The following tables set forth our selected historical consolidated financial information for the last five years. This data should also be read in conjunction with Item 8 Consolidated Financial Statements and the accompanying notes and
Results by Segment: Years ended December 31, 2017, 2016 and 2015
Net loss attributable to common shareholders of $416 million, or $(4.94) per common share and per diluted common share
Estimated pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $835 million compared to $204 million for 2016
Total cash and investments of $16.1 billion; fixed maturities, cash and short-term securities comprise 87% of total cash and investments and have an average credit rating of AA-
Total debt of $1.4 billion and a debt to total capital ratio of 20.5%
Common shareholders’ equity of $4.6 billion; diluted book value per common share of $53.88
Non-GAAP operating income (loss) and non-GAAP operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations of non-GAAP measures to the most comparable GAAP financial measures (net income (loss) available to common shareholders and diluted earnings per common share, respectively) are provided in the 'Results of Operations', which is included in the 'Executive Summary' section of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
We are a Bermuda-based global provider of specialty lines insurance and reinsurance products with operations in Bermuda, the U.S., Europe, Singapore, Canada, Latin America and the Middle East. Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Re.
Our mission is to provide our clients and distribution partners with a broad range of risk transfer products and services and meaningful capacity, backed by significant financial strength. We manage our portfolio holistically, aiming to construct the optimum consolidated portfolio of funded and unfunded risks, consistent with our risk appetite and development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks. Our execution on this strategy in 2017 included:
continued rebalancing of our portfolio towards less volatile lines of business that carry attractive rates;
continued improvement in the effectiveness and efficiency of our operating platforms and processes;
Our investment in Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by AXIS Capital and The Blackstone Group L.P. ("Blackstone"). Harrington Re’s strategy is to combine a multi-line reinsurance portfolio with a diversified allocation to alternative investment strategies to earn attractive risk-adjusted returns. Harrington has developed a portfolio that optimizes the risk-reward characteristics of both assets and liabilities, leveraging the respective strengths of AXIS Capital and Blackstone while deploying a disciplined and fully integrated approach to both underwriting and investing; and
On April 17, 2017, we redeemed the remaining $351 million of its 6.875% Series C preferred shares. The execution of this transaction reduced the weighted average annual dividend rate on our preferred equity capital base by 88 basis points to 5.50%.
On July 5, 2017, we announced that we agreed on the terms of a recommended offer to acquire Novae, a diversified specialty (re)insurer that operates through Syndicate 2007 at Lloyd’s. On October 2, 2017 ("the acquisition date), we acquired a 100% ownership interest in Novae. The results of Novae are included in the results of the our insurance and reinsurance segments
On July 6, 2017, S&P Global Ratings affirmed its 'A-' long-term counterparty credit and senior debt ratings of AXIS Capital, and its 'A+' long-term counterparty credit and financial strength ratings of the Company's core operating subsidiaries. At the same time, S&P Global Ratings revised its outlook on AXIS Capital to negative from stable based on the planned acquisition of Novae.
On January 8, 2018, we announced that we had received authorization from Lloyd’s for AXIS Managing Agency Ltd to commence management and oversight of Syndicate 2007 and Special Purpose Arrangement 6129 )"SPA 6129") with effect from January 1, 2018. The authorization creates a single managing agent structure for our operations at Lloyd’s. Syndicate 2007 and SPA 6129 will operate alongside Syndicate 1686, which AXIS Managing Agency currently manages. We have initiated plans to consolidate its Lloyd’s business into Syndicate 1686, under management of AXIS Managing Agency, and anticipates completing that process by January 1, 2019.
On February 16, 2018, A.M. Best Company, Inc. ("A.M. Best") affirmed the Long-Term ICR of 'a-' and the existing Long-Term Issue Credit Ratings (Long-Term IR) of AXIS Capital and the Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Ratings ("Long-Term ICR") of "aa-" of our core operating subsidiaries. At the same time, A.M. Best revised its outlook to negative from stable based on unfavorable trends in the Group’s operating performance, particularly from our insurance segment.
We are committed to being a leader in specialty risk, an area in which we already have depth of talent and experience, and have earned an outstanding reputation. Committed to our hybrid strategy, we have developed substantial platforms in both insurance and reinsurance, providing us with balance and diversification. Management believes its positioning, franchise, expert underwriters and strong relationships with distributors and clients will provide opportunities for further profitable growth in 2018, with variances amongst our lines driven by our tactical response to market conditions. At the same time, we are broadening our risk-funding sources and developing vehicles that utilize the industry’s available third party capital. Consequently, we expect that our net premiums written will not grow as much as our gross premiums written, as we intend to share more of our risk with strategic capital partners.
The reinsurance market is experiencing some upward movement in price after the substantial loss activity that occurred in 2017. These increases, both in catastrophe and other lines of business, are necessary to improve adequacy of rates and vary across geographies. The market overall is strongly capitalized and demand side conditions, while largely stable, do present opportunities to support clients in a world of changing exposures, regulation, and reinsurance panels. We also believe that there is a real opportunity to achieve more leadership and scale, emphasizing our clients and new streams of income in the future while still defending the quality of our existing portfolio. We are also focused on managing the volatility of our portfolio and expanding our already strong group of strategic capital partners.
We present our results of operations in a way we believe will be most meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are considered non-GAAP financial measures under SEC rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income, non-GAAP operating income (in total and on a per share basis), amounts presented on a constant currency basis, and pre-tax total return on cash and investments excluding foreign exchange movements, which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the U.S. GAAP.
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our individual underwriting operations, we exclude them from underwriting-related general and administrative expenses and, therefore, consolidated underwriting income. General and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, also includes corporate expenses.
The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP measure, is presented in the 'Results of Operations'.
We evaluate our underwriting results separately from the performance of our investment portfolio. As such, we believe it is appropriate to exclude net investment income and net realized investment gains (losses) from our underwriting profitability measure.
Foreign exchange losses (gains) in our Consolidated Statement of Operations primarily relate to our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange losses (gains) on our investment portfolio, generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) are not a meaningful contributor to our underwriting performance, therefore, foreign exchange losses (gains) are excluded from consolidated underwriting income.
Interest expense and financing costs primarily relate to interest payable on our senior notes. As these costs are not incremental and/or directly attributable to our individual underwriting operations, we exclude them from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income.
Transaction and reorganization expenses are driven by business decisions, the nature and timing of which are not related to the underwriting process therefore, these expenses are excluded from consolidated underwriting income.
The revaluation of net deferred tax asset ("DTA") resulted in a tax expense recognized in the fourth quarter of 2017 related to the revaluation of our net DTA, due to the reduction in the U.S. corporate income tax rate from 35% to 21% enacted as part of the U.S. Tax Reform. The nature and timing of the tax expense associated with the U.S. Tax Reform is not related to the underwriting process, therefore, this expense is excluded from consolidated underwriting income.
The termination fee received represents the break-up fee received on the cancellation of the Amalgamation Agreement
between PartnerRe Ltd. and the Company and is not related to the underwriting process, therefore it is excluded from consolidated underwriting income.
Non-GAAP operating income represents after-tax operational results without consideration of after-tax net realized investment gains (losses), foreign exchange losses (gains), revaluation of net deferred tax asset, bargain purchase gain, transaction and reorganization expenses, loss on repurchase of preferred shares, and termination fee received.
Loss on repurchase of preferred shares arose from capital transactions that are not reflective of underlying business performance.
The termination fee received represents the break-up fee paid by PartnerRe Ltd. following the cancellation of the Amalgamation Agreement with the Company and is not indicative of future revenues.
Pre-Tax Total Return on Cash and Investments excluding Foreign Exchange Movement
Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income (loss), net realized investments gains (losses), interest in income (loss) of equity method investments, and pre-tax change in unrealized gains (losses) generated by our average cash and investment balances. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure is presented in the 'Net Investment Income and Net Realized Investment Gains (Losses)' section of this MD&A. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investments.
Underwriting-related general and administrative expenses is a non-GAAP measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP measure, also included corporate expenses of $129,945, $120,016 and $109,910 for the year ended December 31, 2017, 2016 and 2015, respectively. Refer to 'Other (Expenses) Revenues, Net' for additional information related to the corporate expenses. Also, refer to 'Non-GAAP Financial Measures' for additional information.
Tax cost (benefit) of $2,022, $1,830 and $(3,171) for the year ended December 31, 2017, 2016 and 2015, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
Return on average common equity ("ROACE") is calculated by dividing net income available to common shareholders for the year by the average shareholders' equity determined by using the common shareholders' equity balances at the beginning and end of the year.
2017 versus 2016: Total underwriting income decreased by $692 million in 2017, compared to 2016, primarily driven by an increase in catastrophe and weather-related losses, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses and a decrease in net favorable prior year reserve development, partially offset by a decrease in general and administrative expenses.
The insurance segment underwriting income decreased by $265 million in 2017, compared to 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, an increase in acquisition costs and an increase in the current accident year loss ratio excluding catastrophe and weather-related losses.
2016 versus 2015: Total underwriting income decreased by $23 million in 2016, compared to 2015, primarily driven by an increase in catastrophe and weather-related losses and a higher acquisition cost ratio partially offset by an increase in net favorable prior year loss reserve development, a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses and an increase in other insurance-related income.
The insurance segment underwriting income decreased by $4 million in 2016, compared to 2015. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses and higher general and administrative expenses partially offset by a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses and an increase in net favorable prior year loss reserve development.
In addition, net investment income increased by $13 million in 2017 compared to 2016, attributable to contributions from fixed income following the acquisition of Novae and Aviabel. Comparatively, net investment income increased by $26 million in 2016, compared to 2015, primarily attributable to contributions from fixed income as a result of longer duration assets and income from commercial mortgage loans as a result of an increased allocation to this asset class in 2016.
The foreign exchange losses of $135 million in 2017 were driven primarily by the impact of the weakening of the U.S. dollar on the re-measurement of net insurance-related liabilities mainly denominated in pound sterling and euro. Depreciation of the pound sterling against the U.S. dollar drove foreign exchange gains of $121 million in 2016, while depreciation of the euro, pound sterling and Australian dollar against the U.S. dollar drove foreign exchange gains of $102 million in 2015.
The tax expense recognized in 2016 increased to $6 million from $3 million in 2015. The increase was driven primarily by an increase in comparative European pre-tax income, offset partially by a decrease in comparative pre-tax income in the U.S.
Interest expense and financing costs in 2017, 2016, and 2015 are related to interest due on our senior notes, as well as interest due on Dekania Notes issued by Novae in 2017. Interest expense and financing costs increased by $4 million in 2017 compared to 2016, primarily attributable to costs associated with the Dekania Notes. Interest expense and financing costs in 2016 were consistent with 2015 as there were no significant changes to our debt and financing arrangements.
In connection with the acquisition of Novae, we incurred transaction and integration related expenses of $27 million including due diligence, legal, accounting, investment banking fees and expenses, as well as integration expenses related to the integration of Novae into our operations and compensation-related costs associated with the termination of certain employees.
Return on average common equity ("ROACE") is calculated by dividing net income available to common shareholders for the year by the average shareholders’ equity determined by using the common shareholders’ equity balances at the beginning and end of the year.
Diluted book value per common share represents total common shareholders’ equity divided by the number of common shares and diluted common share equivalents outstanding, determined using the treasury stock method. Cash settled awards are excluded from the denominator.
ROACE reflects the impact of net income attributable to common shareholders including net realized investment gains (losses), foreign exchange losses (gains), revaluation of net deferred tax assets, a bargain purchase gain related to the acquisition of Aviabel, together with transaction and reorganization expenses associated with the acquisition of Novae in 2017 as well as profitability enhancement initiatives in 2015 and loss on repurchase of preferred shares.
