The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Results of Operations'.
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 investment 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 the '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 better analyze the performance of our investment portfolio.
Ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and ex-PGAAP operating return on average common equity are non-GAAP financial measures as defined in SEC Regulation S-K. Ex-PGAAP operating ROACE, is calculated by dividing ex-PGAAP operating income (loss) for the year by the average common shareholders' equity. The reconciliation of ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and ex-PGAAP operating return on average common equity to the most comparable GAAP financial measures, (net income (loss) available (attributable) to common shareholders, earnings (loss) per diluted common share, and ROACE, respectively) are provided in the table above, and a discussion of the rationale for the presentation of these items is included in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures'.
Net investment gains in 2017 were primarily attributable to net realized investments gains associated with the sale of ETFs, due to the strong performance of global equity markets. Net investment losses in 2016 were primarily due to foreign exchange losses on non-U.S. denominated fixed maturities, due to the strengthening of the U.S. dollar. Other than temporary impairment ("OTTI") charges were $10 million, $14 million and $26 million in 2018, 2017 and 2016, respectively.
Underwriting-related general and administrative expenses is a non-GAAP measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to total general and administrative expenses, the most comparable GAAP measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Results of Operations'.
currency basis) attributable to our motor, liability and property lines, partially offset by decreases in marine and other, and agriculture lines.
Reinsurance credit and surety reserve class recorded net favorable prior year reserve development of $33 million, $33 million and $10 million in 2018, 2017 and 2016, respectively, due to the recognition of generally better than expected loss emergence.
$8 million of net adverse prior year reserve development on liability business primarily related to reserve strengthening on certain claims within our excess casualty book of business.
The increase in the acquisition cost ratio to 20.2% in 2018 from 19.9% in 2017 was primarily due to an increase in our insurance segment primarily due to business mix attributable to the acquisition of Novae.
Foreign exchange losses in 2017 were driven primarily by the impact of the weakening of the U.S. dollar on the re-measurement of net insurance-related liabilities mainly denominated in pound sterling and euro. In addition, foreign exchange losses included the reclassification of the cumulative translation adjustment balance of $24 million related to AXIS Specialty Australia from accumulated other comprehensive income in the consolidated balance sheet to foreign exchange losses (gains) in the consolidated statement of operations due to the wind-down of these operations which was substantially complete at March 31, 2017.
2018 versus 2017: OTTI losses in 2018 were $10 million compared to $14 million in 2017 a decrease of $4 million. The decrease in 2018 compared to 2017 was mainly due to higher losses related to non-U.S. denominated securities due to the strengthening of the U.S. dollar against the pound sterling and the euro in 2017. The current year OTTI losses included impairments on non-U.S. denominated securities as a result of foreign exchange losses and non-investment grade corporate debt securities that have had a significant decline in value.
At December 31, 2018, our non-investment grade portfolio had a fair value of $985 million (2017: $978 million), a weighted average credit rating of B (2017: B) and duration of 2.4 years (2017: 2.0 years). At December 31, 2018, our total corporate debt portfolio, including non-investment grade securities, had a duration of 3.1 years (2017: 3.2 years).
CMBS include mostly investment-grade bonds originated by non-agencies. At December 31, 2018, approximately 99% (2017: 98%) of our CMBS were rated AA or better. At December 31, 2018, the weighted average estimated subordination percentage of the portfolio was 31% (2017: 29%), which represents the current weighted average estimated percentage of the capital structure subordinated to the investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. At December 31, 2018, our CMBS had an average duration and weighted average life of 4.7 years (2017: 5.1 years) and 5.5 years (2017: 6.0 years), respectively.
Municipals comprise revenue and general obligation bonds issued by U.S. domiciled state and municipal entities and are primarily held within the taxable portfolios of our U.S. subsidiaries. The table below provides details of the fair value of our municipal debt portfolio by state and between Revenue bonds and General Obligation ("G.O.") bonds:
G.O. bonds are backed by the full faith and credit of the authority that issued the debt and are secured by the taxing powers of those authorities. Revenue bonds are backed by the revenue stream generated by the services provided by the issuer (e.g. sewer, water or utility projects). As issuers of revenue bonds do not have the ability to draw from tax revenues or levy taxes to fund obligations, revenue bonds may carry a greater risk of default than G.O. bonds. At December 31, 2018, 93% (2017: 90%) of our municipals are taxable with the remainder tax exempt.
