We maintain office facilities in the United States, Bermuda, Europe, Canada, Australia, Singapore, Latin America and Middle East. We own the property in which our offices are located in Dublin, Ireland, and we lease office space in the other countries. We renew and enter into new leases in the ordinary course of business as required. Our global headquarters is located at 92 Pitts Bay Road, AXIS House, Pembroke HM 08, Bermuda. We believe that our office space is sufficient for us to conduct our operations for the foreseeable future.
Net income available to common shareholders of $602 million, or $6.10 per common share and $6.04 per diluted common share
Reserve for losses and loss expenses of $9.6 billion and reinsurance recoverable of $2.1 billion
Total debt of $992 million and a debt to total capital ratio of 14.5%
At February 24, 2016 the remaining authorization under the share repurchase program approved by our Board of Directors and effective through December 31, 2016, was $654 million
Operating income is a non-GAAP financial measure as defined in SEC Regulation G. See ‘Non-GAAP Financial Measures’ for reconciliation to nearest GAAP financial measure (net income available to common shareholders).
We are a Bermuda-based global provider of specialty lines insurance and treaty reinsurance products with operations in Bermuda, the United States, Europe, Singapore, Canada, Australia, Latin America and the Middle East. Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Re.
continued growth of our accident and health lines, which launched in 2010 and are focused on specialty accident and health products. In addition, during December 2015 the Company was granted a license by the Dubai Financial Services Authority to establish a representative office in the Dubai International Financial Center. The representative office will initially focus on marketing accident and health specialty reinsurance in the Middle East and Africa.
On January 25, 2015, the Company entered into an the Amalgamation Agreement with PartnerRe pursuant to which the Company would amalgamate with PartnerRe, and the two companies would continue as a single Bermuda exempted company. On August 3, 2015, the Company announced that it accepted a request from PartnerRe to terminate the Amalgamation Agreement. PartnerRe paid the Company $315 million to immediately terminate the Amalgamation Agreement, the amount comprising a termination fee of $280 million and a reimbursement of merger-related expenses of $35 million.
On April 1, 2015, the Company announced that it completed the acquisition of Ternian Insurance Group LLC, a leading provider of voluntary, limited benefit, affordable health plans and other employee benefits coverage for hourly and part-time workers and their families.
2014 versus 2013: The $34 million improvement in our underwriting result during 2014 compared to 2013 was primarily due to a decrease in the level of catastrophe and weather-related losses. The increase in net favorable prior year reserve development of $40 million also contributed to the improvement. These improvements were partially offset by increases in the current accident year loss ratios, exclusive of the catastrophe and weather-related losses, for both segments.
Our reinsurance segment's underwriting result improved by $40 million in 2014 compared to 2013. The increase was primarily attributable to the significantly lower level of catastrophe and weather-related losses and a $26 million increase in net favorable prior year development. Partially offsetting these increases were an increase in the current accident year loss ratio, after adjusting for catastrophe and weather-related losses, and an increase in acquisition costs. The current accident year loss ratio, after adjusting for catastrophe and weather-related losses, increased due to a change in the mix of business and an increase in agriculture loss reserves, partially offset by improved loss experience across most other lines of business.
The variability in our net investment income from 2013 through 2015 was largely attributable to the performance of our other investments. Income from this portfolio decreased by $37 million in 2015 compared to 2014, as a result of lower returns from our hedge funds and a decline in value of our investments in equity tranches of collateralized loan obligations ("CLO Equities") which declined in value along with other risk assets. Comparatively, income from this portfolio decreased by $71 million in 2014 compared to 2013, driven by lower returns from our hedge funds and reflected lower returns from global equity markets during 2014.
Excluding income from our other investments, net investment income was comparable to 2014. Net investment income increased $5 million in 2014, compared to 2013 due to an increase in average fixed maturities balances.
During 2015, we realized net investment losses of $138 million compared to net investment gains of $132 million in 2014 and net investment gains of $76 million in 2013. The net realized losses during 2015 were primarily due to foreign exchange losses on non-U.S. denominated fixed maturities, as a result of the strengthening of the US dollar, and an increase in other-than-temporary impairment ("OTTI") charges. OTTI charges were $73 million, $31 million and $9 million in 2015, 2014 and 2013, respectively. The increase in OTTI during 2015 was primarily attributable to losses recorded on high yield corporate debt securities as a result of the widening of credit spreads.
Tax expense decreased to $3 million in 2015, compared to $26 million in 2014. The effective tax rate can vary between periods depending on the distribution of net income amongst tax jurisdictions, as well as other factors. The primary factor in the decrease in the effective tax rate from 2014 to 2015, was the geographical distribution of our net income with the majority of our operating income as well as the PartnerRe merger termination fee received recognized in Bermuda. The tax expense increase to $26 million in 2014, from $7 million in 2013, was due to an increase in valuation allowances and a decrease in tax exempt income.
A $24 million decrease in interest expense and financing costs for 2015, compared to 2014, primarily reflected the repayment of the $500 million 5.75% senior unsecured notes which were due on December 1, 2014. The $13 million increase for 2014
On August 3, 2015, AXIS Capital announced that we accepted a request from PartnerRe to terminate the Amalgamation Agreement with the Company. PartnerRe paid the Company $315 million to immediately terminate the Amalgamation Agreement, the amount comprising a termination fee of $280 million and a reimbursement of merger-related expenses of $35 million.
In addition to the items noted above for operating ROACE, ROACE is also impacted by net realized investment gains (losses), foreign exchange losses (gains), termination fee received, reorganization and related expenses and the loss on repurchase of preferred shares. The termination fee received and foreign exchange movements contributed favorably to our 2015 results, and were only partially offset by the adverse impacts of net realized investment losses and reorganization and related expenses; thus ROACE exceeded operating ROACE in 2015. Net realized investment gains contributed favorably to our results in 2014 and 2013; thus ROACE exceeded operating ROACE in both years. Foreign exchange movements also contributed favorably to our results in 2014 while in 2013 we recorded foreign exchange losses, resulting in a larger increase in ROACE in 2014 compared to 2013.
Group (or consolidated) underwriting income is a non-GAAP financial measure as defined in SEC Regulation G. Refer Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information', for a reconciliation of consolidated underwriting income to the nearest GAAP financial measures (income before income taxes) for the years indicated above. Also, refer to 'Non-GAAP Financial Measures' for additional information related to the presentation of consolidated underwriting income.
The insurance segment's gross written premium increased by $48 million or 2% compared to 2014. The increase was driven by new business in our accident and health lines, growth in our professional and liability lines, increased deal premium in our credit and political risk lines compared to prior year, and certain new initiatives providing growth in professional lines. These increases were partially offset by the strength of the U.S. dollar as well as certain profitability enhancement initiatives announced during the third quarter of 2015, as well as reductions in our property lines.
U.S. casualty markets with both new business and rate increases reported. The increase in aviation was driven by differences in timing of renewals and new business.
The ceded gross written premium ratio increased by 1% in 2014 compared to 2013, and was also driven by increases in both segments. The increase in the ceded gross written premium ratio in the insurance segment related to changes in the business mix partially offset by changes in the structure of our reinsurance programs. The ceded gross written premium ratio increase in the reinsurance segment reflected new retrocessional covers primarily in the catastrophe lines.
The decrease in net premiums earned in the reinsurance segment in 2015, compared to 2014, was primarily driven by reductions in the business written in the catastrophe, agriculture, professional and credit & surety lines in recent periods, along with an increase in the premiums ceded primarily in the catastrophe lines. These decreases were partially offset by growth in the motor lines.
2015 versus 2014: The current accident year loss ratio increased to 65.6% in 2015 from 63.2% in 2014. The increase in 2015 was primarily due to changes in business mix, primarily reflecting the reduction in catastrophe exposures, the impact of lower rates, an increase in the insurance marine and liability and reinsurance credit & surety loss experience as well as an increased level of catastrophe and weather-related losses. In 2015, we recorded $100 million of such aggregate pre-tax losses, including $30 million related to the Tianjin port explosion and $70 million related to various weather events. Comparatively, in 2014 we recorded $93 million of pre-tax catastrophe and weather-related losses. The increases in the current accident year loss ratio were partially offset by improvement in loss experience across both segments' property and other reserving lines and the insurance professional lines.
