | (1,581) | | |
| Net income (loss) | (123,167) | | |
| Preferred share dividends | (22,688) | | |
| Common share dividends | (106,194) | | |
| Treasury shares repurchased | (8,685) | | |
| | | |
| | | |
| Common equity - closing | $ | 4,715,895 | | |
| | | |
During the nine months ended September 30, 2020, we repurchased 4.3 millionrepurchased 155,256 common shares repurchased from employees to satisfy withholding tax liabilities related to the vesting of share-settled restricted stock units granted under our 2007 and 2017 Long-Term Equity Compensation Plans for a total cost of $286 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).$8.7 million.
At November 8, 2017, the remaining authorization under the
A 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'plan has not been authorized for additional information).2020.
However, following the Company's announcement of the offer to acquire Novae on July 5, 2017, the Company suspended its open market share repurchase program.
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 throughthat become due within one year after the foreseeable future.
date that the financial statements are issued. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Recent Developments related to COVID-19' for further information on the impact of COVID-19 pandemic.
Financial Strength Ratings
Our principal insurance and reinsurance operating subsidiaries are assigned financial strength ratings from internationally recognized rating agencies, including Standard & Poor’s, A.M. Best and Moody’s Investors Service. These ratings are publicly announced and are available directly from the agencies, as well as on our website.
On May 5, 2020, A.M. Best revised its rating and outlook from A+ and negative to A and stable, respectively. The revised rating was based on unfavorable trends in operating performance over the past five years, particularly emanating from the insurance segment. The revised outlook continues to reflect our strong balance sheet, favorable business profile and appropriate risk management practices.
On May 11, 2020, Standard & Poor's revised its outlook from stable to negative due to unfavorable trends in operating performance.
Our rating and outlook from Moody’s Investors Service remain unchanged.
The following are the most recent financial strength ratings from internationally recognized agencies in relation to our principal insurance and insurance operating subsidiaries:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rating agency | | Agency’s description of rating | | Rating and outlook | | Agency’s rating
definition | | Ranking of rating | |
| | | | | | | | | | |
| Standard & Poor’s | | An "opinion about the financial security characteristics of an insurance organization, with respect to its ability to pay under its insurance policies and contracts, in accordance with their terms". | | A+ (Negative) | | "Strong capacity to meet its financial commitments" | | The ‘A’ category is the third highest out of ten major rating categories. The second through eighth major rating categories may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. | |
| | | | | | |
| A.M. Best | | An "opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations". | | A
(Stable) | | "Excellent ability to meet ongoing insurance obligations" | | The ‘A’ category is the third highest rating out of fourteen. Ratings outlooks (‘Positive’, ‘Negative’ and ‘Stable’) are assigned to indicate a rating’s potential direction over an intermediate term, generally defined as 36 months. | |
| | | | | | |
| Moody’s Investors Service | | "Opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations." | | A2 (Negative) (1) | | "Offers good financial security" | | The ‘A’ category is the third highest out of nine rating categories. Each of the second through seventh categories are subdivided into three subcategories, as indicated by an appended numerical modifier of ‘1’, ‘2’ and ‘3’. The ‘1’ modifier indicates that the obligation ranks in the higher end of the rating category, the ‘2’ modifier indicates a mid-category ranking and the ‘3’ modifier indicates a ranking in the lower end of the rating category. | |
| | | | | | | | | | |
(1)In April 2019, Moody's Investor Service revised its outlook from stable to negative reflecting higher operational and financial leverage and lower capitalization relative to peers.
CRITICAL ACCOUNTING ESTIMATES
Our
The Company's Consolidated Financial Statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we arethe Company is required to make assumptions and best estimates in order to determine the reported values. We considerThe Company considers 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 ourthe Company's results of operations, financial condition or liquidity.
As disclosed in our 2016 Annual Report on Form 10-K, we believe thatThe Company believes the material items requiring such subjective and complex estimates are our:are:
•reserves for losses and loss expenses;
•reinsurance recoverable balances;on unpaid losses and loss expenses, including the provision for uncollectible amounts;
premiums;•gross premiums written;
•fair value measurements for ourof financial assets and liabilities; and
assessments•other-than-temporary impairments ("OTTI") in the carrying value of other-than-temporary impairments.available for sale securities and the allowance for credit losses associated with available for sale securities.