During 2018, our investment in commercial mortgage loans decreased to $299 million from $325 million, a decrease of $26 million. The commercial mortgage loans are high quality and collateralized by a variety of commercial properties and are
On March 19, 2012, we issued $400 million of 6.875% Series C preferred shares. Dividends on the Series C preferred shares were non-cumulative. To the extent declared, dividends accumulated, with respect to each dividend period, in an amount per share equal to 6.875% of the liquidation preference per annum.
The terms and conditions of the $500 million secured letter of credit facility under the $750 Million Facility remain unchanged. The $500 million secured letter of credit facility expires December 31, 2019.
(3) Following the offer to acquire Novae, Moody's Investor Service re-affirmed our financial strength rating and outlook.
In the ordinary course of business, we renew and enter into new leases for office space which expire at various dates.
The Company's consolidated financial statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, the Company is required to make assumptions and best estimates in order to determine the reported values. The 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 the Company's results of operations, financial condition or liquidity.
We believe the most significant accounting judgment we make is the estimate of our reserve for losses and loss expenses ("loss reserves"). Our loss reserves represent management’s estimate of the unpaid portion of our ultimate liability for losses and loss expenses ("ultimate losses") for (re)insured events that have occurred at or before the balance sheet date. Our loss reserves reflect both claims that have been reported ("case reserves") to us and claims that have been incurred but not reported ("IBNR") to us. Our loss reserves represent our best estimate of what the ultimate settlement and administration of claims will cost, based on our assessment of facts and circumstances known at that particular point in time.
As previously described, the estimation of the value of our recoveries on credit and political risk business requires significant management judgment. At December 31, 2018, our estimated recoveries on credit insurance business were $24 million (2017: $57 million).
the possibility of future litigation, legislative or judicial change that may impact future loss experience relative to the prior industry loss experience relied upon in reserve estimation.
estimates of the size of insured industry losses from the catastrophic event and our corresponding market share;
Consequently, we review reinsurance recoverable on unpaid and paid losses on a quarterly basis to estimate a provision for uncollectible amounts. Any adjustments to the provision for uncollectible amounts are recognized in the period in which they are determined.
Our revenues primarily relate to gross premiums written generated by our underwriting operations. The basis for recognizing gross premiums written varies by contract type.
Our excess of loss reinsurance contracts with cedants typically include provisions for deposit or minimum premiums receivable, which are generally considered to be the best estimate of the excess of loss reinsurance gross premiums written at the inception of the contract. The minimum/deposit premium is normally adjusted at the end of the contract period to reflect changes in the underlying risks in force during the contract period. Any adjustments to deposit or minimum premiums are recognized in the period in which they are determined. Gross premiums written for excess of loss reinsurance contracts accounted for 38%, 32% and 37% of our reinsurance segment’s gross premiums written for the year ended December 31, 2018 , 2017 and 2016, respectively.
Our premiums are earned over the period during which we are exposed to the underlying risk. Changes in circumstances subsequent to the inception of contracts can impact the earning periods. For example, when our exposure limit for a contract is reached, we fully earn any associated unearned premium. This can have a significant impact on net premiums earned, particularly for multi-year contracts such as those in our credit and political risk line of business.
The length of time and extent to which the fair value is less than the amortized cost.
AXIS Specialty Europe SE ("AXIS Specialty Europe") is a European public limited liability company, incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with company law of the E.U. AXIS Specialty Europe also conducts insurance business through its branch in the United Kingdom, AXIS Specialty Europe SE ("UK Branch"). Effective January 1, 2019, AXIS Specialty Europe will also conduct insurance business through new branches in Belgium and in the Netherlands.
At December 31, 2018 the Company represented reinsurance recoverable on unpaid losses separately from reinsurance recoverable on paid losses in the consolidated balance sheets. This presentation was adopted to facilitate comparison to the reconciliation of beginning and ending net reserves for unpaid losses and loss expenses (refer to Note 9 'Reserve for Losses and Loss Expenses').
If a fixed maturity is impaired and the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the impairment is considered other-than-temporary. In these instances, the full amount of the impairment is charged to net income and is included in net investment gains (losses).
the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified;
Large brokers: These relationships include Novae's large brokers and consideration was given to the expectation of the renewal of these relationships and the associated expenses.
AXIS Capital's underwriting operations are organized around its global underwriting platforms, AXIS Insurance and AXIS Re. The Company has determined that it has two reportable segments, insurance and reinsurance. The Company does not allocate its assets by segment, with the exception of goodwill and intangible assets, as it evaluates the underwriting results of each segment separately from the results of its investment portfolio.