We continue to monitor paid and incurred loss development for catastrophe events of prior years and update our estimates of ultimate losses accordingly.
In 2015, we recognized $23 million of net favorable prior year reserve development, the principal components of which were:
$25 million of net favorable prior year development on marine business, largely related to better than expected loss emergence in our energy offshore business spanning multiple years, particularly accident year 2014.
$14 million of net adverse prior year development on professional lines business, predominately reflecting reserve strengthening resulting from updated actuarial assumptions for our Australian professional lines and impacting accident years 2010 to 2014, partially offset by favorable development in certain US professional lines.
$27 million of net adverse prior year development on liability business, related to strengthening of specific individual claim reserves and a higher frequency of large auto liability claims in accident year 2014.
$24 million of net adverse prior year reserve development on liability business, related to developments on two particular claims and pertained to the 2009 and 2011 accident years.
$51 million of net adverse prior year reserve development on professional lines business, primarily related to strengthening of certain parts of our U.S. D&O lines in the 2011 and 2012 accident years and development on global financial crisis-related claims in our 2008 and 2009 accident years, as discussed in the overview.
$50 million of net favorable prior year reserve development on property and other business, largely driven by better than expected loss emergence on the 2006 through 2009 and the 2012 accident years.
$22 million of net favorable prior year reserve development on professional lines reinsurance business, primarily related to the 2007 through 2009 accident years and driven by better than expected loss emergence, for the reasons discussed in the overview..
The increase in the ratio in 2014 compared to 2013 was driven by increases in both segments. The increase in the insurance segment primarily reflected a reduction in ceding commissions following changes to our reinsurance programs and a change in the mix of business. In the reinsurance segment, the increase was driven by higher acquisition costs paid on certain lines of business and variances in accruals for loss-sensitive features in underlying contracts.
2015 versus 2014: Gross premiums written in 2015 increased by $48 million or 2% compared to 2014. The 2015 gross premiums written were negatively impacted by foreign exchange movements as well as certain profitability enhancement initiatives announced during the third quarter of 2015, which together reduced business written primarily in our professional, liability and property lines by approximately $78 million. After adjusting for foreign exchange and profitability enhancement initiatives we reported an increase in the segment premiums of $126 million primarily driven by growth in our accident and health, professional, liability and credit and political risk lines. The increase in our accident and health lines was primarily driven by new business. The professional lines increase was the result of growth in our lawyers' liability program in the U.S. and cyber liability initiatives. The liability increase reflected continued growth in the U.S. primary and excess casualty markets. The credit and political risk line reported increased deal premiums compared to the prior year. These increases were partially offset by a reduction in our property lines, reflecting continued competitive market conditions.
2014 versus 2013: Premiums ceded in 2014 were $756 million, or 30%, of gross premiums written, compared to $746 million, or 29%, in 2013. The increase in premiums ceded and the related ceded ratio was primarily due to changes in the business mix, partially offset by changes in the structure of our reinsurance program.
2015 versus 2014: Net premiums earned in 2015 decreased by $32 million or 2% (or 1% on a constant currency basis) compared to 2014. The decrease in net premiums earned was driven by the growth in our ceded reinsurance programs primarily covering our professional lines.
Acquisition Cost Ratio: The decrease in the current year acquisition cost ratio from 15.2% in 2014 to 14.5% in 2015 primarily reflected changes in the mix of business, higher ceded commissions received, following increases in our ceded reinsurance programs, and a federal excise tax adjustment, reflecting a change in the application of certain tax rules by the Internal Revenue Service in the United States. These decreases were partially offset by higher commissions paid on certain lines of business.
2014 versus 2013: The increase in gross written premium of $38 million was significantly impacted by a number of treaties written on a multi-year basis in the liability, property, catastrophe and motor lines and included written premium that related to future underwriting years of $131 million (2013: $13 million). After adjusting for the impact of the multi-year contracts, gross premiums written declined $80 million driven by professional, property and catastrophe lines, partially offset by increases in liability, motor and agriculture lines. The decrease in professional lines was primarily driven by timing differences, non-renewals and decreased treaty participations. The decreases in property and catastrophe were primarily driven by variances in premium adjustments, reduced participations and non-renewals. The increase in liability lines primarily reflected increased treaty participations and new business. The motor lines increase was primarily driven by increased treaty participations, while the agriculture increase reflected our growth initiatives for this line of business.
changes in business mix, reflecting a shift towards less volatile lines of business that carry a higher loss ratio;
increase in losses due to catastrophe and weather-related events. During 2015 we incurred pre-tax losses related to catastrophe and weather-related losses of $46 million, including $20 million related to the Tianjin port explosion and $26 million related to various weather events. Comparatively, in 2014 we incurred $27m of weather-related events;
2014 versus 2013: The reduced level of catastrophe and weather-related activity was the primary driver of the decrease in the 2014 current accident year loss ratio. During 2014, we recognized estimated aggregate pre-tax net losses of $27 million related to worldwide catastrophe and weather-related events. Comparatively, in 2013, we recognized pre-tax net losses (net of related reinstatement premiums) of $105 million related to worldwide catastrophe and weather-related events. After considering the impact of these catastrophe and weather-related losses, our 2014 current accident year loss ratio increased relative to 2013 primarily due to a change in the mix of business, an increase in agriculture loss reserves, partially offset by improved loss experience across most lines of business.
Acquisition Cost Ratio: The increase in the current year acquisition cost ratio from 22.5% in 2014 to 24.2% in 2015 was primarily impacted by higher acquisition costs paid in certain lines of business, the impact of loss-sensitive feature adjustments, primarily due to prior year reserve releases, and changes in the business mix.
The increase in the reinsurance segment’s acquisition cost ratio in 2014 compared to 2013 was driven by higher acquisition costs paid on certain lines of business and variances in accruals for loss-sensitive features in underlying contracts.
General and Administrative Expense Ratio: The increase in the general and administrative expense ratio from 7.1% in 2014 to 7.7% in 2015 was attributable to the impact of decreased net earned premiums and increased costs associated with new growth initiatives. These were partially offset by a reduction in the allocations of certain corporate expenses.
The increase in corporate expenses during 2014 compared to 2013 was primarily related to increased personnel costs as we expand our business globally, a reduction in certain allocated costs to the operating segments, and increased information technology and professional costs related to operational excellence initiatives. These initiatives are aimed at improving the effectiveness and efficiency of our operations and are expected to result in a reduction of expenses in future periods.
Foreign Exchange Losses (Gains): Some of our business is written in currencies other than the U.S. dollar. The foreign exchange losses (gains) for all years presented were largely driven by the re-measurement of net insurance related liabilities. During 2015, the foreign exchange gains were primarily driven by the depreciation of the euro, sterling and Australian dollar against the U.S. dollar. The foreign exchange gains in 2014 were primarily driven by the depreciation in the euro and the sterling. The appreciation of the euro and sterling had the opposite effect in 2013, with depreciation in the Australian dollar partially offsetting the 2013 losses.
Interest Expense and Financing Costs: Interest expense and financing costs, primarily related to interest due on our senior notes, decreased in 2015 as a result of the repayment of $500 million of our 5.75% senior unsecured notes which matured on December 1, 2014. The increase in 2014 compared to 2013 related to the issuance during the first quarter of 2014 of $250 million of 2.65% senior unsecured notes due in 2019 and $250 million of 5.15% senior unsecured notes due in 2045. Net proceeds from these two offerings were used towards the repayment of the $500 million of AXIS Capital’s 5.75% senior unsecured notes which matured on December 1, 2014.
The increased tax rate in 2014 compared to 2013 was impacted by an increase in our valuation allowance of $9 million related primarily to operating loss tax-carryforwards generated from branch operations in Australia and certain foreign tax
credits. Further increasing income tax expense in 2014 was a decrease in tax exempt income driven by a reduction in our U.S. tax-exempt portfolio.
Generally, sales of individual securities occur when there are changes in the relative value, credit quality, or duration of a particular issuer. We may also sell to rebalance our investment portfolio in order to change exposure to particular sectors or asset classes.
