For discussion of our results of operations and changes in financial condition for year ended December 31, 2019, compared to year ended December 31, 2018, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K, which was filed with the SEC on February 27, 2020, and such discussions are incorporated herein by reference.
We reported an estimate of $360 million for ultimate losses related to the direct impacts of the COVID-19 pandemic incurred at December 31, 2020. We also analyzed loss potential from indirect exposures, especially in casualty lines, professional lines, and credit lines. We recognize that while emerging losses in these lines of business may be more difficult to directly attribute to COVID-19, the pandemic has caused an economic and legal environment which will likely lead to an increased frequency of losses in some of these areas. With the addition of the $360 million recognized in 2020, we believe our estimate of reserve for losses and loss expenses ("loss reserves") established at December 31, 2020 adequately reflects our estimate of ultimate losses related to the COVID-19 pandemic, considering the direct and indirect impacts, for all lines of business incurred at December 31, 2020. 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.
We review claims on an individual basis and where our policies provide coverage, we are making payments to help our insureds overcome financial setbacks.
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.
(2)The pre-tax return on other investments is calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated, excluding overseas deposits.
Foreign exchange gains in 2019 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.
Interest expense and financing costs increased by $7 million in 2020, compared to 2019, due to the issuance of the 3.900% Senior Notes on June 19, 2019 and the issuance of the Junior Subordinated Notes on December 10, 2019, partially offset by the repayment of the 2.650% Senior Notes on April 1, 2019 and the repayment of the 5.875% Senior Notes on June 1, 2020.
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).
Municipals comprise revenue bonds and general obligation bonds issued by U.S. domiciled state and municipal entities and are primarily held in the taxable portfolios of our U.S. subsidiaries.
We have generated positive operating cash flows in all years since 2003, with the exception of 2009 which was impacted by the global financial crisis. These positive cash flows were generated even with the recognition of significant catastrophe and weather-related losses including the impact of the COVID-19 pandemic in 2020.
On May 20, 2013, we issued $225 million of 5.50% Series D preferred shares with a liquidation preference of $25.00 per share. Dividends on the Series D preferred shares were non-cumulative. To the extent declared, dividends accumulated, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum. On January 17, 2020, we redeemed all outstanding Series D preferred shares, for an aggregate liquidation preference of $225 million (refer to Item 8, Note 14 to the Consolidated Financial Statements 'Shareholder's Equity' for further details).
(3)We have $588 million of unfunded investment commitments related to our other investments portfolio, which are callable by our investment managers (refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments' for further details). In addition, we have $46 million of unfunded commitments related to our commercial mortgage loans portfolio.
In order to capture the key dynamics of loss reserve development and potential volatility, reserve classes should be considered according to their potential expected length of loss emergence and settlement, generally referred to as the "tail". We consider our business to consist of three claim tail classes, short-tail, medium-tail and long-tail. Favorable development on prior accident year reserves indicates that current estimates are lower than previous estimates, while adverse development on prior accident year reserves indicates that current estimates are higher than previous estimates. Below is a discussion of the specifics of our loss reserve process as it applies to each claim tail class, as well as commentary on the factors contributing to our historical loss reserve development for each class.
Our insurance credit and political risk business provides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events.
An important and distinguishing feature of many of these contracts is the contractual right, subsequent to payment of a claim to an insured, to be subrogated to, or otherwise have an interest in, the insured’s rights of recovery under an insured loan or facility agreement. These estimated recoveries are recorded as an offset to credit and political risk loss reserves. The lag between the date of a claim payment and the ultimate recovery from the corresponding security can result in negative case reserves at a point in time (as was the case at December 31, 2020 and 2019). The nature of the underlying collateral is specific to each transaction therefore we estimate the value of this collateral on a contract-by-contract basis. This valuation process is inherently subjective and involves the application of management’s judgment because active markets for the collateral often do not exist. Estimates of values are based on numerous inputs, including information provided by our insureds, as well as third-party sources including rating agencies, asset valuation specialists and other publicly available information. We also assess any post-event circumstances, including restructurings, liquidations and possession of asset proposals/agreements.
The recognition of reinsurance recoverable balances requires two key estimates. The first estimate is the amount of loss reserves to be ceded to our reinsurers. This amount consists of amounts related to case reserves and amounts related to IBNR.
Revenues primarily relate to premiums generated by our underwriting operations. The basis for recognizing gross premiums written varies by policy or contract type.
Gross premiums written for proportional reinsurance contracts incepting during the year were as follows:
At December 31, 2020 and 2019, we had invested indirectly, through a fund structure in CLO-Equities, also known as "cash flow CLOs" in the industry. During 2020, the CLO-Equity market continued to be relatively inactive with only a small number of transactions being observed, particularly related to transactions involving our CLO-Equities. Our indirect investment in CLO-Equities is valued using a discounted cash flow model prepared by an external manager. At December 31, 2020 and 2019, the estimated fair value of our indirect investment in CLO-Equities was $6 million (2019: $14 million).
The length of time a security has been in an unrealized loss position no longer impacts the determination of whether a credit loss exists.