We believeOther that the Company's consideration of the impact of the targeted changes to the impairment model for available for sale securities introduced in ASU 2016-13 detailed in Note 1 'Basis of Presentation and Significant Accounting Policies' to the Consolidated Financial Statements, the Company believes that the critical accounting estimates discussion in Item 7 of ourits Annual Report on Form 10-K for the year ended December 31, 2016,2019, continues to describe the significant estimates and judgments included in the preparation of ourthe 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 'Basis of Presentation and Significant Accounting Policies' to the Consolidated Financial Statements in ourthe Company's Annual Report on Form 10-K for the year ended December 31, 2016,2019, 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, 2017, we have2020, the Company had not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
87
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, 2019. There have been no material changes to this item since December 31, 2019, 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, 2020 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | 5,438 | | | $ | (2,735) | | | $ | 190,349 | | | $ | (436,213) | | | $ | (265,099) | | | $ | (88,100) | | | $ | 86,352 | | | $ | (510,008) | | |
| Foreign currency derivatives, net | (4,446) | | | 4,304 | | | (181,617) | | | 437,229 | | | 225,952 | | | 103,506 | | | 3,457 | | | 588,385 | | |
| Net managed foreign currency exposure | 992 | | | 1,569 | | | 8,732 | | | 1,016 | | | (39,147) | | | 15,406 | | | 89,809 | | | 78,377 | | |
| Other net foreign currency exposure | — | | | — | | | 113 | | | 3,121 | | | (1,456) | | | — | | | 34,553 | | | 36,331 | | |
| Total net foreign currency exposure | $ | 992 | | | $ | 1,569 | | | $ | 8,845 | | | $ | 4,137 | | | $ | (40,603) | | | $ | 15,406 | | | $ | 124,362 | | | $ | 114,708 | | |
| Net foreign currency exposure as a percentage of total shareholders’ equity | — | % | | — | % | | 0.2 | % | | 0.1 | % | | (0.8 | %) | | 0.3 | % | | 2.4 | % | | 2.2 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 99 | | | $ | 157 | | | $ | 885 | | | $ | 414 | | | $ | (4,060) | | | $ | 1,541 | | | $ | 12,436 | | | $ | 11,471 | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | 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 |
| |
| | | | | | | | | | | | | | | | | | |
| |
(1) | Assumes 10% change in underlying currencies relative to the U.S. dollar. |
Total Net Foreign Currency Exposure
At September 30, 2017, our2020, total net foreign currency exposure was $575assets were $115 million net long, driven by increases in our exposures to the euro, pound sterling, Japanese yenYen and other non-core currencies primarily due to new business written during the nine months ended September 30, 2017.2020. In addition, our pound sterling exposure was increased$35 million included in other net foreign currency exposures related to fundassets managed by specific investment managers who have the acquisitiondiscretion to hold foreign currency exposures as part of Novae. Managed exposure in Othertheir total return strategy. An emerging market debt portfolio is primarily Indian rupee, UAE Dirham (peggedthe primary contributor to USD) and Israeli shekel. Other net exposurethis group of $83 million is driven by our emerging markets debt fixed income portfolio.assets.
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 ourthe Company's 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 of at September 30, 2017.2020. Based upon that evaluation, ourthe Company's Chief Executive Officer and Chief Financial Officer concluded that, as of at September 30, 2017, our2020, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by usthe Company in reports that we fileit files or submitsubmits 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, 2017. 2020.
Based upon that evaluation, there were no changes in ourthe Company's internal control over financial reporting that occurred during the three months ended September 30, 20172020, that have materially affected, or are reasonably likely to materially affect, ourthe Company's internal control over financial reporting.
The Company has not experienced any material impact to its internal control over financial reporting resulting from the introduction of a remote work model due to the COVID-19 pandemic.
88
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.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 inFor information regarding factors that could affect our Quarterly Report on Form 10-Q for the period ended June 30, 2017, there have been no material changesresults of operations, financial condition or liquidity, refer to the risk factors previously disclosed discussed in Part I, Item 1A. 'Risk Factors' in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
In light of developments relating to the novel coronavirus ("COVID-19") pandemic occurring subsequent to the filing of our Annual Report on Form 10-K, we are supplementing the risk factors discussed in our Annual Report with the following risk factor, which should be read in conjunction with the risk factors contained in our Annual Report.
The scale and scope of the ongoing, novel COVID-19 pandemic is unknown and is expected to continue to adversely impact our business. The overall impact on our business, results of operations, financial condition or liquidity could be material.
During the first quarter of 2020, there was a global outbreak of the novel coronavirus, COVID-19, which has spread to over 200 countries and territories, including our key business locations of Bermuda, the European Union, the U.K. and the U.S. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries in which we operate, including Bermuda, the U.K., Switzerland and the U.S., have declared national emergencies. The global impact of the outbreak has continued to evolve through the third quarter of 2020, and many countries reacted by instituting social distancing measures and quarantines, placing restrictions on travel, restricting trading, limiting operations of non-essential businesses and issuing shelter in place orders. Whilst some initial restrictions have been relaxed, resurgence of the pandemic in many countries has seen continued restrictions to social and economic activity. Such actions have created disruption in global supply chains, and adversely impacted operations in many sectors of the economy. The outbreak will likely have a continued adverse impact on economic and market conditions, triggering a global economic slowdown.