The level of OTTI losses increased in 2015 compared to 2014 and 2013 due mainly to losses recorded on high yield corporate debt securities as a result of the widening of credit spreads. The current year also included impairments on non-U.S denominated bond mutual funds that we were no longer able to assert that we had the intent to hold until full recovery of cost due to the future reallocation to other asset classes.
From time to time, we may economically hedge the foreign exchange exposure of non-U.S. denominated securities by entering into foreign exchange forward contracts. During 2015, our foreign exchange hedges resulted in $11 million of net gains which related primarily to securities denominated in the Australian dollar, Mexican peso and euro. Each of these currencies declined against the U.S. dollar during 2015.
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net realized investment gains and losses and the change in unrealized gains and losses generated by our investment portfolio. The following table provides a breakdown of the total return on cash and investments for the periods indicated:
At December 31, 2015, fixed maturities had a weighted average credit rating of AA- (2014: AA-), a book yield of 2.5% (2014: 2.5%) and an average duration of 3.3 years (2014: 3.0 years). The interest rate swap positions, which reduced duration to 2.9 years at December 31, 2014, were closed during 2015. When incorporating short-term investments and cash and cash equivalents into this calculation (bringing the total to $12.9 billion), the weighted average credit rating would be AA- (2014: AA-) and duration (including interest rate swaps) would be 3.0 years (2014: 2.7 years).
To calculate the weighted average credit rating for fixed maturities, we assign points to each rating with 29 points for the highest rating (AAA) and 2 points for the lowest rating (D) and then calculate the weighted average based on the fair values of the individual securities. Securities that are not rated by S&P, Moody’s or Fitch are excluded from weighted average calculations. At December 31, 2015, the fair value of fixed maturities not rated was $3.6 million (2014: $0.1 million).
In light of global concerns during recent years over the creditworthiness of certain sovereign debt within the eurozone, we have actively managed our exposure. Our current non-U.S. government holdings include exposure to only one country within the eurozone - Netherlands - which has a weighted average credit rating of AAA. At December 31, 2015, we held no sovereign debt issued by the peripheral European countries of Greece, Ireland, Italy, Portugal and Spain.
We also have an indirect eurozone exposure through our investment in non-U.S. bond mutual funds and exchange traded funds, which are classified as equities. At December 31, 2015 our exposure was $21 million (2014: $158 million).
Our holdings in non-U.S. government securities consisted of fixed income obligations of non-U.S. sovereigns, including government agencies, local governments and supranationals. The table below summarizes our aggregate fixed maturity exposures to governments in the eurozone and other non-U.S. government concentrations by fair value at December 31, 2015 and 2014:
At December 31, 2015, our non-U.S. government debt had net unrealized losses of $70 million (2014: $47 million) which included gross unrealized foreign exchange losses of $65 million (2014: $51 million), mainly on emerging market sovereign debt securities.
At December 31, 2015, our non-investment grade portfolio had a fair value of $986 million (2014: $985 million), a weighted average credit rating of B+ (2014: B+) and duration of 3.2 years (2014: 2.0 years). At December 31, 2015, our total corporate debt portfolio, including non-investment grade securities, had a duration of 3.3 years (2014: 2.8 years).
At December 31, 2015, our non-agency RMBS had an average duration and weighted average life of 0.3 years (2014: 0.5 years) and 4.0 years (2014: 4.3 years), respectively.
Our CMBS portfolio continues to be primarily high grade, with approximately 82% rated AA or better (2014: 84%). Additionally, the weighted average estimated subordination percentage for the portfolio was 32% at December 31, 2015 (2014: 30%), 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, 2015, the average duration and weighted average life was 2.8 years (2014: 3.2 years) and 3.5 years (2014: 3.8 years), respectively.
The average duration and weighted average life of our ABS portfolio at December 31, 2015 was 0.5 years (2014: 0.5 years) and 3.2 years (2014: 3.7 years), respectively.
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, 2015, the top three revenue streams related to transportation (44%), university (15%) and schools (12%) (2014: transportation (42%), university (17%) and hospital (7%)).
At December 31, 2015, the gross unrealized losses on our fixed maturities portfolio were $230 million (2014: $173 million).
The increase in gross unrealized losses on investment-grade fixed maturities reflected the upward shift in sovereign yield curves as a result of the increase in U.S. interest rates and the widening of credit spreads on investment grade corporate debt holdings.
The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for all non-investment grade fixed maturities in an unrealized loss position at December 31, 2015 and 2014:
At December 31, 2015, our equities portfolio had net unrealized gains of $22 million (2014: $36 million); the decrease was due to a decline in valuations reflective of the performance of the global equity markets.
The $162 million decrease in the fair value of our total hedge funds in 2015 was driven by $180 million of net redemptions offset by $18 million of price appreciation. Certain of these funds may be subject to restrictions on redemptions which may limit our ability to liquidate these investments in the short term. See Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments' for further details on these restrictions.
We have made total commitments of $310 million to managers of direct lending funds. To date, $88 million of this commitment has been called. We have made a total commitment of $60 million as a limited partner in a multi-strategy hedge fund, of which $48 million has been called to date.
The $28 million decrease in the fair value of our CLO - Equities was driven by a decline in value of the underlying collateral balances, in addition to the receipt of $13 million of cash distributions.
In order to support our obligations in regulatory jurisdictions where we operate as a non-admitted carrier, we provide collateral in the form of assets held in trust and, to a lesser extent, letters of credit. Refer to Item 8, Note 10(b) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further information on our collateral requirements upon issuance of certain letters of credit. The fair value of our restricted investments primarily relates to these items, as noted in the table below. Our restricted investments primarily consist of high-quality fixed maturity and short-term investment securities.
As a holding company, AXIS Capital has no operations of its own and its assets consist primarily of investments in its subsidiaries. Accordingly, AXIS Capital’s future cash flows depend on the availability of dividends or other statutorily permissible distributions, such as returns of capital, from its subsidiaries. The ability to pay such dividends and/or distributions is limited by the applicable laws and regulations of the various countries and states in which AXIS Capital’s subsidiaries operate (refer to Item 8, Note 21 to the Consolidated Financial Statements 'Statutory Financial Information' for further information), as well as the need to maintain capital levels to adequately support (re)insurance operations and to preserve financial strength ratings issued by independent rating agencies. During 2015, AXIS Capital received $420 million (2014: $1,221 million; 2013: $566 million) of distributions from its subsidiaries. AXIS Capital’s primary uses of funds are dividend payments to both common and preferred shareholders, share repurchases, interest and principal payments on debt, capital investments in subsidiaries and payment of corporate operating expenses. We believe the dividend/distribution capacity of AXIS Capital’s subsidiaries, which was over $1 billion at December 31, 2015, will provide AXIS Capital with sufficient liquidity for the foreseeable future.
AXIS Capital’s operating subsidiaries primarily derive cash from the net inflow of premiums less claim payments related to underwriting activities and from net investment income. Historically, these cash receipts have been sufficient to fund the operating expenses of these subsidiaries, as well as to fund dividend payments to AXIS Capital. The subsidiaries’ remaining cash flows are generally reinvested in our investment portfolio, although they have also been used to fund common share repurchases in recent periods.
The cash outflows from investing activities in 2015 related principally to the net purchases of fixed maturities of $172 million (2014: $162 million, 2013: $561 million) and the purchase of mortgage loans of $206 million partially offset by the net proceeds from the sale of other investments. The net purchases in all years were primarily a result of reinvesting of our net investment income.
Dividends paid to common and preferred shareholders are the primary source of recurring cash flows used in financing activities and totaled $159 million in 2015 (2014: $158 million, 2013: $158 million). Financing cash outflows also included common share repurchases totaling $332 million, $543 million and $472 million in 2015, 2014 and 2013, respectively. We note that market share repurchases are completely discretionary; the timing and amount of the additional repurchase transactions will depend on a variety of factors including, but not limited to, global (re)insurance and financial market conditions and opportunities, capital management and regulatory considerations (see ‘Capital Resources - Share Repurchases’ below). Cash outflows in 2014 and 2013 were partially offset by $15 million and $50 million third party investment in shares issued by Ventures Re, respectively (refer to noncontrolling interests discussion in Item 8, Note 14 of the Consolidated Financial Statements 'Noncontrolling Interests'). During 2013, financing cash flows also included a net $118 million inflow related to the preferred share transactions discussed under 'Capital Resources - Preferred Shares' below.