ROACE decreased in 2017, compared to 2016 primarily driven by the underwriting loss generated and foreign exchange losses in 2017 compared to underwriting income generated and foreign exchange gains in 2016. Transaction and reorganization expenses, together with amortization of value of business acquired and intangible assets associated with the acquisition of Novae incurred in 2017, also contributed to the decrease in ROACE. In addition, ROACE in 2017 was negatively impacted by a tax charge associated with the revaluation of net deferred tax assets. These expenses were partially offset by an increase in net investment income and net realized investment gains together with the benefit of the bargain purchase gain.
The unrealized investment gains in 2017 reflected a tightening of credit spreads and the strengthening of the euro and pound sterling against the U.S. dollar which positively impacted the values of non-U.S. government debt and corporate debt securities. The decrease in unrealized investment losses in 2016 reflected the impact of a tightening of credit spreads on non-government bonds and strong equity market returns.
In 2017, the decrease in diluted book value per common share adjusted for dividends was due to our net loss, partially offset by unrealized investment gains included in other comprehensive income.
Underwriting-related general and administrative expenses is a non-GAAP measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP measure, is presented in the 'Results of Operations', which is included in the 'Executive Summary' section of this MD&A.
Group (or consolidated) underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss before tax and interest in income (loss) of equity investments), the most comparable GAAP measure, is presented in the 'Results of Operations', which is included in the 'Executive Summary' section of this MD&A.
The increase in our insurance segment's gross premiums written of $408 million or 15% compared to 2016 was driven by an increase in gross premiums written of $241 million associated with our acquisition of Novae. In addition, gross premiums written increased by $167 million or 6% (6% on a constant currency basis(1)) primarily attributable to our accident and health, liability, professional lines and aviation lines. These increases were partially offset by a decrease in our property and marine lines.
The increase in the insurance segment's gross premiums written of $137 million or 5% was negatively impacted by our exit from retail insurance operations in Australia and foreign exchange movements. After adjusting for our exit from retail insurance operations in Australia and foreign exchange movements, gross premiums written increased by $200 million.
Ceded premiums written in 2017 were $1,529 million, or 28% of gross premiums written, compared to $1,217 million, or 24%, in 2016. The increase in the ceded premiums written was mainly attributable to our reinsurance segment due to an increase in premiums ceded to retrocessional treaties which cover our catastrophe, credit and surety, and agriculture lines.
2016 versus 2015: Net premiums earned in 2016 increased by $19 million or 1% ($123 million or 3% decrease on a constant currency basis) compared to 2015. The increase was driven by an increase in gross premiums written, partially offset by an increase in premiums ceded in both the reinsurance and insurance segments.
2017 versus 2016: The current accident year loss ratio increased to 84.1% in 2017 from 67.4% in 2016. The increase was primarily due to an increase in catastrophe and weather-related losses. During 2017, we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $835 million or 20.4 points, attributable to Hurricanes Harvey, Irma and Maria, the two earthquakes in Mexico, the wildfires in Northern and Southern California, and other U.S. weather-related events. Comparatively, in 2016 we incurred $204 million or 5.6 points of losses attributable to catastrophe and weather-related events.
After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio decreased from 62.9% in 2015 to 63.7% in 2016. The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was driven by a decrease in mid-size loss experience in our insurance marine and property lines and a decrease in loss experience in our reinsurance credit and surety lines, partially offset by the ongoing adverse impact of rate and trend, and an increase in loss experience in our insurance credit and political risk and reinsurance agriculture lines.
Development from these classes contributed $60 million, $148 million and $152 million of net favorable prior year reserve development in 2017, 2016 and 2015, respectively, and primarily reflected the recognition of better than expected loss emergence on these years.
Our medium-tail business consists primarily of insurance and reinsurance professional reserve classes, credit and political risk insurance reserve class and credit and surety reinsurance reserve class.
Our reinsurance professional reserve class recognized $44 million, $30 million and $38 million of net favorable prior year development in 2017, 2016 and 2015, respectively. The net favorable prior year loss development on this reserve class continued to reflect the generally favorable experience on earlier accident years as we continued to transition to more experience based methods. As our loss experience on these accident years has generally been better than expected, this resulted in the recognition of net favorable prior year reserve development.
Our insurance professional reserve class recorded net favorable prior year development of $26 million in 2017 reflecting the generally favorable experience on earlier accident years as we transition to more experience based methods. As our loss experience has generally been better than expected, this resulted in the recognition of net favorable prior year reserve development. Our insurance professional reserve class recorded net favorable prior year reserve development of $14 million in 2016, also driven by overall better than expected development. Our insurance professional reserve class recorded adverse prior year reserve development of $14 million in 2015 due to reserve strengthening on our Australian book of business during the three months ended September 30, 2015.
Our reinsurance credit and surety reserve class recorded net favorable prior year reserve development of $33 million, $10 million and $27 million in 2017, 2016 and 2015, respectively due to the recognition of generally better than expected loss emergence.
Our long-tail business consists primarily of liability and motor reserve classes.
Our reinsurance liability reserve classes contributed net favorable prior year reserve development of $43 million, $44 million and $46 million, in 2017, 2016 and 2015, respectively. The net favorable prior year reserve development primarily reflected the progressively increased weight given by management to the generally favorable emerging loss experience on earlier accident years.
$8 million of net adverse prior year reserve development on liability business, due to reserve strengthening on several large claims within our run-off Bermuda excess casualty book of business and due to limited reserve strengthening within our U.S. excess casualty book of business.
In 2016, we recognized $56 million of net favorable prior year reserve development, the principal components of which were:
$25 million of net favorable prior year reserve 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 reserve 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.
In 2017, we recognized $151 million of net favorable prior year reserve development, the principal components of which were:
$44 million of net favorable prior year reserve development on professional lines business, reflecting the generally favorable experience on earlier accident years, particularly 2009 through 2012, as we continue to transition to more experience based methods.
$33 million of net favorable prior year reserve development on credit and surety business, due to better than expected loss emergence primarily related to accident years 2012 through 2015.
$30 million of net favorable prior year development on property and other business due to overall better than expected loss emergence across multiple accident years.
$1 million of net favorable prior year reserve development on motor business, due to the impact of the change in Ogden rate, largely offset by continued better than expected loss emergence spanning multiple accident years.
In 2016, we recognized $236 million of net favorable prior year reserve development, the principal components of which were:
$55 million of net favorable prior year reserve development on motor business, primarily related to non-proportional business spanning multiple accident years, driven by better than expected loss emergence.
$73 million of net favorable prior year reserve development on property and other business, spanning a number of accident years and driven by better than expected loss emergence. Included in this net development is $17 million of adverse development on agriculture reserves relating to loss developments on the 2014 accident year driven by lower than expected crop yields reported for two specific treaties.
The increase in the acquisition cost ratio to 20.2% in 2016 from 19.5% in 2015 was driven by an increase in our reinsurance segment. The increase in the reinsurance segment's acquisition cost ratio was primarily due to the impact of retrocessional contracts, adjustments related to loss-sensitive features in underlying contracts, and higher acquisition costs in certain lines of business due to the increase in the amount of business being written on a proportional basis. This increase was partially offset by a decrease in the insurance segment's acquisition cost ratio driven by higher ceding commissions following increased cessions in our professional lines, partially offset by higher variable acquisition costs paid on certain lines of business and favorable federal excise tax adjustment which benefitted 2015.
2017 versus 2016: Gross premiums written in 2017 increased by $408 million or 15% compared to 2016. In 2017, the increase in gross premiums written included $241 million attributable to property, professional lines, marine as well as credit and political risk lines associated with our acquisition of Novae. In addition, gross premium written increased by $167 million or 6% (6% on a constant currency basis (1)) primarily attributable to new business opportunities in our accident and health, liability, and professional lines together with an increase in our aviation lines associated with our acquisition of Aviabel. These increases were partially offset by a decrease in our property lines following our exit from U.S. retail insurance operations last year and a decrease in our marine lines largely driven by timing differences.
2017 versus 2016: Net premiums earned in 2017 increased by $329 million or 19% compared to 2016. The increase in net premiums earned included $162 million primarily attributable to property and marine lines associated with our acquisition of Novae. In addition, net premiums earned increased by $167 million or 9% (10% on a constant currency basis) attributable to our accident and health, property and aviation lines.
This increase was driven an increase in gross premiums earned due to strong premium growth in our accident and health lines in recent periods together with premium growth in our aviation lines associated with our recent acquisition of Aviabel, partially offset by a decrease in ceded premiums earned in our property lines.
Acquisition Cost Ratio: The increase in the acquisition cost ratio to 15.8% in 2017 from 14.1% in 2016 primarily reflected changes in business mix in our accident and health lines.
General and Administrative Expense Ratio: The decrease in the general and administrative expense ratio to 16.3% in 2017 from 19.5% in 2016, was primarily driven by a decrease in performance-related compensation costs and an increase in net earned premium, partially offset by general and administrative expenses associated with the acquisition of Novae.
The increase in the general and administrative expense ratio to 19.5% in 2016 from 19.1% in 2015 was primarily driven by the decrease in net earned premium, an increase in personnel expenses as well as transition and severance costs associated with the closure of four U.S. retail business units.
The following table provides gross premiums written by line of business for the years indicated:
2017 versus 2016: Gross premiums written in 2017 increased by $178 million or 8% compared to 2016. The increase in gross written premiums was attributable to our catastrophe, agriculture, property and motor lines, partially offset by a decrease in our credit and surety lines. The increase in our catastrophe and property lines was driven by new business spread across several cedants. Favorable premium adjustments and reinstatement premiums also contributed to the increase in premiums written in our catastrophe, property and agriculture lines. The increase in our motor lines was driven by new business and favorable premium adjustments, partially offset by the impact of foreign exchange movements and a lower level of premiums written on a multi-year basis during 2017, compared to 2016. The decrease in our credit and surety lines was primarily due to a lower level of premiums written on a multi-year basis.
2017 versus 2016: Premiums ceded in 2017 were $489 million, or 20%, of gross premiums written, compared to $304 million, or 14%, in 2016. The increase was due to an increase in premiums ceded to retrocessional treaties which cover our catastrophe, credit and surety, and agriculture lines.
The other insurance loss in 2015 related to realized losses and mark-to-market adjustments on our weather and commodity derivatives portfolio following unseasonably warm weather conditions in Europe during the fourth quarter of 2015.
Acquisition Cost Ratio: The decrease in the acquisition cost ratio to 24.0% in 2017 from 25.7% in 2016 primarily reflected changes in business mix, together with a decrease in adjustments related to loss-sensitive features, the impact of favorable reinstatement premium adjustments, partially offset by the impact of retrocessional contracts with lower acquisition costs.
The increase in the acquisition cost ratio to 25.7% in 2016 from 24.2% in 2015 primarily reflected the impact of retrocessional contracts, adjustments related to loss-sensitive features in underlying contracts and higher acquisition costs in certain lines of business due to the increase in the amount of business being written on a proportional basis.
Interest Expense and Financing Costs: Interest expense and financing costs are related to interest due on 5.875% Senior Notes issued in 2010, 2.65% Senior Notes and the 5.15% Senior Notes issued in 2014, and 4.0% Senior Notes issued in 2017, as well as Dekania Notes issued by Novae on June 30, 2004. Interest expense and financing costs increased by $4 million in 2017 compared to 2016, primarily attributable to costs associated with the Dekania Notes.
Interest expense and financing costs in 2016 were consistent with 2015 as there were no significant changes to our debt and financing arrangements.