During the year ended December 31, 2018, an impairment charge of $3,500 was recognized related to the termination of the MGA contract intangible asset identified in connection with the acquisition of Novae.
At December 31, 2018, the Company had $147 million (2017: $115 million) of unfunded commitments as a limited partner in funds which invest in real estate and real estate securities and businesses. These funds include an open-ended fund and funds with investment terms ranging from seven years to the dissolution of the underlying fund.
The credit loss component of an OTTI charge recognized in net income is calculated based on the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to the impairment. A summary of credit loss activities by asset class as well as the significant inputs and the methodology used to estimate these credit losses are described below.
The notional amounts of derivative contracts which represent the basis upon which pay or receive amounts are calculated and are presented in the above table to quantify the volume of the Company's derivative activities. Notional amounts are not reflective of credit risk.
The Company's investment portfolio is exposed to foreign currency risk therefore the fair values of its investments are partially influenced by the change in foreign exchange rates. The Company may enter into foreign exchange forward contracts to manage the effect of this foreign currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.
The tables below map the Company's lines of business to reserve classes and the expected claim tails:
this method tends to produce volatile estimates of ultimate losses where there is volatility in the underlying incurred/paid patterns. In particular, where the expected percentage of incurred/paid losses is low, small deviations between actual and expected claims can lead to very volatile estimates of ultimate losses. As a result, this method is often unsuitable at early development stages for an accident year or underwriting year.
Prior year reserve development arises from changes to loss and loss expense estimates related to loss events that occurred in previous calendar years. The following table presents prior year reserve development by segment:
Non-U.S. dollar denominated loss data is converted to U.S. dollar at the rates of exchange in effect at the balance sheet date for material underlying currencies. Fluctuations in foreign currency exchange rates may cause material shifts in loss development. Reserves for losses and loss expenses disclosed in the consolidated balance sheets are also revalued using the exchange rate at the balance sheet date.
This reserve class includes the aviation line of business which provides cover for hull and liability, and specific war cover primarily for passenger airlines but also for cargo operations, general aviation operations, airports, aviation authorities, security firms and product manufacturers. The claims reporting pattern varies by insurance coverage provided. Losses arising from war or terrorism and damage to hulls of aircraft are generally reported quickly compared with liability claims which involve passengers and third parties which generally exhibit longer reporting and payment patterns. To date, the claims reported to the Company have predominantly related to damage to hulls, therefore, reporting and payment patterns have typically exhibited a relatively short tail.
The catastrophe line of business provides protection for most catastrophic losses that are covered in the underlying insurance policies written by the Company's cedants. The underlying policies principally cover property-related exposures but other exposures including workers compensation and personal accident are also covered. The principal perils covered by policies in this portfolio include hurricane and windstorm, earthquake, flood, tornado, hail and fire. In some instances, terrorism may be a covered peril or the only peril. The Company underwrites this business on a proportional and an excess of loss basis.
The agriculture line of business provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail, and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. The Company underwrites this business on a proportional and aggregate stop loss reinsurance basis.
The motor non-proportional business consists of standard excess of loss contracts written for cedants in several European countries with most of the premium related to two major markets, U.K. and France. Since 2009/2010, an increasing number of large bodily injury settlements in the U.K. market were settled using indexed annuities (Periodical Payment Orders "PPOs"). This led to a materially longer development tail on the older accident years for the U.K. non-proportional motor
The following table reconciles the reserves for loss and loss expenses at December 31, 2018 included in the loss development tables to the reserves for loss and loss expenses reported in the consolidated balance sheet:
Letters of credit issued under the $750 million Facility will principally be used to support the reinsurance obligations of the Participating Subsidiaries. The Participating Subsidiaries are subject to certain covenants, including the requirement to maintain sufficient collateral to cover the obligations outstanding under the $750 million Facility. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the $750 million Facility to any or all of the Participating Subsidiaries.
Brokers and other intermediaries collect premiums from customers on behalf of the Company. The Company has procedures in place to manage and monitor credit risk from intermediaries with a focus on day-to-day monitoring of the largest positions.
For the year ended December 31, 2018, bad debt expense was $nil (2017: $nil; 2016: $1 million).
On January 27, 2016 the Company redeemed the remaining 28,430 Series B preferred shares, for an aggregate redemption price of $3 million.