In addition to common equity, we have utilized other external sources of financing, including debt, preferred shares and credit facilities to support our business operations. We believe that we hold sufficient capital to allow us to take advantage of market
On January 27, 2016 we redeemed the remaining 28,430 Series B preferred shares, for their aggregate liquidation preference.
During May 2013, we issued 9 million of 5.50% Series D preferred shares with a liquidation preference of $25.00 per share for gross proceeds of $225 million. Dividends on the Series D preferred shares are non-cumulative; to the extent declared, dividends will accumulate, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum. We may redeem these shares on or after June 1, 2018 at a redemption price of $25.00 per share.
From March 2013 we are party to a $250 million credit facility (the “Credit Facility”), which provides us with combined borrowing and letter of credit issuance capacity up to the aggregate amount of the facility. At our request, and subject to certain conditions, the aggregate commitment of this facility may be increased by up to $150 million. Interest on loans issued under this facility is payable based on underlying market rates at the time of loan issuance. While any loans are unsecured, we have the option to issue letters of credit on a secured basis in order to reduce associated fees. This facility is subject to certain non-financial covenants that we believe are customary for facilities of this type, including limitations on fundamental changes, the incurrence of additional indebtedness and liens and certain transactions with affiliates and investments, as defined in the facility documents.
Maintenance of a minimum consolidated net worth, with the minimum being equal to the sum of $3.802 billion plus 25% of consolidated net income (if positive) for each semi-annual fiscal period ending on or after June 30, 2013 plus 25% of the net cash proceeds received by AXIS Capital from the issuance of its capital stock during each such semi-annual fiscal period. For the purposes of this covenant, consolidated net worth excludes unrealized appreciation (depreciation) on our available for sale investments.
At December 31, 2015, this facility required a minimum consolidated net worth of $4.384 billion and our actual consolidated net worth, as calculated under the provisions of the Credit Facility, was $6.016 billion. We had a consolidated debt to total capital ratio, calculated in accordance with the Credit Facility provisions, of 0.14 to 1 and each of our material insurance/reinsurance subsidiaries party to the agreement had an A.M. Best financial strength rating of A+.
At December 31, 2015, we had $341 million and $nil letters of credit outstanding under the LOC Facility and the Credit Facility, respectively. The remaining available capacity under these facilities was $409 million, before taking into consideration the $150 million potential increase in the amount available under the Credit Facility. There was no debt outstanding under the Credit Facility. We were in compliance with all covenants of the facilities at December 31, 2015.
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”.
We have $379 million of unfunded investment commitments related to our investments in hedge, direct-lending, real estate and bank revolver opportunity funds, which are callable by our investment managers. For further details, refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments'.
Nevertheless, other significant accounting policies are important to understanding our Consolidated Financial Statements. Refer Item 8, Note 2 to the Consolidated Financial Statements ‘Significant Accounting Policies’ for further information.
We believe that the amounts included in our Consolidated Financial Statements reflect our best judgment. However, factors such as those described in Item 1A ‘Risk Factors’ could cause actual events or results to differ materially from our underlying assumptions and estimates; this could lead to a material adverse impact on our results of operations, financial condition and/or liquidity.
Bornhuetter-Ferguson Method (“BF”): This method can be seen as a combination of the ELR and Loss Development Methods, under which the Loss Development Method is given progressively more weight as an accident year or underwriting year matures. The main advantage of the BF Method is that it provides a more stable estimate of ultimate losses than the Loss Development Method at earlier stages of development, while remaining more sensitive to emerging loss development than the ELR Method. In addition, the BF Method allows for the incorporation of external market
An important and distinguishing feature of many of these contracts, though, is our contractual right, subsequent to payment of a claim to our 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 our credit and political risk loss reserves. The lag between the date of a claim payment and our ultimate recovery from the corresponding security can result in negative case reserves at a point in time (as was the case at December 31, 2015 and 2014). The nature of the underlying collateral is specific to each transaction and we also 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. Our estimates of value 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 use of the above actuarial methods requires us to make certain explicit assumptions, the most significant of which are: (1) expected loss ratios and (2) loss development patterns.
Similarly, we also placed significant reliance on industry benchmarks in selecting our loss development patterns in earlier years. Over time, we have given varying degrees of weight to our own historical loss experience, as further discussed in the ‘Claim Tail Analysis’ section.
Beginning in 2013, the Company significantly enhanced the capabilities and resources dedicated to the actuarial reserving function. Consequently, from the first quarter of 2014, management began to rely upon its internal actuarial reserving function for the quarterly reserve evaluation process rather than utilizing the services of an independent actuarial firm. On an annual basis, the Company uses an independent actuarial firm to provide an actuarial opinion on the reasonableness of our loss reserves for each of our operating subsidiaries and statutory reporting entities; such actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm also discusses its conclusions from the annual review with management and presents its findings to our Board of Directors.
Due to the relatively short reporting and settlement patterns for our short-tail business, we generally place more weight upon experience-based methods and other qualitative considerations in establishing reserves for both our recent and more mature accident years. As our experience developed more favorably than our initial expectations, we recognized favorable prior year development on short-tail business in recent years. See 'Underwriting Results - Group - Prior Year Reserve Development' for a discussion of the net favorable reserve development recognized when re-estimating our ultimate losses for short-tail business during the past three years.
For our professional lines business, claim payment and reporting patterns are typically medium to long-tail in nature. The underlying business is predominantly written on a claims-made basis, with the majority of reinsurance treaties being written on a risks attaching basis. With respect to our key actuarial assumptions, we are progressively giving more weight to our own experience when establishing our expected loss ratios and our selected loss development patterns, though we continue to consider industry benchmarks.
As previously described, the estimation of the value of our recoveries on credit and political risk business requires significant management judgment. At December 31, 2015, our total estimated recoveries on credit insurance business were $71 million, while comparatively, at December 31, 2014, our estimated recoveries were $79 million.
Commencing with our fourth quarter 2012 reserving process, we began to give weight to actuarial methods that reflect our actual experience for liability business as we believed that our oldest accident years were at a stage of expected development where such methods would produce meaningful actuarial indications. In 2015, we continued to give weight to experience-based methods for the insurance liability classes for accident years 2008 and prior, which led to the recognition of $3 million of net favorable prior year reserve development during 2015 on those accident years. For the reinsurance liability lines, we continued to give weight to experience-based methods for accident years 2009 and prior, resulting in the recognition of $56 million of net favorable prior year reserve development for those years during 2015.
The following tables show the effect on our estimate of gross loss reserves of reasonably likely changes in the two key assumptions used to estimate our gross loss reserves at December 31, 2015.
The second estimate is the amount of reinsurance recoverable on unpaid and paid losses that we will ultimately be unable to recover from reinsurers. The majority of our reinsurance recoverable on unpaid losses will not be due for collection until some point in the future. As a result, the amount we ultimately collect may differ from our estimate due to the ability and willingness of reinsurers to pay our claims, which may be negatively impacted by factors such as insolvency, contractual disputes over contract language or coverage and/or other reasons. Additionally, over the period of time before the amounts become due to us, economic conditions and/or operational performance of a particular reinsurer may deteriorate and this
For the majority of our insurance business, we receive a fixed premium which is identified in the policy and recorded as unearned premium on the inception date of the contract. This premium will be adjusted only if the underlying insured values ultimately differ. Accordingly, we actively monitor underlying insured values and record adjustment premiums in the period in which amounts are reasonably determinable. Gross premiums written on a fixed premium basis accounted for approximately 90%, 91% and 90% of the segment’s total for the years ended December 31, 2015, 2014 and 2013, respectively. A portion of this business is written through MGAs, third parties granted authority to bind risks on our behalf in accordance with our underwriting guidelines. For this business, we record premiums based on monthly statements received from the MGAs. Due to inherent reporting delays, we generally record premiums written via MGAs one month in arrears. In the event that a significant individual statement is not received, we record our best estimate based upon our historical experience.