The scale and scope of the COVID-19 pandemic may heighten the potential adverse effects on our business, results of operation, financial condition or liquidity described in the risk factors contained in our Annual Report on Form 10-K, including without limitation:
•We have substantial exposure to losses resulting from catastrophe events, including pandemics. The extent of our losses from the COVID-19 pandemic will ultimately depend on its severity and duration and such losses could have a material adverse effect on our results of operations, financial condition or liquidity. We have identified exposures arising from our
underwriting of insurance and reinsurance policies that cover accident and health (including travel), event cancellation, property/business interruption, and potential exposures arising from our underwriting of insurance and reinsurance policies that cover credit and surety (including mortgage) and professional lines (medical malpractice and directors’ and officers’ liability) among others. These exposures and potential exposures include direct claims relating to COVID-19 (e.g., business interruption following a shelter in place order) and indirect exposures arising from an ensuing economic downturn. We note that other lines may be affected as the pandemic and associated economic downturn develop, and new information is discovered.
•Our exposures are controlled and limited by our insurance and reinsurance contracts, which include specific terms and conditions defining if and how our policies respond to losses arising from the COVID-19 pandemic. However, legislative, regulatory or judicial actions (e.g. the UK Financial Conduct Authority test case on business interruption insurance and subsequent legal actions, including appeals) and social influences could alter the interpretation of our contracts or extend or change coverage (beyond the obligations set forth within those contracts or beyond what was intended by the parties). We set our reserves based on our best interpretation of the current legal position in applicable jurisdictions, but these legislative, regulatory or judicial actions make it more difficult to predict the total amount of losses we could incur.
•Actual claims may exceed loss reserves. While we believe that net reserves for losses and loss expenses at September 30, 2020 are adequate, changes in the duration, severity and scope of the impact of the COVID-19 pandemic from current expectations may result in ultimate losses being materially greater or less than the net reserves for losses and loss expenses currently provided. Among the factors that would cause net reserves for losses and loss expenses to increase or decrease are changes in claim frequency or severity driven by the COVID-19 pandemic or its related impact on the economy.
•Uncertainty and market turmoil caused by the COVID-19 pandemic could affect, among other aspects of our business, the demand for our products, and the ability of customers, counterparties and others to establish or maintain their relationships with us. In addition, the market for insurance and reinsurance could be smaller and certain industries for which we write business have been and will likely continue to be particularly impacted by the pandemic (such as, energy, aviation, retail, hospitality and construction lines, among others), resulting in downward pressure on our premium levels.
•Our investment and derivative instrument portfolios are exposed to significant economic and capital markets risks related to changes in interest rates, bankruptcies, credit spreads and equity prices, as well as other risks, which may adversely affect our results of operations or financial condition. The performance of our cash and investments portfolio has a significant impact on our financial results. The impact of the COVID-19 pandemic has heightened the risks to which our portfolios are subject, including risks relating to general economic conditions, interest rate fluctuations, equity price risk, foreign currency movements, pre-payment or reinvestment risk, liquidity risk and credit risk. Our investments in equities, corporate debt and hedge funds have experienced an increase in price volatility. Government imposed restrictions on movements and/or social distancing practices have led to sharp declines in the revenue of many companies and industries, and we have some debt and/or equity exposure to some of these highly impacted sectors. We anticipate that negative impacts of the COVID-19 pandemic may continue for some time.
•The COVID-19 pandemic may impact cashflows and could require access to liquidity in excess of prior forecasts. There is a risk that accessing additional required liquidity may be difficult or have costs associated as a result of the COVID-19 pandemic.
•The impact on the COVID-19 pandemic on financial markets may impact our ability to acquire additional capital, should we desire to do so, or to be able to effectively deploy existing capital resources.
•Certain of our policyholders and intermediaries may not pay premiums owed to us due to insolvency or other reasons. Insolvency, liquidity problems, distressed financial condition due to the impact of the COVID-19 pandemic or the general effects of economic recession may increase the risk that policyholders or intermediaries, such as insurance brokers, may not pay a part of or the full amount of premiums owed to us, despite an obligation to do so. The terms of our contracts, or actions by our regulators, may not permit us to cancel our insurance even though we have not received payment. We may further decide (or be obliged by regulation) to refund premiums already paid where it is judged that the COVID-19 pandemic has reduced the customer need for insurance. If refunds or non-payments become widespread, whether as a result of insolvency, lack of liquidity, adverse economic conditions, operational failure or otherwise, it could have a material adverse impact on our revenues and results of operations.