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments and investments in CLO-Equities (both direct and indirect). These investments are recorded at fair value, with the change in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially period over period, particularly during volatile equity and credit markets.
Fixed maturities and equities are classified as available for sale and reported at fair value. The effect of market movements on our available for sale investment portfolio impacts net income (through net realized investment gains (losses)) only when securities are sold or impaired.
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 re-balance our investment portfolio in order to change exposure to particular sectors or asset classes.
OTTI losses in 2017 were $14 million compared to $26 million in 2016 a decrease of $12 million. The decrease in 2017 compared to 2016 was mainly due to higher losses related to non-U.S. denominated securities as a result of the decline in foreign exchange rates against the U.S. dollar in 2016. The current year OTTI losses included impairments on non-U.S. denominated securities as a result of foreign exchange losses and non-investment grade corporate debt securities that have had a significant decline in value.
From time to time, we may economically hedge the foreign exchange exposure of non-U.S. denominated securities by entering into foreign exchange forward contracts.
During 2017, we also introduced the use of interest rate swaps to reduce duration risk of our fixed income portfolio.
During 2017, our foreign exchange hedges resulted in $7 million of net losses which related primarily to securities denominated in the Japanese yen, euro and pound sterling. Each of these currencies experienced volatility during 2017.
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 (losses), the change in unrealized gains (losses), and interest in loss of equity method investments generated by our investment portfolio. The following table provides a breakdown of the total return on cash and investments for the periods indicated:
The table below provides a breakdown of our cash and investments:
Includes restricted cash and cash equivalents of $415 million and $202 million for 2017 and 2016, respectively.
At December 31, 2017, our non-U.S. government debt had net unrealized gains of $8 million (2016: net unrealized losses of $47 million) which included gross unrealized foreign exchange losses of $8 million (2016: $51 million), mainly on U.K. government bonds.
Non-Agency RMBS include mostly investment-grade bonds originated by non-agencies. At December 31, 2017, our non-agency RMBS had an average duration and weighted average life of 0.8 years (2016: 0.5 years) and 4.2 years (2016: 3.8 years), respectively.
CMBS include mostly investment-grade bonds originated by non-agencies with approximately 98% rated AA or better at December 31, 2017 (2016: 89%). Additionally, the weighted average estimated subordination percentage for the portfolio was 29% at December 31, 2017 (2016: 36%), 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, 2017, the average duration and weighted average life was 5.1 years (2016: 2.8 years) and 6.0 years (2016: 3.5 years), respectively.
The average duration and weighted average life of our ABS portfolio at December 31, 2017 was 0.7 years (2016: 0.6 years) and 3.8 years (2016: 2.8 years), respectively.
Municipals comprise revenue and general obligation bonds issued by U.S. domiciled state and municipal entities and are primarily held within the taxable portfolios of our U.S. subsidiaries. The following table provides a breakdown of the fair value of our municipal debt portfolio by state and between Revenue and General Obligation ("G.O.") bonds:
The following table provides information on the severity of the unrealized loss position as a percentage of amortized cost for all investment grade fixed maturities in an unrealized loss position and includes any impact of foreign exchange:
At December 31, 2017, net unrealized gains on our equities portfolio were $83 million (2016: $41 million). The increase was due to improved valuations reflective of the performance of the global equity markets.
Overseas deposits include investments in private funds held by Syndicate 2007 in which the underlying investments are primarily U.S. government, Non-U.S. government and corporate fixed maturities. The funds do not trade on an exchange therefore are not included within the available for sale investments category.
Net cash provided by operating activities was $259 million in 2017, compared to $407 million in 2016 and $791 million in 2015. Our insurance and reinsurance operations typically receive principal cash inflows from premiums, net of policy acquisition costs, and reinsurance recoverables. Our principal cash outflows are for the payment of claims and loss adjustment expenses, premium payments to reinsurers and operating expenses. Cash provided by operating activities can fluctuate due to timing differences in the collection of premium receivable and reinsurance recoverables and the payment of losses and ceded premiums payable.
Operating cash flows decreased in 2017 primarily attributable to increased purchases of reinsurance and retrocession covers, together with an increase in losses paid primarily in our property, catastrophe, marine as well as our accident and health lines, partially offset by an increase in premium collection due to higher gross premiums written in 2017, together with an increase in reinsurance recoveries.
The decrease in operating cash flows in 2016 compared to 2015 was primarily attributable to the termination fee received from PartnerRe in 2015, increased purchases of reinsurance and retrocession covers and an increase in losses paid, primarily in our liability and accident and health lines, partially offset by an increase in premium collection which was driven by higher gross premiums written in 2016.
Financing cash outflows primarily relate to dividends paid to common and preferred shareholders on a recurring basis and totaled $188 million in 2017 (2016: $172 million, 2015: $159 million). Financing cash outflows also included common share repurchases which totaled $286 million in 2017 ( 2016: $510 million and 2015: $332 million). We note that market share repurchases are 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 (refer to 'Capital Resources - Share Repurchases' below for further details). In addition, we redeemed our remaining Series C preferred shares, resulting in a cash outflow of $351 million and issued senior notes, resulting in cash inflows of $346 million in 2017 (refer to Item 8, Note 11(a) of the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).We used a portion of the proceeds from the issuance of senior notes to repay a Novae term loan of $67 million. Cash outflows in 2016 were partially offset by net cash inflows of $480 million related to the preferred share transactions (refer to 'Capital Resources - Preferred Shares' below for further details).
Our diversified underwriting portfolio has demonstrated an ability to withstand catastrophic losses. We have generated positive operating cash flows in all years since 2003, with the exception of 2009 which was impacted by the global financial crisis. These positive cash flows were generated notwithstanding the impacts of the global financial crisis and the recognition of significant natural catastrophe-related losses during the period. Our net losses and loss expenses, gross of reinstatement premiums, included $744 million for Hurricanes Harvey, Irma and Maria, and the two earthquakes in Mexico and the wildfires in Northern and Southern California in 2017; $331 million for Storm Sandy in 2012; $944 million for numerous natural catastrophe and weather events in 2011; $256 million for the Chilean and New Zealand earthquakes in 2010; $408 million for Hurricanes Gustav and Ike in 2008; $1,019 million for Hurricanes Katrina, Rita and Wilma in 2005 and $266 million for Hurricanes Charley, Frances, Ivan and Jeanne in 2004. There remains significant uncertainty associated with our estimates of net losses for certain of these events (refer to the Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Underwriting Results - Group, Underwriting Expenses' for further details), as well as the timing of the associated cash outflows.
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 opportunities and to maintain our financial strength ratings, as well as to comply with various local statutory regulations. We monitor our capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business. Refer to Item 1 ‘Risk and Capital Management’ for further details.
At December 31, 2017, our consolidated balance sheet reflected a decrease in preferred equity due to redemption of the remaining $351 million of 6.875% Series C preferred shares on April 17, 2017, as well as an increase in debt due to the issuance of $350 million of 4.0% Senior Notes on December 6, 2017. We used a portion of the proceeds from the issuance of the 4.0% Senior Notes to repay a Novae term loan of $67 million and intends to use a further portion of the proceeds from the issuance of 4.0% Senior Notes to repay or redeem its 2.650% Senior Notes due on April 1, 2019.
Debt: Debt represents the 5.875% Senior Notes issued in 2010, which will mature in 2020, the 2.65% Senior Notes and the 5.15% Senior Notes issued in 2014, which will mature in 2019 and 2045, and the 4.0% Senior Notes issued in 2017, which will mature in 2027 (refer to Item 8, Note 11(a) of the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details). Debt also includes the Dekania Notes issued by Novae on June 30, 2004 which will mature on June 30, 2034 or September 29, 2034.
On November 23, 2005, we issued $250 million of 7.50% Series B preferred shares. In April 2012, we closed a cash tender offer for any and all of our outstanding Series B preferred shares at a price of $102.81 per share. As a result, we repurchased 2,471,570 Series B Preferred shares, for $254 million. At December 31, 2015, 28,430 Series B preferred shares, representing $3 million in aggregate liquidation preference, remained outstanding. On January 27, 2016 we redeemed the remaining 28,430 Series B preferred shares, for their aggregate liquidation preference.
On July 5, 2017, the Company and the board of directors of Novae announced that we agreed on terms of a recommended offer to be made by us to acquire the entire issued and to be issued share capital of Novae. Following the offer, we suspended our open market share repurchase plan.
On December 31, 2017, authorization under the Board-authorized share repurchase plan for common share repurchases through 2017 expired. A common share repurchase plan has not been authorized for 2018.
We routinely enter into agreements with financial institutions to obtain secured and unsecured credit and letter of credit facilities. These facilities are primarily used for the issuance of letters of credit, in the normal course of operations, to certain (re)insurance operations that purchase reinsurance protection from us. These letters of credit allow those operations to take credit, under local insurance regulations, for reinsurance obtained in jurisdictions where AXIS Capital’s subsidiaries are not licensed or otherwise admitted as an insurer. The value of our letters of credit outstanding is driven by, amongst other factors, the amount of unearned premium, loss development on existing reserves, the payment patterns of such reserves, the
On March 27, 2017, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing
$500 million secured letter of credit facility (the "LOC Facility") with Citibank Europe plc ("Citibank") to include an additional $250 million of secured letter of credit capacity (the "$250 Million Facility") pursuant to a Committed Facility Letter and an amendment to the Master Reimbursement Agreement (the "LOC Facility Documents"). Under the terms of the $250 Million Facility, letters of credit to a maximum aggregate amount of $250 million are available for issuance on behalf of the Participating Subsidiaries. These letters of credit will principally be used to support the reinsurance obligations of the Participating Subsidiaries. The $250 Million Facility is subject to certain covenants, including the requirement to maintain sufficient collateral, as defined in the LOC Facility Documents, to cover all of the obligations under the LOC Facility. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to the lender. In the event of default, the lender may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the facility to any or all of the participating operating subsidiaries.
The following table provides a breakdown of our contractual obligations and commitments at December 31, 2017 by period due:
We have $414 million of unfunded investment commitments related to our other investments portfolio, which are callable by our investment managers. refer to Item 8, Note 6(c) to the Consolidated Financial Statements 'Investments' for further details. In addition, we have a $16 million commitment to purchase commercial mortgage loans.
Refer to Item 8, Note 11(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details.
For our reinsurance business, case reserves for reported claims are generally established based on reports received from ceding companies and/or their brokers. For excess of loss contracts, we are typically notified of insured losses on specific contracts and record a case reserve for the estimated ultimate liability arising from the claim. With respect to contracts written on a proportional basis, we typically receive aggregated claims information and record a case reserve based on that information. However, our proportional reinsurance contracts typically require that losses in excess of pre-defined amounts be separately notified so that we can adequately evaluate them. Our claims department evaluates each specific loss notification we receive and records additional case reserves when a ceding company’s reserve for a claim is not considered adequate.
Our quarterly reserving process begins with the collection and analysis of paid and incurred claim data for each of our segments. The segmental data is disaggregated by reserving class and further disaggregated by underwriting year (i.e., the year in which the contract generating premium and losses incepted). We use underwriting year information to analyze our business and subsequently allocate reserves to the respective accident years. Our reserving classes are selected to ensure that the underlying contracts have homogeneous loss development characteristics, while remaining large enough to make the estimation of trends credible. We review our reserving classes on a regular basis and adjust them over time as our business evolves. This data, in addition to industry benchmarks, serves as a key input to many of the methods employed by our actuaries. The relative weights assigned to our own historical loss data versus industry data vary according to the length of the development profile for the reserving class being evaluated. (See 'Claim Tail Analysis' below for more detailed information by claim tail class.)
Expected Loss Ratio Method ("ELR Method"): This method estimates ultimate losses for an accident year or underwriting year by applying an expected loss ratio to the earned or written premium for that year. Generally, expected loss ratios are based on one or more of (a) an analysis of historical loss experience to date, (b) pricing information and (c) industry data, adjusted as appropriate, to reflect changes in rates and terms and conditions. This method is insensitive to actual incurred losses for the accident year or underwriting year in question and is, therefore, often useful in the early stages of development when very few losses have been incurred. Conversely, the lack of sensitivity to incurred/paid losses for the accident year or underwriting year in question means that this method is usually inappropriate in later stages of an accident year or underwriting year’s development.
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, 2017 and 2016). 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.
In some instances, upon becoming aware of a loss event related to our credit and political risk business, we negotiate a final settlement of all of our policy liabilities for a fixed amount. In most circumstances, this occurs when the insured moves to realize the benefit of the collateral that underlies the insured loan or facility and presents us with a net settlement proposal that represents a full and final payment by us under the terms of the policy. In consideration for this payment, we secure a cancellation of the policy, or a release of all claims, and waive our right to pursue a recovery of these settlement payments against the security that may have been available to us under the insured loan or facility agreement. In certain circumstances, cancellation by way of net settlement or full payment can result in an adjustment of the net premium to be received and earned on the policy.
We generally use a blend of these information sources to arrive at our aggregate estimate of the ultimate losses arising from the catastrophic event. In subsequent reporting periods, we review changes in paid and incurred losses in relation to each significant catastrophe and adjust our estimates of ultimate losses for each event if there are developments that are different from our previous expectations; such adjustments are recorded in the period in which they are identified.
With regard to establishing the fair value of reserves for losses and loss expenses for Syndicate 2007 on October 2, 2017, the acquisition date, weight was given to the observable value of these reserves based on a Reinsurance to Close ("RITC") transaction of the Syndicate’s 2015 and prior years of account, which was completed prior to the allocation of purchase price. Management made no change to the initial estimate when establishing its best estimate of reserves for losses and loss expenses at December 31, 2017. This is consistent with our general approach of recognizing all or part of the anticipated cost of third party liability commutations if the transaction has either completed or is considered sufficiently likely to be completed in the near term.
Beginning in 2013, we 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, we use 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.
In order to capture the key dynamics of our loss reserve development and potential volatility, our reserving classes should be considered according to their potential expected length of loss emergence and settlement, generally referred to as the "tail". We consider our business to consist of three claim tail classes: short-tail, medium-tail and long-tail. Below is a discussion of the specifics of our loss reserve process as they apply to each claim tail class, as well as commentary on the factors contributing to our historical loss reserve development for each class. Favorable development on prior accident year reserves indicates that our current estimates are lower than our previous estimates, while adverse development indicates that our current estimates are higher than our previous estimates.
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 and discontinued lines - Novae, 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.
until our selections are based almost exclusively on experience-based methods. We evaluate the appropriateness of the transition to experience-based methods at the reserving class level, commencing this transition when we believe that our incurred loss development is sufficient to produce meaningful actuarial indications. The rate at which we transition fully to sole reliance on experience-based methods can vary by reserving class and by year, depending on our assessment of the stability and relevance of such indications. For some professional lines in our insurance segment, we also rely upon the evaluation of the open claim inventory in addition to the commonly employed actuarial methods when establishing reserves.
As previously described, the estimation of the value of our recoveries on credit and political risk business requires significant management judgment. At December 31, 2017, our total estimated recoveries on credit insurance business were $57 million, while comparatively, at December 31, 2016, our estimated recoveries were $73 million.
In contrast to our short and medium-tail business, the claim tail for our long-tail business is expected to be notably longer, as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. Our long-tail business primarily relates to liability business written in our insurance and reinsurance segments, as well as our motor reinsurance business and discontinued lines - Novae.
As a general rule, our estimates of accident year or underwriting year ultimate losses for our long-tail business are notably more uncertain than those for our short and medium-tail business. Factors that contribute additional uncertainty to estimates for our long-tail business include, but are not limited to:
See 'Underwriting Results - Group, Prior Year Reserve Development' for further details on the recognition of adverse development for our long-tail business during the last three years.
Reinsurance recoverable on unpaid losses as a percentage of gross loss reserves was 24% at December 31, 2017 (2016: 23%). At December 31, 2017 and 2016, respectively, 88.8% and 96.7% of our gross reinsurance recoverable (i.e. excluding the provision for uncollectible amounts) were collectible from reinsurers rated A- or better by A.M. Best. For an analysis of the credit risk associated with our reinsurance recoverable balances at December 31, 2017, refer to Item 8, Note 12 to the Consolidated Financial Statements 'Commitments and Contingencies'.
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 could also affect the willingness and ability of a reinsurer to meet their contractual obligations to us. Accordingly, we review our reinsurance recoverable on a quarterly basis and estimate and record an offsetting provision for uncollectible amounts. Any changes in this provision are reflected in net income. We are selective in choosing our reinsurers, placing reinsurance principally with reinsurers with a strong financial condition and industry ratings.
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 is adjusted only if underlying insured values ultimately differ. 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 86%, 85% and 87% of the segment’s total for the years ended December 31, 2017, 2016 and 2015, 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 either record gross premiums written based on monthly statements received from MGAs or we record our best estimate based upon our historical experience. Due to inherent reporting delays, we generally record premiums associated with business written by MGAs one month in arrears.
In our credit and political risk line of business, we write certain policies on a multi-year basis. We record premiums in respect of these policies at the policy inception date based on our best estimate of total premiums, including assumptions relating to prepayments/refinancings. These premiums are generally payable in installments. At December 31, 2017, the average duration of the outstanding unearned premiums written for our credit and political risk line of business was 5.5 years (2016: 6.1 years).
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 34% of our reinsurance segment’s total gross premiums written for the year ended December 31, 2017 and 38% for the years ended December 31, 2016 and 2015, respectively.
As a result of this review process, any adjustments to estimates are recognized in gross premiums written during the period they are determined. Such changes in premium estimates could be material to gross premiums written and the resulting adjustments may directly and significantly impact net premiums earned favorably or unfavorably in the period they are determined because the adjustment may be substantially or fully earned. Gross premiums written for proportional contracts, including amounts related to the adjustment of premium estimates established in prior years, accounted for 66% of our reinsurance segment’s gross premiums written for the year ended December 31, 2017 and 62% for both years ended December 31, 2016 and 2015.
Our fixed premium insurance and excess of loss reinsurance contracts are generally written on a "losses occurring" or "claims made" basis over the term of the contract. Accordingly, we earn the premium evenly over the contract term, which is generally 12 months.
At December 31, 2017, the fair value for 93% (2016: 97%) of our total fixed maturities and equities was based on prices provided by globally recognized independent pricing services where we have a current and detailed understanding of how their prices were derived. The remaining securities were priced by either non-binding broker quotes or internal valuation models.
At December 31, 2017 and 2016, we have not adjusted any pricing provided by independent pricing services (see 'Management Pricing Validation' below). Additionally, our total Level 3 fixed maturities and equities amounted to $53 million (2016: $96 million), less than 1% of total fixed maturities and equities. Refer Item 8, Note 7 to the Consolidated Financial Statements 'Fair Value Measurements' for further information.
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using net asset values (NAVs) as advised by external fund managers or third party administrators. Refer Item 8, Note 7 to the Consolidated Financial Statements 'Fair Value Measurements' for further information.
We have also invested directly and indirectly (through a fund structure) in CLO-Equities, also known as "cash flow CLOs" in the industry. During 2017, the CLO-Equity market continued to be relatively inactive with only a small number of transactions being observed, particularly as it related to transactions involving our CLO-Equities. Given that all of our direct investments in CLO-Equities are past their reinvestment period, there is uncertainty over the remaining time until maturity. As such, fair values of our direct investments in CLO-Equities are estimated using a liquidation valuation. Our indirect investments in CLO-Equities are valued using a discounted cash flow model prepared by an external manager with similar inputs as our internally developed discounted cash flow model. At December 31, 2017, the estimated fair value for CLO-Equities was $31 million (2016: $61 million).
Overseas deposits include investments in private funds held by Syndicate 2007 in which the underlying investments are primarily U.S. government, Non-U.S. government and corporate fixed maturities. The funds do not trade on an exchange, therefore are not included within available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.
Our available-for-sale ("AFS") investment portfolio is the largest component of our consolidated assets and it is a multiple of our shareholders’ equity. As a result, an OTTI charge could be material to our financial condition and operating results particularly during periods of dislocation in financial markets. During 2017, we recorded an OTTI charge in net income of $14 million (2016: $26 million; 2015: $73 million). Refer to the 'Net Investment Income and Net Realized Investment Gains (Losses)' section above for further details.
A security is "impaired" if fair value is below amortized cost for fixed maturities or cost for equities. On a quarterly basis, we review all impaired AFS securities to determine if impairments are other-than-temporary. The OTTI assessment is inherently judgmental, especially where securities have experienced severe declines in fair value over a short period. Our review process begins with a quantitative analysis to identify securities to be further evaluated for potential OTTI. For all identified securities, further fundamental analysis is performed that considers the following quantitative and qualitative factors:
The following discussion provides further details regarding our processes for identification of impairments that are other-than-temporary for AFS fixed maturities and equity securities and the recognition of the related OTTI charges in net income.
For an impaired fixed maturity, we recognize an OTTI charge in net income when we:
more likely than not will be required to sell the security before its anticipated recovery, or
For the first two criteria above, the OTTI charge is the entire difference between the security’s fair value and its amortized cost and the full amount of the impairment is charged to net income and is included in net realized investment gains (losses). If the impairment arises due to an anticipated credit loss on the security (third criterion above), we recognize only the credit loss component (i.e. the amount representing the decrease in cash flows expected to be collected) of the OTTI charge in net income with a corresponding adjustment to amortized cost (new cost basis) of the security. The non-credit component (e.g. interest rates, market conditions, etc.) of the OTTI charge is recognized in other comprehensive income in shareholders’ equity.
For impaired investment-grade securities (i.e. rated BBB- or above) that we do not intend to sell and it is more likely than not that we will not be required to sell, we have established some parameters for identifying securities with potential credit losses. Our parameters focus primarily on the extent and duration of the decline, including but not limited to:
declines in value greater than 20% for nine consecutive months, and
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
We have audited the accompanying consolidated balance sheets of AXIS Capital Holdings Limited and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Non-cash foreign exchange losses are attributable to the reclassification of the cumulative translation adjustment related to AXIS Specialty Australia from accumulated other comprehensive income to foreign exchange losses due to the wind-down of this operation which was substantially complete at March 31, 2017 (see Note 9 'Reserve for Losses and Loss Expenses' and Note 20 'Other Comprehensive Income').
In 2016, total consideration paid for a quota share and adverse development reinsurance cover was $170 million of which $92 million was settled by transfer of securities and was treated as a non cash activity in the Consolidated Statement of Cash Flows (see Note 9 'Reserve for Losses and Loss Expenses').
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 with operations in Bermuda, the United States (U.S.), Europe, Singapore, Canada, Latin America and the Middle East, 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.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and include AXIS Capital and its wholly-owned subsidiaries.
To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year's presentation. These reclassifications did not impact results of operations, financial condition or liquidity.
other-than-temporary impairments ("OTTI") in the carrying value of available-for-sale securities; and
Net investment income includes interest and dividend income and the amortization of market premiums and discounts and is presented net of investment expenses. Investment income is recognized when earned. Purchases and sales of investments are recorded on a trade-date basis and realized gains (losses) on sales of investments are determined based on the specific identification method.
On a quarterly basis, the Company assesses whether unrealized losses on available for sale investments represent impairments that are other than temporary. Several factors are considered in this assessment including, but not limited to:
(ii) the reason for the decline (e.g. credit spread widening, credit event, foreign exchange rate movements);
(iii) the historical and implied future volatility of the fair value;
(iv) the financial condition and near-term prospects of the issuer; and
Other investments are recorded at fair value (refer to Note 7 'Fair Value Measurements'), with both changes in fair value and realized investment gains (losses) reported in net investment income.
Short-term investments primarily comprise highly-liquid debt securities with maturities greater than three months but less than one year from the date of purchase. These investments are carried at amortized cost, which approximates fair value.
Premiums receivable balances are reviewed for impairment at least quarterly and an allowance is established for amounts considered uncollectible.
Acquisition costs vary with and are directly related to the successful acquisition efforts of acquiring new or renewing existing(re)insurance contracts and consist primarily of fees and commissions paid to brokers and premium taxes. Premiums receivable are presented net of applicable acquisition costs when contract terms provide for the right of offset. Acquisition costs are shown net of commissions earned on ceded reinsurance. Net acquisition costs are deferred and charged to expense as the related premium is earned.
The estimates of reinsurance recoverable and the associated provision require management’s judgment and are reviewed in detail on a quarterly basis. Any adjustments to amounts recognized in prior periods are reported in net losses and loss expenses in the consolidated statements of operations for the period when the adjustments were identified.
The Company’s reporting currency is the U.S. dollar. In translating the financial statements of its subsidiaries or branches where the functional currency is other than the U.S. dollar, assets and liabilities are converted into U.S. dollars using the rates of exchange in effect at the balance sheet dates and revenues and expenses are converted using the weighted average foreign exchange rates for the period. The effect of translation adjustments is reported as a separate component of AOCI in shareholders’ equity.
The Company is authorized to issue restricted stock units, performance units, restricted shares, stock options, stock appreciation rights and other equity-based awards to its employees and directors. The Company's plan includes both share and cash-settled awards comprising of service and performance based awards. The fair value of share 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 equity performance-vesting restricted stock units ("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 service and performance based cash-settled awards is re-measured at each balance sheet date, with the effects
The Company may enter into derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts as part of its overall foreign currency risk management strategy, to obtain exposure to a particular financial market or for yield enhancement. During 2013, the Company 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. Effective July 1, 2017, the Company no longer writes derivative-based risk management products which address weather risks. From time to time the Company may also enter into (re)insurance contracts that meet the Financial Accounting Standards Board's ("FASB") definition of a derivative contract.
The Company measures all derivative instruments at fair value (see Note 7 'Fair Value Measurements') and recognizes them as either assets or liabilities in the Consolidated Balance Sheets. Subsequent changes in fair value and any realized gains or losses are recognized in the Consolidated Statements of Operations.
If goodwill or an intangible asset is impaired, the carrying value of the asset is reduced to fair value and a corresponding expense is recorded in the Consolidated Statements of Operations.
Certain subsidiaries and branches of the Company operate in jurisdictions where they are subject to taxation. Current and deferred income taxes are charged or credited to net income, or in certain cases to AOCI, based upon enacted tax laws and rates applicable in the relevant jurisdiction in the period in which the tax becomes accruable or realizable. Deferred income taxes are provided for all temporary differences between the bases of assets and liabilities used in the Consolidated Balance Sheets and those used in the various jurisdictional tax returns. When the assessment indicates that it is more likely than not that a portion of a deferred tax asset will not be realized in the foreseeable future, a valuation allowance against deferred tax assets is recorded. The Company recognizes the tax benefits of uncertain tax positions only when the position is more-likely-than-not to be sustained upon audit by the relevant taxing authorities.
simplifies the impairment assessment of equity investments without readily determinable values by requiring a qualitative assessment to identify impairment, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost,
This guidance is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted for certain of the amendments. The adoption of this guidance is expected to have a material impact on the Company's results of operations as changes in fair value of equity securities will be included in net income rather than other comprehensive income. At December 31, 2017, accumulated other comprehensive income included $70 million of net unrealized gains on equity securities, net of taxes.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash" which addresses diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance will require a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The guidance will be adopted on a retrospective basis. As this guidance relates solely to financial statement disclosures, the adoption of ASU 2016-18, will not impact the Company's results of operations, financial condition and liquidity.
In March 2017, the FASB issued ASU 2017-08 "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities" which shortens the amortization period for certain purchased callable debt securities held at a premium. This guidance is effective for interim and annual reporting periods, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its results of operations, financial condition and liquidity.
the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and
The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update. This guidance is effective for interim and annual reporting periods, beginning after December 15, 2017, with early adoption permitted. The Company anticipates adopting this guidance effective January 1, 2018. The adoption of this guidance will not materially impact the Company's results of operations, financial condition or liquidity.
underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.
This guidance is effective for interim and annual reporting periods, beginning after December 15, 2018, with early adoption permitted. The Company anticipates adopting this guidance effective January 1, 2018. As a consequence of U.S. Tax Reform, the Company recognized a tax benefit of $2 million related to the revaluation of net deferred tax liabilities associated with the reduction in the U.S. corporate income tax rate from 35% to 21%, attributable to net unrealized investment gains associated with investment held by the Company's U.S domiciled entities. The adoption of this guidance will not materially impact the Company's results of operations, financial condition or liquidity.
In connection with the acquisition of Novae, the Company incurred transaction and reorganization related expenses of $27 million in the year ended December 31, 2017, which included transaction costs, such as due diligence, legal, accounting, investment banking fees and expenses, as well as integration expenses related to the integration of Novae into the Company's operations and compensation-related costs associated with the termination of certain employees.
The purchase price was allocated to the assets acquired and liabilities assumed of Novae based on estimated fair values at the closing date and the Company recognized goodwill of $54 million.
The Company identified finite lived intangible assets of $385 million, including Value of Business Acquired ("VOBA") which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction, of $257 million and finite lived intangible assets primarily related to distribution networks of $128 million. Finite lived intangible assets will be amortized over a weighted average period of 7 years. The Company also identified indefinite lived intangible assets related to Lloyd's syndicate capacity of $95 million.
Reserves for losses and loss expenses: To reflect adjustments arising from the alignment of premium recognition accounting policies and reserving methodologies, as well as the price associated with the Reinsurance to Close ("RITC") of the 2015 and prior years of account of Lloyd's Syndicate 2007 ;
Identifiable intangible assets at the acquisition date are included in intangible assets in the Consolidated Balance Sheets and are shown in the following table:
Valuation methodologies applicable to identifiable intangible assets are explained as follows:
The following selected audited information is a summary of the results of Novae that has been included in the Consolidated Financial Statements for the year ended December 31, 2017.
The allocation of the purchase price was based on information included in unaudited financial statements at March 31, 2017. The allocation is subject to change if additional information becomes available within the measurement period, which cannot exceed 12 months from the acquisition date. The fair values of the assets acquired and liabilities assumed may be subject to adjustments, which may impact the amounts recorded for the assets acquired and liabilities assumed, as well as the bargain purchase gain.
On September 6, 2017 (the "closing date"), the Company acquired a 100% ownership interest in Contessa Limited ("Contessa"). Contessa is a Managing General Agent that that manages, underwrites, services and administers small and medium sized commercial property and casualty business on behalf of the Company. The purchase price was allocated to the assets acquired and liabilities assumed of Contessa based on estimated fair values on the closing date. Consequently, the Company recognized goodwill of $1 million.
The Company's reinsurance segment provides non-life treaty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, professional lines, credit and surety, motor, liability, agriculture, engineering and marine and other together with discontinued lines which represents lines of business that Novae exited or placed into run-off in the three month period ended December 31, 2016 and in the three month period ended March 31, 2017. The reinsurance segment also wrote derivative based risk management products designed to address weather and commodity price risks until July 1, 2017.
On April 1, 2015, the Company completed the acquisition of Ternian Insurance Group LLC ("Ternian"), a leading provider of voluntary, limited benefit affordable health plans and other employee benefits coverage for hourly and part-time workers and their families. The Company recognized intangible assets of $13 million associated with this acquisition.
During September 2015, as part of its profitability enhancement initiatives, the Company decided to wind-down all of its retail insurance operations in Australia. As a result of this decision, the Company recognized an impairment of an associated finite-lived intangible asset. The impaired intangible asset related to the purchase of an Australian distribution network in 2009 that had an initial expected useful life of thirty years. The impairment expense of $13 million was included as part of the reorganization and related expenses in the Consolidated Statement of Operations.
In connection with the acquisition of Novae, the Company identified finite lived intangible assets of $385 million, including Value of Business Acquired ("VOBA") which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction, of $257 million and other finite lived intangible assets primarily related to distribution networks of $128 million. Finite lived intangible assets will be amortized over a weighted average period of 7 years, including VOBA that will be amortized over a period of 4 years and other finite lived intangible assets that will be amortized over a weighted average of 13 years, respectively. In addition, the Company identified indefinite lived intangible assets related to Lloyd's syndicate capacity of $95 million. The Company also recognized goodwill of $54 million.
Intangible assets with an indefinite life include U.S. state licenses that provide a legal right to transact business indefinitely and the value of Lloyd's syndicate capacity, which represents Novae's right to underwrite a certain allocated limit of premium in the Lloyd's market.
The gross amount and accumulated amortization by category of VOBA and intangible assets is shown in the following table:
The amortized cost or cost and fair values of the Company's fixed maturities and equities were as follows:
The following table summarizes fixed maturities and equities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
The following table provides a breakdown of the Company's mortgage loans held-for-investment:
For commercial mortgage loans, the primary credit quality indicator is the debt service coverage ratio (which compares a property’s net operating income to amounts needed to service the principal and interest due under the loan, generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss) and the loan-to-value ratio (loan-to-value ratios compare the unpaid principal balance of the loan to the estimated fair value of the underlying collateral, generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss). The debt service coverage ratio and loan-to-value ratio, as well as the values utilized in calculating these ratios, are updated annually, on a rolling basis.
The Company has a high quality mortgage loan portfolio with weighted average debt service coverage ratios in excess of 3.0x and weighted average loan-to-value ratios of less than 60%. There are no credit losses associated with the commercial mortgage loans held by the Company at December 31, 2017.
Private equity funds: Seek to achieve attractive risk-adjusted returns by investing in private transactions over the course of several years.
Two common redemption restrictions which may impact the Company's ability to redeem hedge funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2017 and 2016, neither of these restrictions impacted the Company's redemption requests. At December 31, 2017, $38 million (2016: $60 million), representing 11% (2016: 12%) of total hedge funds, relate to holdings where the Company is still within the lockup period. The expiration of these lockup periods range from March 2018 to March 2019.
At December 31, 2017, the Company had $137 million (2016: $176 million) of unfunded commitments as a limited partner in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to 3 years.
Syndicate 2007 holds overseas deposits which include investments in private funds in which the underlying investments are primarily U.S. government, Non-U.S. government and corporate fixed maturities. The funds do not trade on an exchange therefore are not included within available for sale investments.
The following table summarizes the OTTI recognized in net income by asset class:
Credit losses are calculated based on the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to the impairment. The following provides a summary of the credit loss activities by asset class for the above table as well as the significant inputs and the methodology used to estimate these credit losses.
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, 2017, the Company's holdings in sovereign debt, including $185 million (2016: $28 million) relating to the eurozone countries, were substantially all investment-grade securities. The gross unrealized losses of $10 million at December 31, 2017 were mainly due to foreign exchange losses. Based on analysis performed, the Company does not anticipate any credit losses on non-U.S. government fixed maturities held at December 31, 2017. In 2017, 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, the Company's projected cash flows are primarily driven by assumptions regarding the probability of default and the severity associated with those defaults. The Company's 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 2017, the OTTI charges on corporate debt securities were mainly related to significant loss severity, unrealized foreign exchange losses on certain securities where forecasted recovery was uncertain, as well as the Company's intent to sell.
The Company's investments in CMBS are diversified and primarily rated AA or better, with a weighted average estimated subordination percentage of 29% at December 31, 2017 (2016: 36%). Based on discounted cash flows at December 31, 2017, the current level of subordination is sufficient to cover the estimated loan losses on the underlying collateral of the CMBS.
There were no OTTI losses on equity securities in 2017. The OTTI losses on equity securities in 2016 are primarily due to the severity of their unrealized loss positions, for which the Company concluded the forecast recovery period was uncertain. The recognition of such losses does not necessarily indicate that sales will occur or that sales are imminent or planned. At December 31, 2017, the fair value of the Company's equities was $636 million (2016: $639 million), which included $2 million (2016: $12 million) of gross unrealized losses.
The capital provided to support underwriting, or Funds at Lloyd’s ("FAL"), may be satisfied by cash, certain investments and letters of credit provided by approved banks (see Note 12 'Commitments and Contingencies' and Note 21 'Statutory Financial Information').
Further, at December 31, 2017 collateral in trust for third party agreements included $1,120 million of fixed maturities and equity securities, and cash of $55 million held on deposit to support the underwriting activities of Syndicate 2007. At December 31, 2017 collateral in trust for third party agreements included cash of $140 million (2016: $84 million) held on deposit to support the underwriting activities of Syndicate 1686.
The valuation techniques, including significant inputs and assumptions generally used to determine the fair values of the Company's financial instruments as well as the classification of the fair values of financial instruments in the fair value hierarchy are described in detail below.
Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of corporate debt securities are classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.
CMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using a pricing model which uses dealer quotes and other available trade information along with security level characteristics to determine deal specific spreads. As the significant inputs used to price these securities are observable market inputs, the fair values of CMBS securities are classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.
Other privately held securities include convertible preferred shares, convertible notes and notes payable. These securities are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these securities are determined using an internally developed discounted cash flow model. As the significant inputs used to price these securities are unobservable, the fair value of these securities are classified as Level 3.
Overseas deposits include investments in private funds held by Syndicate 2007 in which the underlying investments are primarily U.S. government, Non-U.S. government and corporate fixed maturities. The funds do not trade on an exchange therefore are not included within available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.
Derivative instruments include foreign currency forward contracts, exchange traded interest rate swaps and commodity contracts that are customized to the Company's economic hedging strategies and trade in the over-the-counter derivative market. The fair values of these derivatives are determined using the market approach valuation technique based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. Accordingly, the fair values of these derivatives are classified as Level 2.
Weather derivatives relate to non-exchange traded derivative-based risk management products addressing weather risks. The fair values of these derivatives are determined using observable market inputs and unobservable inputs in combination with industry or internally developed valuation and forecasting techniques. Accordingly, the fair values of these derivatives are classified as Level 3.
Other underwriting-related derivatives include insurance and reinsurance contracts that are required to be accounted for as derivatives. These derivative contracts are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these derivatives are determined using internally developed discounted cash flow models. As the significant inputs used to price these derivatives are unobservable, the fair value of these contracts are classified as Level 3.
During 2017 and 2016, the Company had no transfers between Levels 1 and 2.
Except certain fixed maturities and insurance-linked securities which are priced using broker-dealer quotes (underlying inputs are not available), the following table quantifies the significant unobservable inputs used in estimating fair values at December 31, 2017 for investments classified as Level 3 in the fair value hierarchy.
The liquidation valuation is based on the fair values of the net underlying collateral which is determined by applying market discount margins by credit quality bucket. An increase (decrease) in the market discount margin would result in a decrease (increase) in value of the Company's CLO-Equities.
On a quarterly basis, the Company's valuation process for CLO-Equities includes a review of the underlying collateral along with related discount margins by credit quality bucket used in the liquidation valuation and a review of the underlying cash flows and key assumptions used in the discounted cash flow model. The above significant unobservable inputs are reviewed and updated based on information obtained from secondary markets, including information received from the managers of the Company's CLO-Equity portfolio. In order to assess the reasonableness of the inputs the Company uses in its models, the Company maintains an understanding of current market conditions, historical results, as well as emerging trends that may impact future cash flows. In addition, the assumptions the Company uses in its models are updated through regular communication with industry participants and ongoing monitoring of the deals in which the Company participates (e.g. default and loss severity rate trends).
Gains and losses included in net income on fixed maturities are included in net realized investment gains (losses). Gains and (losses) included in net income on other investments are included in net investment income. Gains (losses) on weather derivatives and other underwriting-related derivatives included in net income are included in other insurance-related income.
The transfers into and out of fair value hierarchy levels reflect the fair values of the securities at the end of the reporting period.
The transfers into Level 2 from Level 3 made during 2017 and 2016 were primarily due to the availability of observable market inputs and quotes from pricing vendors on certain fixed maturities.
Measuring the Fair Value of Other Investments Using Net Asset Valuations
If there is a reporting lag between the current period end and reporting date of the latest available fund valuation for any hedge fund, the Company estimates fair values by starting with the most recently available fund valuation and adjusting for return estimates as well as any subscriptions, redemptions and distributions that took place during the current period. Return estimates are obtained from the relevant fund managers. Accordingly, the Company does not typically have a reporting lag in fair value measurements of these funds. Historically, the Company's valuation estimates incorporating these return estimates have not significantly diverged from the subsequently received NAVs.
The carrying value of mortgage loans held-for-investment approximated their fair value at December 31, 2017. The fair values of mortgage loans are primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk, or are determined from pricing for similar loans. As mortgage loans are not actively traded their fair values are classified as Level 3.
Within the investment portfolio the Company is exposed to foreign currency risk. Accordingly, the fair values for the investment portfolio are partially influenced by the change in foreign exchange rates. The Company may enter into foreign currency forward contracts to manage the effect of this foreign currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.
During 2013, the Company began to write derivative-based risk management products designed to address weather risks with the objective of generating profits on a portfolio basis. The majority of this business consists of receiving a payment at contract inception in exchange for bearing the risk of variations in a quantifiable weather-related phenomenon, such as temperature. Where a client wishes to minimize the upfront payment, these transactions may be structured as swaps or collars. In general, the Company's portfolio of such derivative contracts is of short duration, with contracts being predominantly seasonal in nature. In order to economically hedge a portion of this portfolio, the Company may also purchase weather derivatives. Effective July 1, 2017, the Company no longer writes derivative-based risk management products which address weather risks.
The reserving process begins with the collection and analysis of paid and incurred claim data for each of the Company's segments. The segmental data is disaggregated by reserving class and further disaggregated by underwriting year (i.e. the year in which the contract generating the premium and losses incepted). Underwriting year information is used to analyze business and subsequently allocate reserves to the respective accident years. Reserve classes are selected to ensure that the underlying contracts have homogeneous loss development characteristics, while remaining large enough to make the estimation of trends credible. This data, in addition to industry benchmarks, serves as a key input to many of the methods employed by the Company's actuaries. The relative weights assigned to its own historical loss data versus industry data vary according to the length of the development profile for the reserving class being evaluated. (See 'Net Incurred and Paid Claims Development Tables By Accident Year' below for further details by reserve class.)
The following is a brief description of the reserve estimation methods commonly employed by the Company's actuaries:
The use of the above actuarial methods requires the Company to make certain explicit assumptions, the most significant of which are: (1) expected loss ratios and (2) loss development patterns.
In earlier years, significant reliance was placed on industry benchmarks in establishing expected loss ratios and loss development patterns. Over time, more reliance has been placed on historical loss experience in establishing these ratios and patterns where the Company believes the weight of its own actual experience has become sufficiently credible for consideration. In establishing expected loss ratios for the insurance segment, consideration is given to a number of other factors, including exposure trends, rate adequacy on new and renewal business, ceded reinsurance costs, changes in claims emergence and underwriters’ view of terms and conditions in the market environment. For the reinsurance segment, expected loss ratios are based on a contract-by-contract review, which considers information provided by clients together with estimates provided by underwriters and actuaries about the impact of changes in pricing, terms and conditions and coverage. Market experience of some classes of business as compiled and analyzed by an independent actuarial firm has also been considered, as appropriate. The weight given to experience differs for each of the three claim tails.
The claim tails for long-tail business, in contrast to short and medium-tail business, is expected to be notably longer, as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. As a general rule, estimates of accident year or underwriting year ultimate losses for long-tail business are notably more uncertain than those for short and medium-tail business. To date, key actuarial assumptions for long-tail business have been derived extensively from industry benchmarks supplemented with the Company own historical experience. Given the Company's relatively short operating history in comparison to the development tail for this business, the Company does not believe that its own historical loss development for long-tail business has amassed an appropriate volume to serve as a fully credible input into the key actuarial assumptions previously outlined. While industry benchmarks that the Company believes reflect the nature and coverage of its business are considered, actual loss experience may differ from the benchmarks based on industry averages. Due to the length of the development tail for this business, reserve estimates for most accident years and underwriting years are predominantly based on the BF or ELR method and the consideration of qualitative factors.
The Company cannot estimate losses from widespread catastrophic events, such as hurricanes and earthquakes, using the traditional actuarial methods described above. Rather, loss reserves for such events are estimated by management in collaboration with actuaries, claim handlers and underwriters after a catastrophe occurs by completing an in-depth analysis of individual contracts which may potentially be impacted by the catastrophic event. This in-depth analysis may rely on several sources of information, including:
a review of portfolio of contracts performed to identify those contracts which may be exposed to the catastrophic event;
A blend of these information sources is generally used to arrive at aggregate estimates of the ultimate losses arising from the catastrophic event. In subsequent reporting periods, changes in paid and incurred losses in relation to each significant catastrophe are reviewed and adjustments are made to estimates of ultimate losses for each event if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified.
The Company's reserving process involves the collaboration of underwriting, claims, actuarial, legal, ceded reinsurance and finance departments, includes various segmental committee meetings and culminates with the approval of a single point best estimate by the Company's Group Reserving Committee, which comprises senior management. In selecting this best estimate, management considers actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to: the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, potential severity of individual claims and the extent of internal historical loss data versus industry information. While these qualitative factors are considered in arriving at the point estimate, no specific provisions for qualitative factors are established.
The following table presents a reconciliation of beginning and ending gross reserve for losses and loss expenses and net reserve for unpaid losses and loss expenses for the years indicated:
During April 2016, the Company entered into a quota share and adverse development cover reinsurance agreement, a retroactive contract which was deemed to have met the established criteria for retroactive reinsurance accounting. At December 31, 2016, foreign exchange and other included reinsurance recoverables of $150 million related to this reinsurance agreement.
Development from these classes contributed $60 million, $148 million and $152 million total net favorable prior year reserve development in 2017, 2016 and 2015, respectively, and primarily reflected the recognition of better than expected loss emergence in the years.
Medium-tail business consists primarily of insurance and reinsurance professional reserve classes, credit and political risk insurance reserve class, and credit and surety reinsurance reserve class.
The reinsurance professional reserve class recognized $44 million, $30 million and $38 million of net favorable prior year development in 2017, 2016 and 2015, respectively. The net favorable prior year loss developments on this reserve class continued to reflect the generally favorable experience on earlier accident years as the Company continued to transition to more experience based methods. As loss experience on these accident years has generally been better than expected, this resulted in the recognition of net favorable prior year reserve development.
The reinsurance liability reserve classes contributed net favorable prior year development of $43 million, $44 million and $46 million in 2017, 2016 and 2015, respectively. The net favorable prior year development primarily reflected the progressively increased weight given by management to the generally favorable emerging loss experience on earlier accident years.
Non-U.S. dollar denominated loss data is converted to U.S. dollar at the rates of exchange in effect at the balance sheet date for material underlying currencies. Fluctuations in currency exchange rates may cause material shifts in loss development. Reserves for losses and loss expenses, disclosed in the Consolidated Balance Sheets, are also revalued using the exchange rate at the balance sheet date.
This reserve class includes property, terrorism as well as accident and health.
The accident and health line of business includes accidental death, travel insurance and specialty health products for employer and affinity groups, as well as accident and health reinsurance for catastrophic or per life events on a quota share and/or excess of loss basis, with aggregate and/or per person deductibles. The accident and health line of business has contributed an increasing portion of the premium earned within this reserve class since 2010 with a large increase in reported claims observed from 2012. In particular, an increase in limited benefits medical business written in 2017 has resulted in a significant increase in reported claims observed in that year.
In general, reporting and payment patterns are relatively short-tailed although they can be volatile due to the incidence of catastrophe events.
This reserve class includes the credit and political risk line of business which provides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events.
The credit insurance coverage is primarily for lenders seeking to mitigate the risk of non-payment from their borrowers. In order to claim compensation under a credit insurance contract, the insured (most often a bank) cannot assign, without the Company's prior agreement, the insured contract (most often a loan) to any third party and is normally obliged to hold a material portion of insured asset on their own books, unhedged and uninsured. Claims for this business tend to be characterized by their severity risk, as opposed to their frequency risk. Claim reporting and payment patterns are anticipated to be volatile. Under the notification provisions of credit insurance policies issued by the Company, it anticipates being advised of an insured event within a relatively short time period. As a result, the Company generally estimates ultimate losses based on a contract-by-contract analysis which considers the contracts’ terms, the facts and circumstances of underlying loss events and qualitative input from claims managers.
lines in the insurance segment, the Company also relies upon the evaluation of the open claim inventory in addition to the commonly employed actuarial methods when establishing reserves.
The catastrophe line of business provides protection for most catastrophic losses that are covered in the underlying policies written by the Company's cedants. The exposure in the underlying policies is principally property exposure but also covers other exposures including workers compensation, personal accident and life. The principal perils in this portfolio are hurricane and windstorm, earthquake, flood, tornado, hail and fire. In some instances, terrorism may be a covered peril or the only peril. The Company underwrites catastrophe reinsurance business principally on an excess of loss basis.
The agriculture line of business provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail, and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. The Company underwrites agriculture reinsurance business on both a proportional and aggregate stop loss basis.
This reserve class includes the professional line of business which provides cover for directors' and officers' liability, employment practices liability, medical malpractice, professional indemnity, environmental liability and miscellaneous errors and omissions insurance risks. The underlying business is predominantly written on a claims-made basis. Business is written on both a proportional and excess of loss basis. Typically, this reserve class is anticipated to exhibit medium to long-tail claim reporting and payment patterns.
With respect to key actuarial assumptions, the Company is progressively giving more weight to its own experience when establishing expected loss ratios and selected loss development patterns, though it continues to consider industry benchmarks. Loss reporting patterns for professional lines business tend to be volatile, causing instability in actuarial indications based on incurred loss data until an accident year matures for a number of years. Consequently, initial loss reserves for an accident year or underwriting year are generally based upon an ELR method and the consideration of relevant qualitative factors. As accident and underwriting years mature, the Company increasingly gives more weight to methods that reflect its actual experience until its selections are based almost exclusively on experience-based methods. The Company evaluates the appropriateness of the transition to experience-based methods at the reserve class level, commencing this transition when it believes that its incurred loss development is sufficient to produce meaningful actuarial indications. The rate at which the Company transitions fully to sole reliance on experience-based methods can vary, depending on its assessment of the stability and relevance of such indications.
This reserve class includes the motor line of business which provides cover to insurers for motor liability and motor property damage losses arising from any one occurrence. A loss occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence.
This reserve class includes the liability line of business which provides cover to insurers of standard casualty business, excess and surplus casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, although workers' compensation and auto liability are also covered.
In October 2017, the Company acquired Novae, a diversified property and casualty (re)insurance business operating through Syndicate 2007 at Lloyd’s. Novae writes a wide range of property, marine, aviation, credit and political risk, professional lines, motor and liability business on a worldwide basis. In addition, cover is also offered for various other lines of business, including agriculture reinsurance, bloodstock, construction, accident and health, political violence and engineering reinsurance.
Marine: The marine line of business covers marine liability, energy, hull, cargo, specie and war exposures and includes risks which are mostly written on a direct basis. In addition, a relatively small amount of marine business is written on an excess of loss basis. The complex nature of claims arising under marine policies tends to result in reporting and payment patterns that are longer than those of the property lines of business.
Aviation: The aviation line of business provides hull, liability, and war cover and predominantly relates to an excess of loss reinsurance account, with a smaller amount of satellite and general aviation business written on a proportional basis. Payments relating to hull damage can settle relatively quickly but an element of the claims profile will often be longer tail due to liability exposures.
Professional Lines: Professional lines business provides cover for directors’ and officers’ liability, errors and omissions liability, crime, professional indemnity, cyber and medical malpractice and includes risks which are mainly written on a direct basis. Most professional lines business written from 2002 onwards relates to non-U.S. exposures. Typically, this business is anticipated to exhibit medium to long tail claim reporting and payment patterns.
Liability: The general liability reinsurance line of business provides cover for directors’ and officers’ liability, errors and omissions liability, crime, professional indemnity, cyber and medical malpractice written on an excess of loss basis from 2010 onwards. Most general liability reinsurance business written relates to non-U.S. commercial liability insurance but also includes U.S. casualty excess of loss reinsurance from 2015. Claim reporting and payment patterns are typically long-tail in nature and, therefore, subject to increased uncertainty surrounding future loss development. In particular, claims can be subject to inflation from a number of sources including, but not limited to, economic and medical inflation, judicial inflation and changing social trends.
The following table reconciles the reserves for loss and loss expenses as of December 31, 2017 as reported in the Consolidated Balance Sheet to the reserves for loss and loss expenses included in the development tables:
Non-U.S. dollar denominated loss data is converted to U.S dollar at the rates of exchange in effect at the balance sheet date for material underlying currencies. Fluctuations in currency exchange rates cause material shifts in loss development. Reserves for losses and loss expenses, disclosed in the Consolidated Balance Sheets, are also revalued using the exchange rate at the balance sheet date.
The Company has 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 remaining scheduled payments of principal and interest. The related indentures contain various covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. The Company was in compliance with all the covenants contained in the indentures at December 31, 2017.
The scheduled maturity of the Company's aggregate amount of its debt obligation on its consolidated balance sheet at December 31, 2017 is shown in the following table :
On September 18, 2013, the Credit Facility was amended in order to permit AXIS Capital and its subsidiaries to enter into swap contracts and other arrangements related to weather derivative transactions. All other material terms and conditions remained unchanged.
On March 27, 2017, the Participating Subsidiaries amended their existing $500 million secured LOC Facility with Citibank to include an additional $250 million of secured letter of credit capacity (the "$250 Million Facility") pursuant to a Committed Facility Letter and an amendment to the Master Reimbursement Agreement. Under the terms of the $250 Million Facility, letters of credit to a maximum aggregate amount of $250 million are available for issuance on behalf of the Participating Subsidiaries. These letters of credit will principally be used to support the reinsurance obligations of the Participating Subsidiaries. The $250 Million Facility is subject to certain covenants, including the requirement to maintain sufficient collateral, as defined in the LOC Facility Documents, to cover all of the obligations under the LOC Facility. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to the lender. In the event of default, the lender may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the facility to any or all of the participating operating subsidiaries.
At December 31, 2017, letters of credit outstanding under the LOC Facility totaled $387 million. At December 31, 2017, the Company was in compliance with all LOC Facility covenants.
Credit risk aggregation is also managed through minimizing overlaps in underwriting, financing and investing activities.
The Company's investment portfolio is managed by external investment managers in accordance with its investment guidelines. The Company limits such credit risk through diversification, issuer exposure limitation graded by ratings and, with respect to custodians, through contractual and other legal remedies. Excluding U.S. government and agency securities, the Company limits its concentration of credit risk to any single corporate issuer to 2% or less of its investment grade fixed maturities portfolio for securities rated A- or above and 1% or less of its investment grade fixed maturities portfolio for securities rated below A-.
At December 31, 2017, the three largest balances by reinsurer accounted for 12%, 11% and 7% (2016: 13%, 10% and 9%) of reinsurance recoverable on unpaid and paid losses.
At December 31, 2017, amounts related to reinsurers with the ten largest balances comprised 56% (2016: 67%) of reinsurance recoverable on unpaid and paid losses and had a weighted average A.M. Best rating of A+ (2016: A+).
The diversity of the Company's client base limits the credit risk associated with its premium balances receivable. In addition, for insurance contracts the Company has contractual rights to cancel cover for non-payment of premiums and for reinsurance contracts the Company has contractual rights to offset premium balances receivable with corresponding payments for losses and loss expenses.
Brokers and other intermediaries collect premiums from customers on behalf of the Company. The Company has policies and standards in place to manage and monitor credit risk from intermediaries with a focus on day-to-day monitoring of the largest positions.
At December 31, 2017, the Company recorded an allowance for estimated uncollectible premium balances receivable of $6 million (2016: $2 million).
The Company produces its business through brokers and direct relationships with insurance companies. For the year ended December 31, 2017, three brokers accounted for 49% (2016: 52%; 2015: 53%) of total gross premiums written.
In the ordinary course of business, the Company renews and enters into new leases for office space which expire at various dates. For the year ended December 31, 2017, total rent expense with respect to operating leases was $29 million (2016: $25 million; 2015: $28 million).
At December 31, 2017, investments and cash of $1.2 billion (2016: $383 million) were restricted to satisfy the Company's FAL requirements (see Note 6 'Investments' and Note 21 'Statutory Financial Information').
Due to the net loss incurred in the year ended December 31, 2017, all the share equivalents were anti-dilutive.
The following table presents changes in common shares issued and outstanding, excluding restricted shares related to the Company's share-based compensation plans (see Note 16 'Share-Based Compensation'):
During 2017, the total cash dividends declared per common share were $1.53 (2016: $1.43; 2015: $1.22).
On July 5, 2017 the Company and the board of directors of Novae announced that it had agreed on terms of a recommended offer to be made by the Company to acquire the entire issued and to be issued share capital of Novae. Following the offer, the Company suspended its open market share repurchase plan.
The following table presents common share repurchased, from shares held in treasury:
Amounts in 2016 and 2015 include common shares acquired under the accelerated share repurchase program of 1,358,380 and 4,149,378, respectively (see below for more detail).
December 1, 2015 at a redemption price of $100.00 per share. Dividends on the Series B preferred shares are non-cumulative. Holders of Series B 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 first day of March, June, September and December of each year, commencing on March 1, 2006, up to but not including January 27, 2016. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 7.50% of the liquidation preference per annum.
In 2017, the total dividends declared and paid on Series C preferred shares were $0.4297 per share. In 2016 and 2015, the total dividends declared and paid on Series C preferred shares were $1.7188 per share in each year.
In 2017, total dividends declared on Series E preferred shares were $137.5 per share of which, $103.13 was paid in 2017 and the remaining $34.375 was paid in 2018. In 2016, total dividends declared on Series E preferred shares were $34.375 per share, which were subsequently paid in 2017.
For eligible U.S. employees, the Company provides a non-qualified deferred compensation plan that enables employees to make contributions to the plan that are in excess of those permitted under the Company's 401(k) Plan. Further, employees are permitted to make additional contributions from any bonus received and to benefit from discretionary employer contribution to the Plan.
In May 2017, shareholders approved the establishment of the AXIS Capital Holdings Limited 2017 Long-Term Equity Compensation Plan (the "2017 Plan"). The 2017 Plan provides for, among other things, the issuance of restricted stock units, performance units, restricted shares, stock options, stock appreciation rights and other equity-based awards to our employees and directors. The 2017 Plan authorizes the issuance of a total of 3,400,000 shares. The Company's 2017 Plan replaced its 2007 Long-Term Equity Compensation Plan ("2007 Plan") upon expiration of the 2007 Plan in May 2017. All remaining shares available pursuant to the 2007 Plan have been canceled although awards made pursuant to the 2007 Plan prior to its expiration remain in effect in accordance with the terms of the 2007 Plan. At December 31, 2017, 3,274,004 equity-based awards remained available for grant pursuant to the 2017 Plan.
Restricted stock units ("RSUs") granted pursuant to the 2017 Plan or the 2007 Plan generally cliff vest at the end of a three year period, vest in accordance with a three year graded vesting schedule, or vest in four equal installments upon the first, second, third and fourth anniversaries of the grant date.
Cash settled restricted stock units ("Cash settled RSUs") granted pursuant to the 2017 Plan or the 2007 Plan are liability awards and generally cliff vest at the end of a three year period, or vest in four equal installments upon the first, second, third and fourth anniversaries of the date of grant.
Performance-vesting restricted stock units ("PSUs") granted pursuant to the 2017 Plan or the 2007 Plan, represent the right to receive a specified number of common shares in the future, based upon the achievement of established performance criteria and continued service during the applicable performance period. Awards granted pursuant to these plans generally cliff vest at the end of a three year period. PSUs granted are either share settled awards or cash settled liability awards.
In 2016, the Company established the AXIS Executive RSU Retirement Plan (the "Plan") to reward certain eligible long-term employees of the Company for their dedicated service. The Plan was implemented in 2017. Subject to certain conditions being met, eligible employees will not forfeit all of their outstanding RSUs or Cash settled RSUs on or following their retirement. Absent the Plan, outstanding RSUs are generally forfeited upon termination of employment.
The following table provides a summary of nonvested RSAs and share settled RSUs:
(2) Share-settled restricted stock units that vested during the year ended December 31, 2017 included 313,391 service-based restricted stock units attributable to a grant made in 2014 which was subject to a three year cliff vesting period.
The following table provides a summary of nonvested cash settled RSUs:
(1) Cash-settled restricted stock units that vested during the year ended December 31, 2017 included 307,556 service-based restricted stock units attributable to a grant made in 2014 which was subject to a three year cliff vesting period.
The Company's investment portfolio includes certain investments where it is considered to have the ability to exercise significant influence over the investment entity's operations. Significant influence is generally deemed to exist where the Company has an investment of 20% or more in the common stock of a corporation or an investment of 3% or more in closed end funds, limited partnerships, LLCs or similar investment vehicles. At December 31, 2017, the Company has $451 million (2016: $411 million) of investments where it is deemed to have the ability to exercise such significant influence. The Company generally pays management and performance fees to the investment managers of these investments. The Company considers all fees paid to the investment managers to be at market rates consistent with negotiated arms-length contracts.
Harrington and Harrington Re commenced operations in 2016 (see Note 6 'Investments'). AXIS Capital has the ability to exercise significant influence over the operating and financial policies of Harrington and Harrington Re. In the normal course of business, the Company entered into certain reinsurance transactions with Harrington Re. For the year ended December 31, 2017, the Company ceded reinsurance premiums of $213 million (2016: $128 million) and ceded losses of $119 million (2016: $27 million) to Harrington Re. In addition, Harrington Re paid certain acquisition costs and administrative fees to the Company. At December 31, 2017, the amount of reinsurance recoverable on unpaid and paid losses was $152 million (2016: $38 million) and the amount of ceded reinsurance payable included in insurance and reinsurance balances payable was $142 million (2016: $86 million) in the Consolidated balance sheets. All transactions were conducted at market rates consistent with negotiated arms-length contracts.
In connection with the acquisition of Novae, the Company incurred transaction and integration related expenses for the year ended December 31, 2017 of $27 million compared to $nil for the years ended December 31, 2016 and 2015, respectively. The transaction and integration related expenses included due diligence, legal, accounting, investment banking fees and expenses, as well as integration expenses related to the integration of Novae into the Company's operations and compensation-related costs associated with the termination of certain employees. These expenses are included in transaction and reorganization expenses in the Consolidated Statement of Operations (see Note 3 'Business Combinations').
During 2015, the Company implemented a number of profitability enhancement initiatives which resulted in the recognition of reorganization and related expenses including 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. Reorganization and related expenses amounted to $nil for the years ended December 31, 2017 and 2016 and $46 million for the year ended December 31, 2015. In addition, the Company incurred corporate expenses associated with these profitability enhancement initiatives of $nil for the years ended December 31, 2017 and 2016 and $5 million for the year ended December 31, 2015 (see Note 5 'Goodwill and Intangible Assets').
Under current Bermuda law, the Company's Bermuda domiciled subsidiaries are not required to pay any taxes in Bermuda on income or capital gains. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, it will be exempt from taxation in Bermuda until March 2035. The Company's primary Bermuda subsidiary has an operating branch in Singapore, which is subject to the relevant taxes in that jurisdiction. The branch is not under examination in this tax jurisdiction, but remains subject to examination for tax years 2014 through 2017.
The Company's 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. The Company's U.S. subsidiaries are not under examination but remain subject to examination in the U.S. for tax years 2014 through 2017.
In Canada, the Company's U.S. reinsurance company operates through a branch and its U.S. service company has an unlimited liability company subsidiary based in Canada. These Canadian operations are subject to the relevant taxes in that jurisdiction and remain subject to examination for tax years 2013 through 2017.
The Company also has subsidiaries in Ireland, the U.K., Belgium, the Netherlands, Luxembourg, Brazil and Dubai. In 2017, the Company ceased operations in Australia. These subsidiaries and their branches, are not under examination, but remain subject to examination in all applicable jurisdictions for tax years 2013 through 2017.
As a result of the Company's acquisitions of Aviabel and Novae in 2017, $103.8 million of net deferred tax liabilities were acquired or established at the acquisition date.
As a result of the Company's acquisition of Novae, these amounts include $23.0 million and $14.8 million of acquired operating loss and tax credit carryforwards, respectively.
certain other deferred tax assets related to branch operations. In 2017 the valuation allowance was released on the Australian operating loss carryforwards, capital loss carryforwards, and other deferred tax assets upon the cessation of operations. The valuation allowance was reduced by a net $1.2 million for items unrelated to the Australian operations.
The tax effects allocated to each component of other comprehensive income (loss) are shown in the following table:
Reclassifications from AOCI into net income (loss) available to common shareholders are shown in the following table:
Amounts in parentheses are debits to net income (loss) available to common shareholders
At December 31, 2017 and 2016, the statutory capital and surplus in each of the Company's most significant regulatory jurisdictions are shown in the following table:
Under the Act, AXIS Specialty Bermuda is restricted as to the payment of dividends for amounts greater than 25% of the prior year’s statutory capital and surplus, whereby an affidavit signed by at least two members of the Board of Directors is required, attesting that any dividend in excess of this amount would not cause the company to fail to meet its relevant margins. At December 31, 2017, the maximum dividend AXIS Specialty Bermuda could pay, without a signed affidavit, having met minimum levels of statutory capital and surplus requirements, was approximately $0.9 billion (2016: $1 billion).
Effective January 1, 2016, the Company's Irish subsidiaries, AXIS Specialty Europe SE and AXIS Re SE, are required to maintain the Minimum Capital Requirement ("MCR") subject to a monetary minimum floor, and the Solvency Capital Requirement ("SCR") at all times. The capital requirements are calculated by reference to Solvency II definitions. If an entity falls below the MCR or SCR, the Central Bank of Ireland is authorized to take action to restore the financial position of the Company's Irish subsidiaries. During 2017 and 2016, the Company's Irish subsidiaries were in compliance with these requirements.
The Company's U.S. operations required statutory capital and surplus is determined using the risk-based capital formula ("RBC"), which is the National Association of Insurance Commissioners' (the "Commissioner") method of measuring the minimum capital appropriate for U.S. reporting entities to support its overall business operations in consideration of its size and risk profile. If a company falls below the authorized control level as determined under the RBC, 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 the Company's 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 the Company's 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, 2017, the maximum dividend that the Company's U.S. insurance operations could pay without regulatory approval was approximately $115 million (2016: $147 million).
The Company operates in the Lloyd’s market through AXIS Corporate Capital UK Limited which is the sole corporate member of Syndicate 1686. Syndicate 1686 was managed by a third party managing agency, Asta Managing Agency Limited until August 2017 when the Company received final authorization from Lloyd's, the Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA") for its own Lloyd's managing agent, AXIS Managing Agency Limited ("AXIS Managing Agency"). Effective August 4, 2017, AXIS Managing Agency assumed management of Syndicate 1686, replacing the Company's third-party managing agency agreement with Asta Managing Agency Limited, which had been in place since 2014.
Each year, corporate members apply to Lloyd's to release accumulated funds, whether syndicate profits or interest on FAL, which are in excess of the agreed FAL requirements. At December 31, 2017 and 2016, the actual capital and assets exceeded the FAL requirements for Syndicate 1686. At December 31, 2017 the actual capital and assets exceeded the FAL requirements for Syndicate 2007. The release of funds for Syndicate 1686 for the year ended December 31, 2016 made during 2017 was $1.6 million and the release of funds for Syndicate 2007 for the year ended December 31, 2016 made during 2017 was $41 million.
The Company's operating subsidiaries in Bermuda and the U.S. maintain branch offices in Singapore and Canada, respectively. The Company's Irish operating subsidiaries maintain branch offices in Switzerland, and the U.K. In 2017, the Company ceased operations in Australia. As branch offices are not considered separate entities for regulatory purposes, the required and actual statutory capital and surplus amounts for each jurisdiction in the table above include amounts related to the applicable branch offices. The Company's branch offices in Singapore and Canada are subject to additional minimum capital or asset requirements in their countries of domicile. At December 31, 2017 and 2016, the actual capital/assets for each of these branches exceeded the relevant local regulatory requirements.
During the three months ended December 31, 2017, the Company recognized a tax expense of $42 million due to the revaluation of net deferred tax assets pursuant to the U.S. Tax Reform. Refer to Item 8, Note 19 of the Consolidated Financial Statements 'Income Taxes' for further details.
During the three months ended December 31, 2017, the Company recognized amortization of value of business acquired of $50 million related to the acquisition of Novae. Refer to Item 8, Note 3 and Note 5 of the Consolidated Financial Statements 'Business Combinations' and 'Goodwill and Intangible Assets' for further details.
Reinsurance to Close ("RITC") of the 2015 and prior years of account of Syndicate 2007
The Company continually monitors and reviews its segment reporting structure in accordance with ASC 280 Segment Reporting to determine whether any changes have occurred that would impact its reporting segments.