In our credit and political risk line of business, we write certain policies on a multi-year basis with premiums generally payable in installments. We record premiums at the inception of the policy based on our best estimate of total premiums, including assumptions relating to prepayments/refinancings. Furthermore, certain contracts within this line of business meet the U.S. GAAP definition of a financial guarantee insurance contract. Premiums for such contracts are recognized as the present value of the contractual premiums due or expected to be collected using a discount rate that reflects the risk-free rate at the inception of contract. Due to the scope exemption for insurance contracts that are similar to financial guarantee insurance contracts, the determination of whether certain of our credit and political risk contracts fall within the scope of the U.S. GAAP definition for financial guarantee contracts requires significant management judgment. For the year ended December 31, 2015 we did not write any contracts that meet the definition of a financial guarantee insurance contract, and in the year ended December 31, 2014, our total premiums from financial guarantee insurance contracts were immaterial in the
context of total gross premiums written for the segment. At December 31, 2015, the average duration of the outstanding unearned premiums written for our credit and political risk line of business was 4.8 years (2014: 4.3 years).
For multi-year contracts where reinsurance premiums are payable in annual installments, premiums are recorded at the inception of the contract based on management’s best estimate of total premiums to be received. However, premiums are recognized on an annual basis for multi-year contracts where the cedant has the ability to unilaterally commute or cancel coverage within the term of the policy. The remaining annual premiums are included as written at each successive anniversary date within the multi-year term.
Our excess of loss reinsurance contracts with cedants typically include provisions for a deposit or minimum premiums payable to us, which are generally considered to be the best estimate of the excess of loss reinsurance written premium at inception. 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. We record adjustments to the deposit/minimum premiums in the period during which they become determinable. Excess of loss contracts accounted for 38%, 38% and 42% of our reinsurance segment’s total gross premiums written for the years ended December 31, 2015, 2014 and 2013, respectively. The percentage of excess of loss premiums written during 2015 was consistent with the percentage written in 2014. The decrease during 2014 compared to 2013 was primarily driven by an increase in proportional multi-year premiums written in our liability lines and an increase in the portion of motor and agriculture business written on a proportional basis, partially offset by the renewal timing of a large proportional treaty in professional lines.
Our estimates on proportional treaties incepting during the year were as follows:
Hedge Funds, Direct Lending Funds, Real Estate Funds and CLO Equity Funds
We measure the fair value for hedge, direct lending, real estate and CLO equity funds by obtaining the net asset value (NAV) as advised by our external fund manager or third party administrator. For any funds for which we did not receive a December 31, 2015 net asset value, we have recorded an estimate of the change in fair value for the latest period based on return estimates obtained from the fund managers and the inclusion of subscriptions, redemptions, drawdowns and distributions. Accordingly, we do not typically have a reporting lag in our fair value measurements for these funds. Historically, our estimated NAVs have not significantly diverged from the subsequent final audited NAVs. Where we have the
We have also invested directly in CLO Equities, also known as “cash flow CLOs” in the industry. In 2015, the CLO - Equity market continues to be mostly inactive with only a small number of transactions being observed in the market and even fewer still involving deals we hold. With all of our direct investments in CLO - Equities past the end of their reinvestment period, there is uncertainty over the remaining time until maturity. As such our direct investments in CLO - Equities are valued at the lower of the liquidation value and our internal discounted cash flow modelled estimate of fair value. At December 31, 2015, the estimated fair value for CLO - Equities was $27 million (2014: $37 million).
The following significant inputs were used in our internal discounted cash flow model.
Because our available-for-sale ("AFS") investment portfolio is the largest component of our consolidated assets and a multiple of shareholders’ equity, OTTI could be material to our financial condition and operating results particularly during periods of dislocation in the financial markets. During 2015, we recorded a total OTTI charge in earnings of $73 million (2014: $31 million; 2013: $9 million). Refer to the ‘Net Investment Income and Net Realized Investment Gains (Losses)’ section above for further details.
The financial condition, near-term and long-term prospects for the issuer of the security, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices.
In light of the volatile global equity markets we have experienced in recent years, we generally impair any equities for which we do not forecast a recovery to cost within two years. Further, we generally impair an equity security if its value is below its cost by 15%. We have also established parameters for identifying potential impaired equity securities for fundamental analysis based on the severity, in either percentage or absolute dollar terms, of the unrealized loss position.
Operating income represents after-tax operational results without consideration of after-tax net realized investment gains (losses), foreign exchange gains (losses), termination fee received, reorganization and related expenses and losses on repurchase of preferred shares. We also present diluted operating income per common share and operating return on average common equity (“operating ROACE”), which are derived from the non-GAAP operating income measure.
Tax cost (benefit) of $3,021, $2,853 and ($2,459) for 2015, 2014 and 2013, 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.
Refer to Note 12 to the Consolidated Financial Statements 'Earnings Per Common Share' for further details on the dilution calculation.
A reconciliation of consolidated underwriting income to income before income taxes (the nearest GAAP financial measure) can be found in Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information'. Underwriting-related general and administrative are reconciled to general and administrative expenses (the nearest GAAP financial measure) within 'Underwriting Results - Group'.
Foreign exchange gains (or losses) 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 gains (or losses) on our available-for-sale investments in other comprehensive income and foreign exchange gains (or losses) realized upon the sale of these investments in net realized investments gain (or losses). These unrealized and realized foreign exchange rate movements generally offset a large portion of the foreign exchange gains (or losses) reported separately in earnings, thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As such, the Consolidated Statements of Operations foreign exchange gains (or losses) in isolation are not a fair representation of the performance of our business.
Reorganization and 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.
In this regard, certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (or losses), foreign exchange gains (or losses), termination fee received, reorganization and related expenses and losses on repurchase of preferred shares to understand the profitability of recurring sources of income.
We believe that showing net income available to common shareholders exclusive of net realized investment gains (or losses), foreign exchange gains (or losses), termination fee received, reorganization and related expenses and losses on repurchase of preferred shares reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
AXIS Capital Holdings Limited (“AXIS Capital”) is the Bermuda-based holding company for the AXIS group of companies, collectively the “Company”. AXIS Capital was incorporated on December 9, 2002, under the laws of Bermuda. Through its subsidiaries and branches organized in Bermuda, the United States, Europe, Singapore, Canada, Australia and Latin America. AXIS Capital provides a broad range of (re)insurance products on a worldwide basis under two distinct global underwriting platforms, AXIS Insurance and AXIS Re. In these notes, the terms “we,” “us,” “our,” or the “Company” refer to AXIS Capital and its direct and indirect subsidiaries.
On January 25, 2015, the Company entered into an Agreement and Plan of Amalgamation (the "Amalgamation Agreement") with PartnerRe Ltd., a Bermuda exempted company ("PartnerRe") pursuant to which the Company would amalgamate with PartnerRe, and the two companies would continue as a single Bermuda exempted company. On August 3, 2015, the Company announced that it accepted a request from PartnerRe to terminate the Amalgamation Agreement. PartnerRe paid the Company $315 million to immediately terminate the Amalgamation Agreement, the amount comprising a termination fee of $280 million and a reimbursement of merger related expenses of $35 million.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission ("SEC") and include the accounts of AXIS Capital, its wholly-owned subsidiaries, and variable interest entities (“VIEs”) in which the Company is considered the primary beneficiary. All inter-company accounts and transactions have been eliminated.
Our fixed maturities and equities classified as “available for sale” are reported at fair value at the balance sheet date. Refer to Note 6 'Fair Value Measurements' for additional information regarding the determination of fair value. The change in fair value (net unrealized gain or loss) on our available for sale investments, net of tax, is included as a separate component of accumulated other comprehensive income (loss) (“AOCI”) in shareholders’ equity.
We record other investments at fair value (refer to Note 6 'Fair Value Measurements'), with both changes in fair value and realized gains/losses reported in net investment income.
Insurance premiums written are recorded in accordance with the terms of the underlying policies. Reinsurance premiums are recorded at the inception of the contract and are estimated based upon information received from ceding companies. For multi-year contracts where (re)insurance premiums are payable in annual installments, premiums are recorded at the inception of the contract based on management’s best estimate of total premiums to be received. However, premiums are normally recognized on an annual basis for multi-year contracts where the cedant has the ability to unilaterally commute or cancel coverage within the term of the policy. The remaining annual premiums are included as written at each successive anniversary date within the multi-year term.
Reinstatement premiums are recognized and earned at the time a loss event occurs, where the coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The accrual of reinstatement premiums is based on our estimate of losses and loss adjustment expenses, which reflects management’s judgment, as described in Note 2(d) section 'Losses and Loss Expenses' below.
The Company is authorized to issue restricted stock awards and units, stock options and other equity-based awards to its employees and directors. The fair value of service-based awards is measured at the grant date, with the associated expense recognized on a straight-line basis over the service period. The fair value of performance-based awards ("PSUs") is measured at the grant date based on pre-established targets relating to certain performance based measures achieved by the Company, with the associated expense recognized on a straight-line basis over the applicable performance and vesting period. The compensation expense for PSUs is subject to a periodic review and adjustment taking into account actual performance of the Company. The fair value of the liability associated with cash-settled awards is re-measured at each balance sheet date, with the effects recognized as an increase or decrease to share-based compensation expense for the period. Forfeiture benefits are estimated at the time of grant and incorporated in the determination of share-based compensation expense.
We may enter into derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts as part of our overall foreign currency risk management strategy, to obtain exposure to a particular financial market or for yield enhancement. During 2013, we began to write derivative based risk management products designed to address weather and commodity price risks, with the objective of generating profits on a portfolio basis. From time to time we may also enter into (re)insurance contracts that meet the FASB’s definition of a derivative contract.
We classify intangible assets into three categories: (1) intangible assets with finite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization, and (3) goodwill.
During the second quarter of 2015, the Company early adopted the Accounting Standards Update (“ASU”) 2015-02, “Amendments to the Consolidation Analysis” issued by the Financial Accounting Standards Board (the “FASB”). The adoption of this amended accounting guidance resulted in the Company concluding that it no longer had a variable interest in AXIS Ventures Reinsurance Limited (“Ventures Re”) and therefore it was no longer required to consolidate the results of operations and the financial position of Ventures Re in its Consolidated Financial Statements. The Company adopted this revised accounting guidance using the modified retrospective approach and ceased to consolidate Ventures Re effective as of January 1, 2015. There was no impact from the adoption of ASU 2015-02 on the Company’s cumulative retained earnings. Refer to Note 14 'Noncontrolling Interests' for more information.
The new consolidation guidance did not have an impact on any other investments currently held by the Company.
In May 2014, the FASB issued new guidance on revenue recognition affecting any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts are not in scope of the new guidance). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued an ASU to defer the effective date for all entities by one year. This guidance is effective for reporting periods beginning after December 15, 2017, and early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.
In May 2015, the FASB issued new guidance eliminating the requirement to categorize investments measured using the NAV practical expedient in the fair value hierarchy table. This guidance is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. The guidance will be applied retrospectively. As the new guidance is disclosure-related only, the adoption of this guidance is not expected to impact our results of operations, financial condition or liquidity.
The guidance also amends how entities present certain changes in fair value of financial liabilities, modifies certain disclosure requirements for financial instruments and clarifies that the valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with the entity’s other deferred tax assets.
We estimate that the annual amortization expense for our total intangible assets with a finite life will be approximately $2 million per year in 2016 through 2018 and $1 million per year in 2019 and 2020. The estimated remaining useful lives of these assets range from three to nine years.
Intangible assets with an indefinite life consist primarily of U.S. state licenses that provide a legal right to transact business indefinitely. Our impairment reviews for goodwill and indefinite lived intangibles did not result in the recognition of impairment losses for the years ended December 31, 2015, 2014 and 2013.
The amortized cost or cost and fair values of our fixed maturities and equities were as follows:
In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in
The contractual maturities of fixed maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2015, 2,314 fixed maturities (2014: 1,388) were in an unrealized loss position of $230 million (2014: $173 million) of which $39 million (2014: $36 million) was related to securities below investment grade or not rated.
At December 31, 2015, 35 securities (2014: 9) were in an unrealized loss position of $9 million (2014: $8 million).
The following table provides a breakdown of our mortgage loans held-for-investment:
We have a high quality mortgage loan portfolio with debt service coverage ratios in excess of 1.3x and loan-to-value ratios of less than 65%; there are no credit losses associated with the commercial mortgage loans that we hold at December 31, 2015.
The following tables provide a breakdown of our investments in hedge funds, direct lending funds and CLO Equities, together with additional information relating to the liquidity of each category:
At December 31, 2015, we have $222 million (2014: $88 million) of unfunded commitments within our other investments portfolio relating to our future investments in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to three years.
At December 31, 2015, we have $12 million (2014: $35 million) of unfunded commitments as a limited partner in a multi-strategy hedge fund. Once the full amount of committed capital has been called by the General Partner, the assets will not be fully returned until the completion of the fund's investment term which ends in March, 2019. The General Partner then has the option to extend the term by up to three years.
During 2015, we made a $100 million commitment as a limited partner in a fund which invests in real estate and real estate securities and businesses. The fund is subject to a three year commitment period and a total fund life of eight years during which time we are not eligible to redeem our investment. At December 31, 2015, $95 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the real estate funds line of the table above.
Non-U.S. government obligations are evaluated for credit loss primarily through qualitative assessments of the likelihood of credit loss using information such as duration and severity of unrealized losses, as well as credit ratings and price volatility. At December 31, 2015, our holdings in sovereign debt, including $21 million (2014: $119 million) relating to the eurozone countries, were substantially all investment-grade securities. The gross unrealized losses of $72 million at December 31, 2015 were mainly due to pricing and foreign exchange losses on emerging market debt. Based on our analysis, we do not anticipate any credit losses on our non-U.S. government fixed maturities at December 31, 2015. In 2015, the OTTI charges on non-U.S. government fixed maturities mainly related to unrealized foreign exchange losses on certain securities where forecasted recovery was uncertain.
To estimate credit losses for corporate debt securities, our projected cash flows are primarily driven by our assumptions regarding the probability of default and the severity associated with those defaults. Our default and loss severity rates are based on credit rating, credit analysis, industry analyst reports and forecasts, Moody’s historical default data and any other data relevant to the recoverability of the security. In 2015, the OTTI charges on corporate debt securities were mainly related to energy sector exposure, unrealized foreign exchange losses on certain securities where forecasted recovery was uncertain, as well as our intent to sell.
Our investments in ABS at December 31, 2015 consist mainly of CLO debt tranched securities (“CLO Debt”) purchased primarily as new issues during 2013-2015. Of these new issues all had credit ratings of AA or better. We utilize a scenario-based approach to reviewing our CLO Debt portfolio based on the current asset market price. We also review subordination levels of our securities to determine their ability to absorb credit losses of underlying collateral. If losses are forecast to be below the subordination level for the tranche held by us, the security is determined not to be impaired. We have concluded there are no credit losses anticipated for any of our CLO Debt at December 31, 2015.
Fair value is defined as the price to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
is sourced from multiple vendors, when available, and we maintain a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, we obtain non-binding quotes from broker-dealers who are active in the corresponding markets.
Agency RMBS securities consist of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. The fair values of these securities are priced using a mortgage pool specific model which uses daily inputs from the active to be announced market and the spread associated with each mortgage pool based on vintage. As the significant inputs are observable market inputs, the fair values of Agency RMBS securities are classified within Level 2.
CMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using a pricing model which uses dealer quotes and other available trade information along with security level characteristics to determine deal specific spreads. As the significant inputs are observable market inputs, the fair values of CMBS securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3.
Non-Agency RMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using an option adjusted spread model or other relevant models, which use inputs including available trade information or broker quotes, prepayment and default projections based on historical statistics of the underlying collateral and current market data. As the significant inputs are observable market inputs, the fair values of Non-Agency RMBS securities are classified withing Level 2.
Equity securities include exchange-traded funds, and bond mutual funds. For exchange-traded funds, we classified these within Level 1 as their fair values are based on unadjusted quoted market prices in active markets. Our investments in bond mutual funds have daily liquidity, with redemption based on the NAV of the funds. Accordingly, we have classified these investments as Level 2.
As a practical expedient, we estimate fair values for hedge funds, direct lending funds, real estate funds and the CLO fund using NAVs as advised by external fund managers or third party administrators. For each of these funds, the NAV is based on the manager's or administrator's valuation of the underlying holdings in accordance with the fund's governing documents and in accordance with U.S. GAAP. For any funds for which we have not yet received a NAV concurrent with our period end date, we record an estimate of the change in fair value for the period subsequent to the most recent NAV. Such estimates are based on return estimates for the period between the most recently issued NAV and the period end date, and the inclusion of any subscriptions, redemptions, drawdowns and distributions. Estimates are obtained from the relevant fund managers. Accordingly, we do not typically have a reporting lag in our fair value measurements for these funds. Historically, our valuation estimates incorporating these return estimates have not significantly diverged from the subsequent NAVs.
For our hedge fund investments with liquidity terms allowing us to fully redeem our holdings at the applicable NAV in the near term, we have classified these investments as Level 2. Certain investments in hedge funds, all of our direct lending funds, our real estate fund and our CLO fund have redemption restrictions (see Note 5(c) 'Investments' for further details) that prevent us from redeeming in the near term and therefore we have classified these investments as Level 3.
At December 31, 2015, our direct investments in CLO - Equities were classified within Level 3 as we estimated the fair value for these securities using an income approach valuation technique (discounted cash flow model) due to the lack of observable and relevant trades in the secondary markets.
Insurance-linked securities comprise an investment in a catastrophe bond. We obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. These securities are classified within Level 3.
(1) Measured in Heating Degree Days ("HDD") which is the number of degrees the daily temperature is below a reference temperature. The cumulative HDD for the duration of the derivatives contract is compared to the strike value to determine the necessary settlement.
On a quarterly basis, our valuation process for CLO - Equities includes a review of the underlying cash flows and key assumptions used in the discounted cash flow model, and a review of the underlying collateral along with related discount margin by credit quality bucket. We review and update the above significant unobservable inputs based on information
obtained from secondary markets, including from the managers of the CLOs we hold. These inputs are the responsibility of management and, in order to ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we update our assumptions through regular communication with industry participants and ongoing monitoring of the deals in which we participate (e.g. default and loss severity rate trends), we maintain a current understanding of the market conditions, historical results, as well as emerging trends that may impact future cash flows. By maintaining this current understanding, we are able to assess the reasonableness of the inputs we ultimately use in our model.
Weather derivatives relate to non-exchange traded risk management products addressing weather risks. We use observable market inputs and unobservable inputs in combination with industry or internally-developed simulation models to determine fair value; these models may reference market price information for similar instruments. The pricing models are internally reviewed by Risk Management personnel prior to implementation and are reviewed periodically thereafter.
The carrying values of cash equivalents (including restricted amounts), accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated their fair values at December 31, 2015, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
The carrying value of mortgage loans held-for-investment approximated their fair value at December 31, 2015, due to the fact that the loans were issued during the year. The estimated fair value of mortgage loans is primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk, or is determined from pricing for similar loans. Mortgage loans are not actively traded and their respective fair values are classified within Level 3.
Our investment portfolio contains a large percentage of fixed maturities which exposes us to significant interest rate risk. As part of our overall management of this risk, we may use interest rate swaps.
We write business with loss experience generally characterized as low frequency and high severity in nature, which can result in volatility in our financial results. During 2015, 2014 and 2013, respectively, we recognized aggregate net losses and loss expenses of $100 million, $93 million and $201 million in relation to catastrophe and weather-related events.
Our long-tail business consists primarily of liability and motor lines. In 2015, 2014 and 2013, our reinsurance liability lines and motor business contributed net favorable prior year reserve development of $82 million, $40 million and $91 million, respectively, primarily reflecting the greater weight management is giving to experience based indications which were generally favorable in 2015 for the accident years 2003 through 2010 and in 2014 and 2013 for the accident years 2004 through 2008. This favorable development was partially offset by adverse development in our insurance liability business of $27 million, $23 million and $24 million in 2015, 2014 and 2013, respectively, relating primarily to an increase in loss estimates for certain specific claim reserves, as well as a higher frequency of large auto liability claims which impacted the adverse reserve development in 2015.
We purchase treaty and facultative reinsurance to reduce exposure to significant losses. Facultative reinsurance provides coverage for all or a portion of the losses incurred for a single policy and we separately negotiate each facultative contract. Treaty reinsurance provides coverage for a specified type or category of risks. Our treaty reinsurance agreements provide this coverage on either an excess of loss or a proportional basis. Excess of loss covers provide a contractually set amount of coverage after a specified loss amount has been reached. These covers can be purchased on a package policy basis, which provide us with coverage for a number of lines of business within one contract. In contrast, proportional covers provide us with a specified percentage of coverage from the first dollar of loss.
On March 13, 2014, AXIS Specialty Finance PLC, a 100% owned finance subsidiary, issued $250 million aggregate principal amount of 2.65% senior unsecured notes (the "2.65% Senior Notes") at an issue price of 99.896% and $250 million aggregate principal amount of 5.15% senior unsecured notes (the "5.15% Senior Notes", and, together with the 5.875% Senior Notes and the 2.65% Senior Notes, the "Senior Notes") at an issue price of 99.474%. The net proceeds of the issuance, after consideration of the offering discount and underwriting expenses and commissions, totaled approximately $248 million and $246 million for the 2.65% Senior Notes and the 5.15% Senior Notes, respectively. Interest on the 2.65% Senior Notes and the 5.15% Senior Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. Unless previously redeemed, the 2.65% Senior Notes and the 5.15% Senior Notes will mature on April 1, 2019 and April 1, 2045, respectively. The 2.65% Senior Notes and the 5.15% Senior Notes are ranked as unsecured senior obligations of AXIS Specialty Finance PLC. AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance PLC under the 2.65% Senior Notes and the 5.15% Senior Notes. AXIS Capital's obligations under this guarantee are unsecured and senior and rank equally with all other senior obligations of AXIS Capital.
We have the option to redeem the Senior Notes at any time and from time to time, in whole or in part, at a ''make-whole'' redemption price, which is equal to the greater of the aggregate principal amount or the sum of the present values of the
Interest expense recognized in relation to our Senior Notes includes interest payable, amortization of the offering discounts and amortization of debt offering expenses. The offering discounts and debt offering expenses are amortized over the period of time during which the Senior Notes are outstanding. During 2015, we incurred interest expense of $50 million (2014: $72 million, 2013: $59 million).
At December 31, 2015, we were in compliance with these limits.
events which may have a material impact on their creditworthiness, recommends counterparty tolerance levels for different types of ceded business and monitors concentrations of credit risk. This assessment considers a wide range of individual attributes, including a review of the counterparty’s financial strength, industry position and other qualitative factors. Generally, the Committee requires that reinsurers who do not meet specified requirements provide collateral.
We lease office space under operating leases which expire at various dates. We renew and enter into new leases in the ordinary course of business, as required. During 2015, total rent expense with respect to these operating leases was $28 million (2014: $27 million; 2013: $29 million).
We purchase reinsurance coverage for our insurance lines of business. The minimum reinsurance premiums are contractually due in advance on a quarterly basis. Accordingly at December 31, 2015, we have an outstanding reinsurance purchase commitment of $29 million, all of which is due in 2016. Actual payments under the reinsurance contracts will depend on the underlying subject premium and may exceed the minimum premium.
During 2015, the total cash dividends declared per common share were $1.22 (2014: $1.10; 2013: $1.02).
On December 7, 2015, our Board of Directors authorized a new share repurchase plan for up to $750 million of our common shares through December 31, 2016. The new plan is effective December 31, 2015.
Amounts in 2015 include 4,149,378 common shares acquired under the accelerated share repurchase program (see below for more detail).
On August 17, 2015, the Company entered into an ASR agreement with Goldman, Sachs & Co. (“Goldman Sachs”) to repurchase an aggregate of $300 million of the Company’s common shares under an accelerated share repurchase program.
During April 2012, we closed a cash tender offer for any and all of our outstanding 7.50% Series B preferred shares at a purchase price of $102.81 per share. As a result, we purchased 2,471,570 Series B preferred shares for $254 million. In connection with this tender offer, we recognized a $9 million loss on redemption (calculated as the difference between the redemption price and the carrying value), which was recognized as a reduction in determining our net income available to common shareholders. Following the completion of the tender offer, 28,430 Series B preferred shares, representing $3 million in aggregate liquidation preference, remain outstanding.
In 2015, total dividends declared on Series B preferred shares were $6.8125 per share, and dividends paid were $7.50 per share. In 2014 and 2013, total dividends declared and paid on Series B preferred shares were $7.50 per share.
During March 2012, we issued $400 million of 6.875% Series C preferred shares, par value $0.0125 per share, with a liquidation preference of $25.00 per share. We may redeem the Series C preferred shares on or after April 15, 2017 at a redemption price of $25.00 per share. Dividends on the Series C preferred shares are non-cumulative. Consequently, if the board of directors does not authorize and declare a dividend for any period, holders of the Series C preferred shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accumulate and be payable. Holders of the Series C preferred shares will be entitled to receive, only when, as and if declared by the board of directors, non-cumulative cash dividends from the original issue date, quarterly in arrears on the fifteenth day of January, April, July and October of each year, commencing on July 15, 2012, without accumulation of any undeclared dividends. To the extent
declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 6.875% of the liquidation preference per annum.
For 2015, 2014 and 2013, the total dividends declared and paid on Series C preferred shares were $1.7188 per share in each year.
During November 2013, the Company formed AXIS Ventures Reinsurance Limited ("Ventures Re"), a Bermuda domiciled insurer. Ventures Re was formed to write reinsurance on a fully collateralized basis.Ventures Re is considered to be a variable interest entity.
Prior to the adoption of ASU 2015-02, the Company had concluded that it was the primary beneficiary of Ventures Re and following this determination, Ventures Re was consolidated by the Company. Shareholders' equity attributable to Ventures Re's third party investors was recorded in the Consolidated Financial Statements as noncontrolling interests.
At December 31, 2014, total assets of Ventures Re were $97 million, consisting primarily of cash and cash equivalents and insurance receivables. Total liabilities were $38 million consisting primarily of loss reserves. The assets of Ventures Re can only be used to settle its own liabilities, and there is no recourse to the Company for any liabilities incurred by this entity.
The reconciliation of the beginning and ending balance of the noncontrolling interests in Ventures Re was as follows:
In May 2007, our shareholders approved the establishment of the AXIS Capital Holdings Limited 2007 Long-Term Equity Compensation Plan (“2007 Plan”). The 2007 Plan provides for, among other things, the grant of restricted stock, restricted stock units, non-qualified and incentive stock options, and other equity-based awards to our employees and directors. The 2007 Plan authorized the issuance of a total of 5,000,000 shares. In May of 2009 and 2012, our shareholders approved amendments to the 2007 Plan to increase the number of common shares authorized for issuance by 4,000,000 and 6,000,000 respectively, to bring the total number of common shares authorized for issuance to 15,000,000. As a result of the adoption of the 2007 Plan, the 2003 Long-Term Equity Compensation and 2003 Directors Long-Term Equity Compensation Plan were terminated, except that all related outstanding awards will remain in effect. At December 31, 2015, 6,007,637 equity-based awards remained available for grant under the 2007 Plan.
The total fair value of restricted stock and cash settled awards vested during 2015 was $75 million (2014: $68 million; 2013: $70 million). At December 31, 2015, we had unrecognized compensation costs of $95 million (2014: $112 million) which are expected to be recognized over the weighted average period of 1.8 years (2014: 2.3 years).
Between January 1, 2016 and February 24, 2016, a total of 1,046,299 service-based restricted stock units and 121,278 performance-based restricted stock units were approved for grant. Included in the total restricted stock awards approved for grant subsequent to December 31, 2015 were 495,195 awards which will be settled in cash upon vesting.
Our Chairman, Mr. Butt, received $1 million in consulting fee payments in 2015 pursuant to the terms of a consulting agreement by and between Mr. Butt and the Company dated May 3, 2012, as amended December 5, 2013, and December 4, 2014 (2014: $1 million; 2013: $1 million). The consulting agreement was further amended on January 15, 2016 to extend the term of the agreement to the Company's 2017 Annual General Meeting for an annual fee of $1 million.
As discussed further in Note 14 'Noncontrolling Interests', during November 2013, the Company formed Ventures Re, a Bermuda domiciled insurer. With effect from January 1, 2015, Ventures Re is no longer consolidated in the financial statements of the Company. All of Ventures Re's directors are also employees of the Company. In the normal course of business, the Company enters into certain reinsurance contracts with Ventures Re. During the year ended December 31, 2015, the Company ceded premiums of $19 million to Ventures Re and recovered ceded losses of $23 million. In addition, Ventures Re also paid certain acquisition costs and administrative fees to the Company. We believe that all transactions were conducted at market rates consistent with negotiated arms-length contracts.
During the third quarter of 2015, the Company implemented a number of profitability enhancement initiatives which resulted in a recognition of reorganization and related expenses of $46 million and additional corporate expenses of $5 million in the Consolidated Statement of Operations for the year ended December 31, 2015. The reorganization and related expenses charge included staff severance and related costs, the write-off of certain information technology assets, lease cancellation costs and an impairment of certain customer-based intangibles following the decision to wind down the Company's Australian retail insurance operations. Refer Note 4 'Goodwill and Intangible Assets' for additional information on the intangible impairment charge.
Our U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the U.S. Internal Revenue Code and Regulations. Should the U.S. subsidiaries pay a dividend outside the U.S. group, withholding taxes will apply. Our U.S. subsidiaries are not under examination but remain subject to examination in the U.S. for tax years 2012 through 2015.
At December 31, 2015 and 2014, we established a full valuation allowance on: (1) operating and capital loss carryforwards relating to operations in Australia and Singapore; (2) unutilized foreign tax credits available in Ireland and (3) certain other deferred tax assets related to branch operations.
Although realization is not assured, management believes it is more likely than not that the tax benefit of the recorded net deferred tax assets will be realized. Other than the items discussed above, the remaining gross deferred tax assets relate substantially to our U.S. operations. In evaluating our ability to recover these tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including historical results, operating loss carryback potential and scheduled reversals of deferred tax liabilities. Our U.S. operations have produced significant taxable income in prior periods and have deferred tax liabilities that will reverse in future periods such that we believe sufficient ordinary taxable income is available to utilize all remaining ordinary deferred tax assets. In 2015 and 2014, there were sufficient net unrealized gains or capital loss carryback potential to offset remaining impairments, therefore a valuation allowance on such impairments in the U.S., was not considered necessary.
The statutory capital and surplus in each of our most significant regulatory jurisdictions at December 31, 2015 and 2014 was as follows:
statutory capital and surplus equal to or exceeding the Required Solvency Margin ("RSM"). The RSM is calculated with reference to Solvency I regulations. The maximum dividend is limited to "profits available for distribution", which consists of accumulated realized profits less accumulated realized losses and statutory reserves. At December 31, 2015, the maximum dividend our Irish subsidiaries could pay out of retained earnings, after obtaining prior approval from the Irish regulator, was approximately $184 million.
Our U.S. operations required statutory capital and surplus is determined using risk based capital tests, which is the threshold that constitutes the authorized control level. If a company falls below the control level, the commissioner is authorized to take whatever regulatory actions may be considered necessary to protect policyholders and creditors. The maximum dividend that may be paid by our U.S. insurance subsidiaries is restricted by the regulatory requirements of the domiciliary states. Generally, the maximum dividend that may be paid by each of our U.S. insurance subsidiaries is limited to unassigned surplus (statutory equivalent of retained earnings) and may also be limited to statutory net income, net investment income or 10% of total statutory capital and surplus. At December 31, 2015, the maximum dividend that our U.S. insurance operations could pay without regulatory approval was approximately $144 million.
On January 15, 2016, Goldman Sachs early terminated the ASR agreement and delivered 1,358,380 additional common shares to the Company. Refer to Note 13 'Shareholders' Equity' for more information.
Subsequent to December 31, 2015, we repurchased an additional 1,809,574 common shares at an average price of $52.93 for a total consideration of $96 million under our Board of Directors authorized common share repurchase plan. At February 24, 2016, we have $654 million of remaining authorization under the common share repurchase program, which will expire on December 31, 2016.