•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 registered in accordance with company law of the E.U. AXIS Specialty Europe also conducts insurance business through its branch in the United Kingdom ("U.K."), AXIS Specialty Europe SE ("UK Branch"). Pursuant to the U.K.'s withdrawal from the European Union on January 31, 2020, AXIS Specialty Europe expects to be fully regulated by the Prudential Regulation Authority ("PRA") as a third-country branch in the U.K. once the transitional arrangements have expired on December 31, 2021. Until AXIS Specialty Europe's application to the PRA for authorization of a third-country branch in the U.K. is approved, AXIS Specialty Europe will continue to trade in the U.K. under the PRA and the U.K. Financial Conduct Authority ("FCA") Temporary Permissions Regime. Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA ("Aviabel") was merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established new branches in Belgium and the Netherlands, AXIS Specialty Europe SE (Belgium Branch) and AXIS Specialty Europe SE (Netherlands Branch), respectively. Effective January 1, 2019, AXIS Specialty Europe conducts insurance business through its new branches in Belgium and the Netherlands.
d.the historical and implied future volatility of the fair value; and
(3) On May 1, 2007, the Company acquired the assets and operations of Media/Professional Insurance (Media/Pro) and recognized the definite life intangible assets detailed above.
Syndicate 2007 holds overseas deposits which include investments in private funds where the underlying investments are primarily U.S. government, non-U.S. government and corporate debt securities. The funds do not trade on an exchange, therefore, are not included within available for sale investments.
Effective January 1, 2020, the Company adopted the targeted changes to the impairment model for available for sale securities. The updated guidance amends the previous OTTI impairment model by requiring the recognition of impairments related to credit losses through an allowance account and limits the amount of credit loss to the difference between a security's amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position no longer impacts the determination of whether a credit loss exists.
The tables below present the financial instruments measured at fair value on a recurring basis for the periods indicated:
(2) Unrealized gains (losses) on fixed maturities are included in other comprehensive income ("OCI").
Short-tail business generally includes exposures for which losses are usually known and paid within a relatively short period of time after the underlying loss event has occurred. Short-tail business includes the underlying exposures in the property and other, marine, and aviation reserve classes in the insurance segment, and the underlying exposures in the property and other reserve class in the reinsurance segment.
The estimate of net reserves for losses and loss expenses related to catastrophes other than the COVID-19 pandemic represent the Company's best estimate of losses and loss expenses that have been incurred at December 31, 2020.The determination of these net reserves for losses and loss expenses is estimated by management after a catastrophe occurs by completing an in-depth analysis of individual contracts which may potentially have been impacted by the catastrophic event. This in-depth analysis may rely on several sources of information including:
A blend of these information sources is generally used to arrive at aggregate estimates of the ultimate losses arising from these catastrophic events.
•$6 million of net adverse prior year reserve development on property and other business primarily due to an increase in the loss estimate attributable to a specific large claim within the marine and aviation line of business related to the 2019 accident year, reserve strengthening within the engineering line of business mainly related to the 2016 to 2018 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.
•$71 million of net favorable prior year reserve development on motor business primarily due to the impact of the increase in the Ogden Rate and changes in related actuarial assumptions on several accident years.
With respect to key actuarial assumptions, the Company relies on its loss experience when establishing expected loss ratios and selecting loss development patterns. Loss reporting patterns for professional lines business tend to be volatile, causing instability in actuarial indications based on incurred loss data until an accident year or underwriting year matures. Consequently, initial reserves for losses and loss expenses for an accident year or underwriting year are generally based on an ELR Method and the consideration of relevant qualitative factors. As accident years and underwriting years mature, the Company increasingly gives more weight to methods that reflect its experience until its selections are based almost exclusively on experience-based methods. The Company evaluates the appropriateness of the transition to experience-based methods at the reserve class level, commencing this transition when it believes that its incurred loss development is sufficient to produce meaningful actuarial indications. The rate at which the Company transitions fully to sole reliance on experience-based methods can vary by reserve class and by year, depending on its assessment of the stability and relevance of such indications. For some professional lines in the insurance segment, the Company also relies on the evaluation of the open claim inventory in addition to the commonly employed actuarial methods when establishing reserves.
At December 31, 2020, letters of credit outstanding under the LOC Facility were $339 million (2019: $357 million). At December 31, 2020, the Participating Subsidiaries were in compliance with all LOC Facility covenants.
The Company's credit aggregation measurement and reporting process is facilitated by its credit risk exposure database, which contains relevant information on counterparty details and credit risk exposures. The database is accessible by management throughout the Company, therefore providing transparency to allow for the implementation of active exposure management strategies. The Company also licenses third-party tools to provide credit risk assessments. The Company monitors all its credit aggregations and, where appropriate, adjusts its internal risk limits and/or takes specific actions to reduce our risk exposures.
The following table presents dividends declared and paid related to the Company's common and preferred shares:
During 2020, total pension expenses were $29 million (2019: $28 million and 2018: $27 million) for the above retirement benefits.
The Company has invested $11 million in a co-investment with Stone Point for a partnership interest in T-VIII Co-Invest-A LP ("Trident VIII Co-Invest") which was formed by Stone Point to facilitate the investment by multiple investors in Duff & Phelps, LLC, a financial advisory firm. For the year ended December 31, 2020, the Company has not paid any fees to Stone Point in relation to Trident VIII Co-Invest.