•The COVID-19 pandemic could impact our ability to obtain reinsurance and retrocessional arrangements on favorable terms which could limit the amount of business we are willing to write or reduce our reinsurance protection for large loss events.
•Our reinsurance and retrocession counterparties may experience financial distress and therefore, may be unable to pay the amounts owed to us under the applicable contracts.
•Our reinsurers and retrocession counterparties may be unwilling to pay claims due to disagreements or differing interpretation of contracts, which could also result in increased litigation and related expenses.
•There is a risk of reputational damage resulting from potential claims disputes and underwriting renewal actions.
In addition, the COVID-19 pandemic may have a material adverse impact on our business and financial condition due to significant disruption in other areas, including:
•We may experience decreased worker productivity, including as a result of prolonged remote working arrangements, increased medical, emergency or other leave.
•The extended period of remote working by our employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic.
•Similarly, third parties on whom we rely to provide key business services on an outsourced basis (including, but not limited to delegated underwriting, claims processing, finance operations, IT support) also may experience operational or system disruption, or cybersecurity issues, impacting their provision of service to us, and in turn, our operational performance.
•The COVID-19 pandemic could impact our ability to attract and retain key personnel which could adversely impact our business.
•Limitations on travel, social distancing requirements implemented in response to COVID-19, alongside economic conditions, may challenge our ability to write new insurance or reinsurance business and market our products and services as anticipated prior to COVID-19.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and, the extent and effectiveness of government actions to support the economy. The duration and severity of the economic downturn is uncertain, as well as the impact of these and other factors on our employees, customers and partners. Such impact on our business, results of operations, financial condition or liquidity could be material.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Common Shares
The following table presentsshows information regarding the number of common shares werepurchased:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total number of shares purchased(a) (b) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs(b) | |
| | | | | | | | |
| July 1-31, 2020 | — | | | $39.80 | | | — | | | — | | |
| August 1-31, 2020 | — | | | $40.12 | | | — | | | — | | |
| September 1-30, 2020 | 1 | | | $48.69 | | | — | | | — | | |
Total | 1 | | | | | — | | | — | | |
| | | | | | | | |
(a) In thousands.
(b) Shares are repurchased duringfrom employees to satisfy withholding tax liabilities related to the three months ended September 30, 2017:vesting of share-settled restricted stock units.
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 | |
| | | | | | |
| | |
(1) | From time to time, we purchase shares in connection with the vesting of restricted stock awards granted to our employees under our 2007 Long-Term Equity Compensation Plan. The purchase of these shares is separately authorized and is not part of our Board-authorized share repurchase program, described below. |
| |
(2) | On December 9, 2016, our Board of Directors authorized a share repurchase plan to repurchase up to $1 billion of our common shares through to December 31, 2017. The 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. |
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, 2017,2020, 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, weWe intend for our non-U.S. subsidiaries to continue to provide such coverage only to the extent permitted by applicable law.
91
ITEM 6. EXHIBITS
| | | | | |
| 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). |
| 2018 Directors Annual Compensation Program.Amendment No. 1 to Employment Agreement dated December 11, 2017 by and between Peter Vogt and AXIS Specialty U.S. Services, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 7, 2020). |
| Amendment No. 1 to Employment Agreement dated July 5, 2017 by and between Steve K. Arora and AXIS Specialty U.S. Services, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on October 7, 2020). |
| Amendment No. 1 to Letter Agreement dated July 5, 2017 by and between Steve K. Arora and AXIS Specialty U.S. Services, Inc. (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on October 7, 2020). |
| |
| 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, 20172020 formatted in Inline XBRL: (i) Consolidated Balance Sheets at September 30, 20172020 and December 31, 2016;2019; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 20172020 and 2016;2019; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20172020 and 2016;2019; (iv) Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 20172020 and 2016;2019; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 20172020 and 2016;2019; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail. |
| †104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| |
* | Exhibit 10.1 represents a management contract, compensatory plan or arrangement in which directors and/or executive officers are eligible to participate. |
* Exhibits 10.1 through 10.3 represent a management contract, compensatory plan or arrangement in which directors and/or executive officers are eligible to participate.
† Filed herewith.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
92
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, 2017October 28, 2020
| | | | | |
| AXIS CAPITAL HOLDINGS LIMITED |
| By: | /S/ ALBERT BENCHIMOL |
| Albert Benchimol |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
AXIS CAPITAL HOLDINGS LIMITED | /S/ PETER VOGT |
By: | /S/ ALBERT BENCHIMOL
Peter Vogt |
| Albert Benchimol |
| President and Chief Executive Officer |
| |
| /S/ JOSEPH HENRY
|
| Joseph Henry |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |