Operating income of $563 million, or $5.32 per diluted common share(1)
Estimated aggregate natural catastrophe and weather-related pre-tax net losses of $93 million
Total cash and investments of $15.0 billion; fixed maturities, cash and short-term securities comprise 90% of total cash and investments and have an average credit rating of AA-
Total debt of $991 million and a debt to total capital ratio of 14.5%
Repurchased 11.8 million common shares for total cost of $543 million
the commencement of operations of our new syndicate at Lloyd's which provides us with access to Lloyd's worldwide licenses and an extensive distribution network; and
On January 25, 2015, the Company announced the signing of a definitive amalgamation agreement with PartnerRe Ltd. PartnerRe Ltd., through its principal operating subsidiaries, provides reinsurance and certain specialty insurance lines on a worldwide basis. The transaction is expected to close in the second half of 2015, subject to approval by the shareholders of both companies, regulatory clearance and customary closing conditions.
2014 versus 2013: The $34 million improvement in our underwriting result during 2014 was primarily due to a decrease in the level of natural catastrophe and weather-related losses. In 2014 we recognized pre-tax net losses of $93 million for various worldwide natural catastrophe and weather-related events. Comparatively, in 2013, we recognized pre-tax net aggregate losses (net of related reinstatement premiums) of $198 million related to worldwide natural catastrophe and weather-related events. The increase in net favorable prior year reserve development of $40 million also contributed to the improvement. These improvements were partially offset by increases in the current accident year loss ratios, exclusive of the natural catastrophe and weather-related losses, for both segments.
Our insurance segment's underwriting income decreased by $6 million in 2014. The decrease was primarily due to an increase in the current accident year loss ratio, after adjusting for natural catastrophe and weather-related losses, due to an increase in the loss ratio in the property lines, which were impacted by a higher level of loss activity in recent periods, and a change in the mix of business written, partially offset by better than expected loss experience in the marine and liability lines. The decrease in underwriting income was also impacted by an increase in acquisition costs and was partially offset by a $27 million decrease in natural catastrophe and weather related-losses, lower general and administrative expenses and a $13 million increase in net favorable prior year reserve development.
Our reinsurance segment's underwriting result improved by $40 million in 2014. The increase was primarily attributable to the significantly lower level of natural catastrophe and weather-related losses and a $26 million increase in net favorable prior year development. Partially offsetting these increases were an increase in the current accident year loss ratio, after adjusting for natural catastrophe and weather-related losses, and an increase in acquisition costs. The current accident year loss ratio, after adjusting for natural catastrophe and weather-related losses, increased due to a change in the mix of business and an increase in agriculture loss reserves, partially offset by improved loss experience across most other lines of business.
Our insurance segment's underwriting income increased by $19 million in 2013 primarily due to a decrease in natural catastrophe and weather-related losses. Growth in net premiums earned, driven by the expansion of our business over the past year, also benefited the segment's results. The increases were partially offset by a $72 million decrease in net favorable prior year reserve development and an increase in the current accident year loss ratio, exclusive of natural catastrophe and weather-related losses.
Our reinsurance segment's underwriting result improved by $146 million in 2013. The increase was primarily attributable to the significantly lower level of natural catastrophe and weather-related losses. Other positive factors included a $46 million
Excluding income from our other investments, net investment income increased by $5 million in 2014, and was attributable to the increase in average fixed maturities balances during 2014. The decrease of $13 million in 2013 was largely attributable to the fixed maturity portfolio, where lower reinvestment yields drove reductions in income.
Depreciation of the euro and Sterling against the U.S. dollar resulted in foreign exchange gains of $104 million in 2014 and primarily reflected the remeasurement of our foreign-denominated net insurance-related liabilities. Conversely appreciation of the same currencies drove foreign exchange losses of $26 million and $30 million in 2013 and 2012. The 2013 loss was partially offset by the depreciation of the Australian dollar.
Excluding these foreign exchange-related amounts, other expenses were $236 million, $159 million and $195 million in 2014, 2013 and 2012 respectively. Corporate expenses increased from $90 million in 2013 to $135 million in 2014. The $45 million increase was driven by increased personnel expenses as we expand our business globally, a reduction in certain allocated costs to segments, and information technology and professional costs related to operational excellence initiatives. These initiatives are aimed at improving the effectiveness and efficiency of our operations and are expected to result in a reduction of expenses in future periods. The decrease of $39 million in 2013 compared to 2012 is primarily attributable to senior leadership transition costs of $34 million incurred during 2012.
Amounts attributable from noncontrolling interests for 2014 related to amounts attributable from the third party investors in Ventures Re. Refer to Item 8, Note 14 to our Consolidated Financial Statements for additional information.
Preferred share dividends were comparable in 2014 and 2013. The increase in preferred share dividends in 2013 compared to 2012 was driven by an increase in preferred equity capital.
See Item 8, note 13 to the Consolidated Financial Statements for further details.
Management expects an overall increase in gross premiums written in 2015, with a continued focus on diversification and pursuit of opportunities to expand our reach in areas where we believe returns are most attractive.
Insurance markets, which experienced positive price movements in recent periods, have seen a general leveling off of pricing. Despite the slowdown in rate improvements, there remain good fundamentals and opportunities for profitable growth in many of the insurance lines of business. While rate increases have moderated, casualty line pricing remains strong, particularly in the United States excess casualty markets. The diversity in our insurance portfolio by line and geography is serving us well in the current environment, as we have been able to place emphasis on those lines of business that have shown better performance.
Operating ROACE is calculated by dividing operating income for the year by the average common shareholders’ equity determined by using the common shareholders’ equity balances at the beginning and end of the year. Operating ROACE is a non-GAAP financial measure, as defined in SEC Regulation G. See ‘Non-GAAP Financial Measures’ for additional information and a reconciliation to the nearest GAAP financial measure (ROACE).
We believe in returning excess capital to our shareholders by way of dividends (as well as share repurchases) and, accordingly, our dividend policy is an integral part of the value we create for our shareholders. Our cumulatively strong earnings have permitted our Board of Directors to approve eleven successive annual increases in quarterly common share dividends.
Underwriting-related general and administrative expenses is a non-GAAP measure as defined in SEC Regulation G. Our total general and administrative expenses also included $135,675, $90,256 and $129,660 of corporate expenses for 2014, 2013 and 2012, respectively; refer to 'Other Expenses, Net' for additional information related to these corporate expenses. Also, refer to 'Non-GAAP Financial Measures' for further information.
AXIS Capital cedes certain of its reinsurance business to AXIS Ventures Reinsurance Limited ("Ventures Re"), the Company's third-party capital vehicle, on a fully collateralized basis. The collateral has been provided by third party investors. Ventures Re is a variable interest entity and AXIS Capital has been determined to be its primary beneficiary. Following this determination Ventures Re is consolidated in the Consolidated Financial Statements of AXIS Capital and the net impact of the cessions has been included in amounts attributable to (from) noncontrolling interests. For 2014, amounts attributable from noncontrolling interests were $6,181. For 2013 and 2012 amounts attributable from noncontrolling interests were $nil. Refer to Item 8, Note 14 to the Consolidated Financial Statements for more information.
2014 versus 2013: Gross premiums written in 2014 were comparable to 2013, with growth in our reinsurance segment offset by a decrease in our insurance segment.
The increase in our reinsurance segment of $38 million or 2%, was significantly impacted by the number of treaties written on a multi-year basis in the liability, property, catastrophe and motor lines, and included an increase in the written premium that related to future underwriting years of $118 million. After adjusting for the impact of the multi-year contracts, gross written premiums declined $80 million primarily driven by professional, property and catastrophe lines, partially offset by increases in liability, motor and agriculture lines. The decrease in professional lines was primarily driven by timing differences, non-renewals and decreased treaty participations. The decreases in property and catastrophe were primarily driven by variances in premium adjustments, reduced participations and non-renewals. The increase in liability primarily reflected increased treaty participations and new business. The motor lines increase was primarily driven by increased treaty participations, while the agriculture increase reflected our growth initiatives in this line of business.
The decrease in our insurance segment of $24 million or 1%, was driven by professional and property lines partially offset by increases in liability and aviation lines. The professional lines decrease was driven by the reshaping of our U.S. D&O portfolio. The property decrease was reflective of competitive market conditions. The growth in liability was attributable to growth in the U.S. casualty markets with both new business and rate increases noted. The increase in aviation was driven by timing of renewals and new business.
The ceded gross written premium ratio increased by 1% and was driven by increases in both segments. The increase in the ceded gross written premium ratio in the insurance segment related to changes in the business mix partially offset by changes in the structure of our reinsurance program. The ceded gross written premium ratio also increased in the reinsurance segment reflecting additional retrocessional covers primarily in the catastrophe lines.
In 2013, the Company obtained catastrophe protection for both our segments through a reinsurance agreement with Northshore Re Limited ("Northshore"). In connection with the reinsurance agreement, Northshore issued notes to unrelated investors in an amount equal to the full $200 million of coverage provided under the reinsurance agreement covering a three year period. The Company performed an evaluation of Northshore to determine if it meets the definition of a variable interest entity ("VIE"). The Company concluded that Northshore is a VIE, however, the Company does not have a variable interest in the entity, as the variability in results is expected to be absorbed entirely by the investors in Northshore. Accordingly, Northshore is not consolidated in the Company's consolidated financial statements. The premium ceded to Northshore during 2014 was $16 million (2013: $14 million).
2013 versus 2012: Gross premiums written growth of 13% was driven by increases in both segments. Increase of 11% in the insurance segment was driven by the accident and health, liability and professional lines. The accident and health line continued to reflect new business expansion. Liability growth was driven by select new business opportunities and, to a lesser extent, rate increases in the U.S wholesale excess casualty market. Growth in the professional lines was largely due to new business as we continue our global expansion.
2014 versus 2013: Growth in net premiums earned of 4% reflected increases in both segments. In our insurance segment the increase reflected the expansion in the accident and health lines, growth in our liability lines in recent periods as well as the positive impact of the reductions in the professional and liability ceded reinsurance programs implemented during 2013. These increases were partially offset by decreases in our property business. The reinsurance segment increase primarily reflected growth in our liability and motor lines, continued expansion of our agriculture business and an increase in professional lines. This growth was partially offset by a decrease in premiums written in our catastrophe, property and credit and surety lines and an increase in retrocessional covers for our catastrophe lines.
2013 versus 2012: Growth in net premiums earned of 9% reflected increases in both segments. Growth in the insurance segment was primarily driven by the growth in gross premiums written in our accident and health line. Net premiums earned for property, liability and professional lines also increased driven by growth in gross written premiums and reductions in premiums ceded. The increase in the gross premiums written in the agriculture line during 2013 was the primary driver of the increase in net premiums earned for our reinsurance segment.
After adjusting for the impact of the natural catastrophe and weather-related losses noted above, the current accident year loss ratio increased in 2014 driven primarily by changes in the mix of business written, an increase in agricultural loss reserves following a significant drop in agriculture commodity prices and an increase in insurance property loss ratios reflecting a higher level of loss activity in recent periods. These increases were partially offset by improved loss experience in the marine, liability, motor, credit and surety and reinsurance professional lines.
2013 versus 2012: A lower level of natural catastrophe and weather-related losses in 2013 was the primary driver of the 5.0 point reduction in our current accident year loss ratio. 2013 included $198 million (net of reinstatement premiums) or 5.4 points of aggregate pre-tax net losses related to worldwide natural catastrophe and weather-related events. These natural catastrophe and weather-related losses impacted both our segments, with the insurance segment reporting $93 million of pre-tax net losses (including reinstatement premiums) and reinsurance segment incurring pre-tax net losses of $105 million (net of reinstatement premiums). Comparatively, 2012 included $436 million (net of reinstatements) or 12.7 points of natural catastrophe and weather-related losses primarily related to Storm Sandy.
The frequency and severity of natural catastrophe and weather-related activity was high in recent years and our December 31, 2014 net reserve for losses and loss expenses continues to include estimated amounts for numerous events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular Storm Sandy, the Japanese earthquake and tsunami and the three New Zealand earthquakes, inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.
Overall, the majority of the net favorable prior year reserve development in 2014 related to short-tail lines of business. Net favorable prior year reserve development for reinsurance of professional, liability and motor lines also contributed significantly and was partially offset by adverse development in insurance liability lines. Favorable reserve development in reinsurance liability and professional lines contributed in 2013 and was partially offset by adverse development in the insurance professional and insurance liability lines. Favorable development in professional lines contributed notably in 2012.
Our motor lines recorded favorable prior year development of $19 million during 2014, relating to better than expected loss emergence on certain European exposures.
In 2014, we recognized $64 million of net favorable prior year reserve development, the principal components of which were:
$68 million of net favorable prior year reserve development on our property and other business, related to the 2013 and prior accident years and driven by better than expected loss emergence.
$15 million of net favorable prior year reserve development on aviation business, spanning a number of accident years and largely related to better than expected loss emergence.
In 2013, we recognized $169 million of net favorable prior year reserve development, the principal components of which were:
In 2012, we recognized $123 million of net favorable prior year reserve development, the principal components of which were:
$80 million of net favorable prior year reserve development on property and other business largely consisting of:
The general and administrative expenses increase during 2013 was primarily due to an increase in headcount and the costs related to various growth initiatives across the Company, while 2012 was primarily impacted by senior leadership transition costs. The impact of the increase in general and administrative expenses during 2013 was more than offset by the growth in net premiums earned reducing the overall general and administrative expense ratio.
2013 versus 2012: Premiums ceded in 2013 were $746 million, or 29%, of gross premiums written, compared to $787 million, or 34%, in 2012. The year on year reductions in the premiums ceded and the related ceded ratio primarily related to changes in our reinsurance purchasing and business mix changes. Reductions related to changes in our reinsurance purchasing included excess of loss treaty reductions driven by both retention and rate, and proportional changes related to reductions in the cession rates on our professional lines and liability programs on renewal during 2013. Changes in business mix related to growth in our accident and health business for which we did not purchase significant reinsurance.
2014 versus 2013: The increase in net premiums earned was primarily driven by the expansion in the accident and health lines, which contributed 59% of the overall net premium earned increase and reflected our continuing efforts to expand this
an increase in the property loss ratio reflecting a higher level of attritional loss activity in recent periods; and
a change in the mix of business with a shift towards less volatile lines that carry a higher loss ratio; partially offset by
better than expected loss experience in the marine and liability lines.
2013 versus 2012: Natural catastrophe and weather-related losses impacted the current accident year loss ratios for both years.
The decrease in the acquisition cost ratio from 2012 to 2013 was largely driven by MGA reductions and to a lesser extent higher ceding commissions earned relative to 2012, partially offset by a change in the business mix.
The general and administrative expense ratio was comparable in 2013 versus 2012. The increase in general and administrative costs from 2012 to 2013 was driven by increased salaries and related costs following an increase in staff. The impact on the general and administrative expense ratio was fully offset by the growth in net premiums earned.
2014 versus 2013: The increase in gross written premium of $38 million was significantly impacted by a number of treaties written on a multi-year basis in the liability, property, catastrophe and motor lines and included written premium that related to future underwriting years of $131 million (2013: $13 million). After adjusting for the impact of the multi-year contracts, gross premiums written declined $80 million driven by professional, property and catastrophe lines, partially offset by increases in liability, motor and agriculture lines. The decrease in professional lines was primarily driven by timing differences, non-renewals and decreased treaty participations. The decreases in property and catastrophe were primarily driven by variances in premium adjustments, reduced participations and non-renewals. The increase in liability primarily reflected increased treaty participations and new business. The motor lines increase was primarily driven by increased treaty participations, while the agriculture increase reflected our growth initiatives for this line of business.
2014 versus 2013: The increase in net premiums earned reflected growth in the business written in recent periods in liability, motor, agriculture and professional lines. This growth was partially offset by decreases in catastrophe, property and credit and surety lines, following reductions in gross premiums written in these lines of business. In addition, the catastrophe line was also impacted by an increase in premiums ceded under retrocessional treaties.
2014 versus 2013: The reduced level of natural catastrophe and weather-related activity was the primary driver of the decrease in the current accident year loss ratio.
After adjusting for these natural catastrophe and weather-related losses, our 2014 current accident year loss ratio increased relative to 2013 primarily due to:
Exclusive of these natural catastrophe and weather-related losses, our 2013 current accident year loss ratio increased relative to 2012 primarily due to changes in the business mix and an increase in losses incurred in our agriculture line.
Acquisition Cost Ratio: The increase in the current year acquisition cost ratio from 21.3% in 2013 to 22.5% in 2014 was primarily impacted by higher acquisition costs paid on certain lines of business and variances in accruals for loss-sensitive features in underlying contracts.
General and Administrative Expense Ratio: The increase in the general and administrative expense ratio from 6.9% in 2013 to 7.1% in 2014 was attributable to an increase in personnel and information technology costs associated with the continued build-out of the Company's global platform. These increases were partially offset by growth in net earned premiums.
General and administrative expenses increased in 2013, primarily driven by staffing increases, as we continue to build-out the segment's global platform. The impact of the increases on the general and administrative expense ratio was partially tempered by the growth in net premiums earned.
The decrease in corporate expenses during 2013 compared to 2012 was reflective of costs associated with our second quarter 2012 senior leadership transition; these costs included accelerated and incremental share-based compensation expenses of $20 million and separation payments of $14 million. Excluding these senior leadership transition amounts, corporate expenses were 2.8% of net premiums earned for 2012.
Interest Expense and Financing Costs: Interest expense and financing costs primarily related to interest due on our senior notes. The increase in 2014 related to the issuance during the first quarter of 2014 of $250 million of 2.65% senior unsecured notes due in 2019 and $250 million of 5.15% senior unsecured notes due in 2045. Net proceeds from these two offerings were used towards the repayment of $500 million of AXIS Capital’s 5.75% senior unsecured notes which matured on December 1, 2014.
Income Tax Expense: Income tax expense primarily results from income generated by our foreign operations in the United States and Europe. Our effective tax rate, which is calculated as income tax expense divided by income before tax, was 3.1%, 1.0% and 0.6% in 2014, 2013 and 2012, respectively. This effective rate can vary between years depending on the distribution of net income (loss) amongst tax jurisdictions, as well as other factors.
The increased tax rate in 2014 compared to 2013 was impacted by an increase in our valuation allowance of $9 million related primarily to operating loss tax-carryforwards generated from branch operations in Australia and certain foreign tax credits. Further increasing income tax expense in 2014 was a decrease in tax exempt income driven by a reduction in our U.S. tax-exempt portfolio.
Pre-tax yield is annualized and calculated as net investment income divided by the average month-end amortized cost balances for the periods indicated.
The pre-tax return on other investments is calculated by dividing total income from other investments by the average month-end fair value balances held for the periods indicated.
2014 versus 2013: The lower pre-tax return on our other investments portfolio was primarily due to modest returns on our hedge funds during 2014, compared to the strong returns provided by these holdings in 2013. The modest returns of these funds were reflective of the lower returns from global equity markets during 2014. The decline in income from CLO Equities in dollar terms was primarily due to a reduction in our direct investments as two holdings have completed their investment cycle and have returned all capital to equity tranche holders.
2014 versus 2013: Improvements in global equity markets during 2013 and the first half of 2014 enabled us to realize net gains on sales of our equity securities (primarily common stock) during 2014. Proceeds from these sales were reallocated to exchange-traded funds ("ETF's"). The primary source of the net realized gains on fixed maturities in 2014 was municipal debt.
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 2014, our foreign exchange hedges resulted in $10 million of net gains which related primarily to securities denominated in the Mexican peso, Euro and Australian dollar. Each of these currencies declined significantly against the U.S. dollar during 2014.
During 2013, we introduced the use of interest rate swaps to reduce duration risk of our fixed income portfolio. During 2014, we recorded $20 million of net losses relating to our interest rate swaps.
In 2012 and prior, we entered into foreign exchange forward contracts to hedge the foreign currency exposure of certain available for sale fixed maturity portfolios denominated in euros. These hedges were designated and qualified as fair value hedges, resulting in the net impact of the hedges recognized in net realized investment gains (losses). During 2012, we sold all available for sale fixed maturities in the portfolios that qualified for hedge accounting and settled all of the associated foreign exchange forward contracts.
Includes restricted cash and cash equivalents of $288 million and $65 million for 2014 and 2013, respectively.
The fair value of our total investments decreased $10 million from December 31, 2013 as net contributions to fixed maturities were more than offset by lower valuations as a result of the strengthening of the US dollar and the widening of credit spreads on both investment grade and high-yield corporate debt. The decline in the fair value of equities was due to sales resulting in net realized gains during the year.
At December 31, 2014, fixed maturities had a weighted average credit rating of AA- (2013: AA-), a book yield of 2.5% (2013: 2.5%) and an average duration of 3.0 years (2013: 3.3 years). The interest rate swap position introduced in 2013 and still in effect during 2014 reduced duration to 2.9 years. When incorporating short-term investments and cash and cash equivalents into this calculation (bringing the total to $13.4 billion), the weighted average credit rating would be AA- (2013: AA-) and duration (including interest rate swaps) would be 2.7 years (2013: 2.9 years).
To calculate the weighted average credit rating for fixed maturities, we assign points to each rating with 29 points for the highest rating (AAA) and 2 points for the lowest rating (D) and then calculate the weighted average based on the fair values of the individual securities. Securities that are not rated by S&P, Moody’s or Fitch are excluded from weighted average calculations. At December 31, 2014, the fair value of fixed maturities not rated was $0.1 million (2013: $1 million).
In light of global concerns during recent years over the creditworthiness of certain sovereign debt within the eurozone, we have actively managed our exposure. Our current non-U.S. government holdings include exposure to only two countries within the eurozone - Netherlands and Slovenia - which have a combined weighted average credit rating of AA. At December 31, 2014, we held no sovereign debt issued by the peripheral European countries of Greece, Ireland, Italy, Portugal and Spain.
During 2014, we continued to reduce our exposure to eurozone sovereign debt. "Other concentrations" includes our local currency emerging market debt portfolio. At December 31, 2014, this portfolio had a weighted average credit rating of BBB+ (2013: A-), a duration of 4.5 years (2013: 5.0 years) and a yield-to-worst of 6.8% (2013: 7.2%).
The following table provides a breakdown of the fair value of our ABS by underlying collateral and credit rating:
The increase in the total fair value during 2014 was primarily due to incremental investments in CLO Debt securities. The CLO Debt is predominantly floating rate and is anticipated to reduce the impact of potential future increases in interest rates while not compromising the high credit quality of our fixed maturities portfolio. These securities were purchased primarily as new issues and all had ratings of AA- or better. The average duration and weighted average life of our ABS portfolio at December 31, 2014 was 0.5 years (2013: 0.6 years) and 3.7 years (2013: 4.0 years), respectively.
During 2014, we reduced our allocation to municipal debt securities after spreads tightened and their after-tax valuations became less attractive.
G.O. bonds are backed by the full faith and credit of the authority that issued the debt and are secured by the taxing powers of those authorities. Revenue bonds are backed by the revenue stream generated by the services provided by the issuer (e.g. sewer, water or utility projects). As issuers of revenue bonds do not have the ability to draw from tax revenues or levy taxes to fund obligations, revenue bonds may carry a greater risk of default than G.O. bonds. At December 31, 2014, the top three revenue streams related to transportation (42%), university (17%) and hospital (7%) (2013: transportation (25%), school (11%) and power (11%)).
Additionally, certain of our holdings in municipal debt are insured by financial guarantee companies. At December 31, 2014, we held insurance enhanced municipal bonds in the amount of $4 million (2013: $150 million), with a weighted average credit rating of A- (2013: AA-). In the event the financial guarantors are unable to make good on their guarantee on a defaulted security, we would then be exposed to the credit loss. Excluding the insurance benefit from the financial guarantee companies, the weighted average credit quality of our insured bond holdings would be AA- (2013: AA-). At December 31, 2014, our largest exposures to financial guarantors were National Public Finance Guarantee Corporation for $2 million (2013: $43 million) and Financial Guaranty Insurance Company for $2 million (2013: Assured Guaranty Corp for $65 million). We had no direct investments in either of these companies at December 31, 2014 and 2013.
The increase in gross unrealized losses on non-investment grade securities is primarily due to the widening of credit spreads on energy sector high-yield corporate debt securities.
The cash outflows from investing activities for 2014 related principally to the net purchase of fixed maturities of $0.2 billion (2013: $0.6 billion, 2012: $0.9 billion). This was a result of reinvesting net investment income across a variety of fixed income asset classes. The decrease in the investing cash flows compared to prior years relates to an increased allocation to cash and cash equivalents during the year.
Should claim payment obligations accelerate beyond our ability to fund payments from operating cash flows, we would utilize our cash and cash equivalent balances and/or liquidate a portion of our investment portfolio. Our investment portfolio
is heavily weighted towards conservative, high quality and highly liquid securities. We expect that, if necessary, approximately $12.8 billion of cash and invested assets at December 31, 2014 could be available in one to three business days under normal market conditions; of this amount, $3.9 billion relates to restricted assets, which primarily support our obligations in regulatory jurisdictions where we operate as a non-admitted carrier (see Item 8, Note 5(e) to the Consolidated Financial Statements for further details). For context, our largest 1-in-250 year return period, single occurrence, single-zone modeled probable maximum loss (Southeast U.S. Hurricane) is approximately $0.9 billion, net of reinsurance; our claim payments pertaining to such an event would be paid out over a period spanning many months. Our internal risk tolerance framework aims to limit both the loss of capital due to a single event, and the loss of capital that would occur from multiple but perhaps smaller events, in any year. Refer to the ‘Risk and Capital Management’ section of Item 1 for further information.
The following table summarizes our consolidated capital position for the periods indicated:
Preferred Shares: During 2005, we issued $250 million of 7.25% Series A and $250 million of 7.50% Series B non-cumulative preferred shares.
Concurrent with the closing of the Series D preferred share issuance, we redeemed the remaining 4 million of 7.25% Series A preferred shares outstanding at a $25.00 per share redemption price for a total of $100 million.
Common Equity: Underlying movements in the value of our common equity over the past two years are outlined in the following table:
On March 31, 2014, AXIS Capital's subsidiary, AXIS Specialty Limited, terminated the $170 million secured letter of credit facility (the "Lloyd's LOC Facility") with ING Bank N.V., London Branch ("ING"). The Funds at Lloyd's requirements for the Company's subsidiary, AXIS Corporate Capital UK Limited, to support the underwriting capacity of the Company's Lloyd's syndicate, AXIS Syndicate 1686, are now being met by capital pledged in the form of fixed income securities deposited directly with Lloyd's.
Maintenance of an A.M. Best Company, Inc. (“A.M. Best”) financial strength rating of at least B++ for each of AXIS Capital’s material insurance/reinsurance subsidiaries that are party to the Credit Facility.
At December 31, 2014, this facility required a minimum consolidated net worth of $4.223 billion and our actual consolidated net worth, as calculated under the provisions of the Credit Facility, was $5.849 billion. We had a consolidated debt to total capital ratio, calculated in accordance with the Credit Facility provisions, of 0.14 to 1 and each of our material insurance/reinsurance subsidiaries party to the agreement had an A.M. Best financial strength rating of A+.
As part of our capital management strategy, our Board of Directors authorizes common share repurchase programs. On December 5, 2014, our Board of Directors authorized a new share repurchase plan for up to $750 million of our common shares through December 31, 2016. The new share repurchase authorization, effective January 1, 2015, replaced the previous plan which had $225.8 million available as at December 31, 2014 (see to Item 5 ‘Market for Registrant’s Common Equity, Related Stockholder Matters and Issue Purchases of Equity Securities’ ). As noted above, repurchases under this program are entirely 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.
On January 16, 2014, we filed an unallocated universal shelf registration statement with the SEC, which became effective upon filing. Pursuant to the shelf registration, we may issue an unlimited amount of equity, debt, warrants, purchase contracts or a combination of those securities. Our intent and ability to issue securities pursuant to this registration statement will depend on market conditions at the time of any proposed offering.
Following the amalgamation announcement, A.M. Best placed our rating under review with negative implications, reflecting the uncertainties related to the merger's size, scope and complexity. A.M. Best has indicated that the under review status will be removed once the merger transaction has closed and the final integration plan has been reviewed.
The following table provides a breakdown of our contractual obligations and commitments at December 31, 2014 by period due:
We lease office space under operating leases which expire at various dates. We renew and enter into new leases in the ordinary course of business, as required.
We purchase reinsurance protection for our insurance lines of business. The minimum premiums are contractually due in advance on a quarterly basis.
We have $123 million of unfunded investment commitments related to our investments in hedge and credit funds, which are callable by our investment managers. We have assumed that such investments will be called in the next year but such funding may occur over a longer period of time, due to market conditions and other factors. For further details, see Item 8, Note 5(b) to the Consolidated Financial Statements. In addition we have a $25 million commitment to purchase securities with one of our fixed income managers at December 31, 2014.
Loss reserves are not an exact calculation of liability but instead are complex estimates. The process of estimating loss reserves involves a number of variables (see ‘Selection of Reported Reserves (Management’s Best Estimate)’ ) below for further details). We review our estimate of loss reserves each reporting period and consider all significant facts and circumstances then known. As additional experience and other data become available and/or laws and legal interpretations change, we may adjust our previous estimates of loss reserves; these adjustments are recognized in the period they are determined and, therefore, can impact that period’s underwriting results either favorably (when reserves established in prior years can be released) or adversely (when reserves established in prior years require upward adjustment).
As part of our quarterly loss reserve review process, our actuaries employ the estimation method(s) that they believe will produce the most reliable estimate of ultimate losses, at that particular evaluation date, for each reserving class and accident year or underwriting year combination. Often, this is a blend (i.e. weighted average) of the results of two or more appropriate actuarial methods. These ultimate loss estimates are generally utilized to evaluate the adequacy of our ultimate loss estimates for previous accident or underwriting years, as established in the prior reporting period. For the initial estimate of the current accident or underwriting year, the available claim data is typically insufficient to produce a reliable estimate of ultimate losses. As a result, our initial estimate for an accident or underwriting year is generally based on the ELR Method for longer tailed lines and a BF method for shorter tailed lines. The initial ELR for each reserving class is established collaboratively by our actuaries, underwriters and management at the start of the year as part of the planning process, taking into consideration prior accident years’ or underwriting years' experience and industry benchmarks, adjusted after considering factors such as exposure trends, rate differences, changes in contract terms and conditions, business mix changes and other known differences between the current year and prior accident or underwriting years. The initial expected loss ratios for a given accident or underwriting year may be modified over time if the underlying assumptions, such as loss development or premium rate changes, differ from the original assumptions.
We 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 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: (1) estimates of the size of insured industry losses from the catastrophic event and our corresponding market share; (2) a review of our portfolio of contracts performed to identify those contracts which may be exposed to the catastrophic event; (3) a review of modeled loss estimates based on information previously reported by customers and brokers, including exposure data obtained during the underwriting process; (4) discussions of the impact of the event with our customers and brokers and (5) catastrophe bulletins published by various independent statistical reporting agencies. 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.
Our results of operations for each of 2014, 2013 and 2012 were impacted by natural catastrophe activity. See Item 7 ‘Underwriting Results - Group, Underwriting Expenses’ for a discussion of these events and the remaining associated uncertainties.
Beginning in 2013, the Company significantly enhanced the capabilities and resources dedicated to the actuarial reserving function. During 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 and plans to continue to rely on its internal actuarial function for future quarterly reserving processes. On an annual basis, the Company uses an independent actuarial firm to provide an actuarial opinion on the reasonableness of our loss reserves for each of our operating subsidiaries and statutory reporting entities; such actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm also discusses its conclusions from the annual review with management and presents its findings to our Board of Directors.
The following table shows our total loss reserves for each of our reportable segments, segregated between case reserves and IBNR and by significant reserving class. This table is presented on a gross basis and, therefore, does not include the benefit of reinsurance recoveries.
The overall increase in our gross loss reserves during 2014 was driven by growth in our business and the continued accumulation of reserves for medium and longer-tailed lines.
Our short-tail business generally includes exposures for which losses are usually known and paid within a relatively short period of time after the underlying loss event has occurred. Our short-tail business primarily relates to property coverages and includes the majority of our property, terrorism and marine business and certain aviation business within our insurance segment, together with the property, catastrophe and agriculture business within our reinsurance segment.
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.
Our transition from the ELR method to experience-based methods began during 2008, when we commenced gradual transition for the 2004 and prior accident years. As our loss history continued to develop, the transition was expanded to include additional accident years. With the exception of the experience in the insurance professional lines during 2013 and 2014, our actual loss experience has generally been more favorable than initial expectations and the transition led to the recognition of net favorable prior year reserve development in recent years. During 2013, the insurance professional lines actual loss development was worse than expected for accident years 2011 and 2012. Management recognized this experience by relying upon experience-based methods, an evaluation of the open claims inventory and other qualitative factors, resulting in a higher ultimate loss estimate than initial expected loss ratios. During 2014, Management continued to rely upon experience-based methods, an evaluation of the open claims inventory and other qualitative factors in establishing the ultimate loss estimates for the insurance professional lines portfolio. See 'Underwriting Results - Group - Prior Year Development' for a discussion of the development recognized during the last three years.
As previously described, the estimation of the value of our recoveries on credit and political risk business requires significant management judgment. At December 31, 2014, our total estimated recoveries on credit insurance business were $79 million, while comparatively, at December 31, 2013, our estimated recoveries were $84 million. The reduction in 2014 primarily reflected the settlement of a recovery.
The potential volatility of actuarial estimates, given the number of years of development it takes to produce a meaningful incurred loss as a percentage of ultimate losses;
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.
The following tables show the effect on our estimate of gross loss reserves of reasonably likely changes in the two key assumptions used to estimate our gross loss reserves at December 31, 2014.
Reinsurance recoverable on unpaid losses as a percentage of gross loss reserves was 20% at December 31, 2014 and 2013. At December 31, 2014 and 2013, respectively, 98.5% and 98.8% 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, 2014, refer to Item 8, Note 11 to the Consolidated Financial Statements.
For the majority of our insurance business, we receive a fixed premium which is identified in the policy and recorded as unearned premium on the inception date of the contract. This premium will be adjusted only if the underlying insured values ultimately differ. Accordingly, we actively monitor underlying insured values and record adjustment premiums in the period in which amounts are reasonably determinable. Gross premiums written on a fixed premium basis accounted for approximately 91%, 90% and 93% of the segment’s total for the years ended December 31, 2014, 2013 and 2012, respectively. A portion of this business is written through MGAs, third parties granted authority to bind risks on our behalf in accordance with our underwriting guidelines. For this business, we record premiums based on monthly statements received from the MGAs. Due to inherent reporting delays, we generally record premiums written via MGAs one month in arrears. In the event that a significant individual statement is not received, we record our best estimate based upon our historical experience.
Our excess of loss reinsurance contracts with cedants typically include provisions for a deposit or minimum premiums payable to us, which are generally considered to be the best estimate of the excess of loss reinsurance written premium at inception. The minimum/deposit premium is normally adjusted at the end of the contract period to reflect changes in the underlying risks in force during the contract period. We record adjustments to the deposit/minimum premiums in the period during which they become determinable. Excess of loss contracts accounted for 38%, 42% and 47% of our reinsurance segment’s total gross premiums written for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease during 2014 compared to 2013 was primarily driven by an increase in proportional multi-year premiums written in our liability lines and an increase in the portion of motor and agriculture business written on a proportional basis, partially offset by the renewal timing of a large proportional treaty in professional lines. The decrease during 2013 when compared to 2012, was primarily driven by the growth in our agriculture line and repositioning of our catastrophe portfolio.
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 62%, 58% and 53% of our reinsurance segment’s gross premiums written for the years ended December 31, 2014, 2013 and 2012, respectively.
We made estimates on proportional treaties incepting during the year as follows:
Refer to Item 8, Note 6 of the Consolidated Financial Statements for further details on the valuation techniques and assumptions used in estimating the fair value of our financial instruments.
Our estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction. Additionally, the valuation of fixed maturities is more subjective when markets are less liquid due to the lack of market based inputs, as was the case during the global financial market crisis in late 2008 and early 2009. This may lead us to change the selection of our valuation technique (from market to income approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance may require significant management judgment and could cause an instrument to be reclassified between levels of the fair value hierarchy.
At December 31, 2014 and 2013, 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 $74 million (2013: $35 million), less than 1% of total fixed maturities and equities. Refer to Item 8, Note 6 to our Consolidated Financial Statements for further information.
Because our available-for-sale ("AFS") investment portfolio is the largest component of our consolidated assets and a multiple of shareholders’ equity, OTTI could be material to our financial condition and operating results particularly during periods of dislocation in the financial markets. During 2014, we recorded a total OTTI charge in earnings of $31 million (2013: $9 million; 2012: $24 million). Refer to the ‘Net Investment Income and Net Realized Investment Gains/Losses’ section above for further details.
do not anticipate to recover fully the amortized cost based on projected cash flows to be collected (i.e. a credit loss exists).
We consider our ability and intent to hold an equity security in an unrealized loss position for a reasonable period of time to allow for a full recovery. As an equity security does not have a maturity date, the forecasted recovery for an equity security is inherently more judgmental than for a fixed maturity security.
In light of the volatile global equity markets we have experienced in recent years, we generally impair any equities for which we do not forecast a recovery to cost within three years. Further, we generally impair an equity security if its value has been below its cost by 30% or more for nine consecutive months or by 20% or more for twelve consecutive months. We have also
established parameters for identifying potential impaired equity securities for fundamental analysis based on the severity, in either percentage or absolute dollar terms, of the unrealized loss position.
Operating income represents after-tax operational results without consideration of after-tax net realized investment gains, foreign exchange losses (gains) and losses on repurchase of preferred shares. We also present diluted operating income per common share and operating return on average common equity (“operating ROACE”), which are derived from the non-GAAP operating income measure.
Consolidated underwriting income is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses. Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our individual underwriting operations. While these measures are presented in Item 8, Note 3 to our Consolidated Financial Statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis.
Operating income, diluted operating income per common share and operating ROACE can be reconciled to the nearest GAAP financial measures as follows:
Tax cost (benefit) of $25,912, ($2,039) and $11,615 for 2014, 2013 and 2012, 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.
Tax cost (benefit) of $2,853, ($2,459) and ($1,148) for 2014, 2013 and 2012, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
Foreign exchange gains (or losses) in our Consolidated Statements of Operations are primarily driven by the impact of foreign exchange rate movements on net insurance related-liabilities. However, this movement is only one element of the overall impact of foreign exchange rate fluctuations on our financial position. In addition, we recognize unrealized foreign exchange gains (or losses) on our available-for-sale investments in other comprehensive income and foreign exchange gains (or losses) realized upon the sale of these investments in net realized investments gain (or losses). These unrealized and realized foreign exchange rate movements generally offset a large portion of the foreign exchange gains (or losses) reported separately in earnings, thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As such, the Statement of Operations foreign exchange gains (or losses) in isolation are not a fair representation of the performance of our business.
We believe that showing net income available to common shareholders exclusive of net realized gains (or losses), foreign exchange gains (or losses) and losses on repurchase of preferred shares reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons.
As noted above, foreign exchange gains (or losses) 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 rate gains (or losses) on our investment portfolio generally offset a large portion of the foreign exchange gains (or losses) arising from our underwriting portfolio. As a result, we believe that foreign exchange gains (or losses) are not a meaningful contributor to our underwriting performance and, therefore, exclude them from consolidated underwriting income.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of AXIS Capital Holdings Limited and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
other-than-temporary impairments (“OTTI”) in the carrying value of available-for-sale investment securities; and
We recognize investment income from fixed maturities based on the constant effective yield method, which includes an adjustment for estimated principal repayments, if any. The effective yield used to determine the amortization for fixed maturities subject to prepayment risk (e.g. asset-backed, loan-backed and other structured securities) is recalculated and adjusted periodically based upon actual historical and/or projected future cash flows. The adjustments to the yield for highly-rated prepayable fixed maturities are accounted for using the retrospective method. The adjustments to the yield for other prepayable fixed maturities are accounted for using the prospective method.
A fixed maturity is impaired when the fair value is below its amortized cost. For an impaired fixed maturity where we intend to sell the security or it is more likely than not that we will be required to sell the security before its anticipated recovery, the full amount of the impairment is charged to earnings and is included in net realized investment gains (losses). Where we intend to hold the impaired fixed maturity, we estimate the anticipated credit loss of the security and recognize only this portion of the impairment in earnings, with the remaining non-credit related balance of the impairment (i.e. related to interest rates, market conditions, etc.) recognized in AOCI.
We impair an equity security in an unrealized loss position when we do not have the ability and intent to hold the security for a reasonable period of time to allow for a full recovery. The full impairment is charged to earnings and is included in net realized investment gains (losses).
Our reinsurance recoverable is presented net of a provision for uncollectible amounts, reflecting the amount we believe will ultimately not be recovered due to reinsurer insolvency, contractual disputes and/or some other reason. We apply case-specific provisions against certain recoveries that we deem unlikely to be collected in full. In addition, we use a default analysis to estimate our provision for uncollectible amounts on the remainder of the balance.
In May 2014, the Financial Accounting Standards Board ("FASB") issued new guidance on revenue recognition affecting any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts are not in scope of the new guidance). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.
In February 2015, the FASB issued new guidance making changes to both the variable interest model and the voting model for consolidation. This new guidance could lead to changes in consolidation conclusions. The new guidance is effective for reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.
At December 31, 2014, 1,388 fixed maturities (2013: 1,127) were in an unrealized loss position of $173 million (2013: $180 million) of which $36 million (2013: $2 million) was related to securities below investment grade or not rated.
At December 31, 2014, $6 million (2013: $11 million) was invested in hedge funds that are not accepting redemption requests. Of this amount, substantially all relates to a leveraged bank loan fund in a period of planned principal distributions. Based on market conditions and payments made to date, management's current expectation is that the distribution process will be completed in 2015.
At December 31, 2014, we have $88 million (2013: $88 million) of unfunded commitments within our other investments portfolio relating to our future investments in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to three years.
Unrealized losses on securities issued or backed (either explicitly or implicitly) by the U.S. government are generally not analyzed for OTTI. We have concluded that the possibility of any credit losses on these securities is highly unlikely due to the explicit U.S. government guarantee on certain securities (e.g. GNMA issuances) and, on others, the implicit guarantee that has been validated by past actions (e.g. U.S. government bailout of FNMA and FHLMC during the 2008 credit crisis). Although not generally analyzed for credit losses, the securities are still evaluated for intention to sell at a loss.
To estimate credit losses for corporate debt securities, our projected cash flows are primarily driven by our assumptions regarding the probability of default and the severity associated with those defaults. Our default and loss severity rates are based on credit rating, credit analysis, industry analyst reports and forecasts, Moody’s historical default data and any other data relevant to the recoverability of the security. In 2014, the OTTI charges on corporate debt securities were mainly related to our intent to sell, as well as unrealized foreign exchange losses on certain securities where forecasted recovery was uncertain.
Our investments in ABS at December 31, 2014 consist mainly of CLO debt tranched securities (“CLO Debt”) purchased primarily as new issues during 2012-2014. Of these new issues all had credit ratings of AA- or better. We utilize a scenario-based approach to reviewing our CLO Debt portfolio based on the current asset market price. We also review subordination levels of our securities to determine their ability to absorb credit losses of underlying collateral. If losses are forecast to be below the subordination level for the tranche held by us, the security is determined not to be impaired. We have concluded there are no credit losses anticipated for any of our CLO Debt at December 31, 2014.
ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and CLO Debt originated by a variety of financial institutions. Similarly to MBS, the fair values of ABS are priced through the use of a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price ABS are observable market inputs, the fair values of ABS are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers.
Equity securities include U.S. and non-U.S. common stocks, exchange-traded funds, and non-U.S. bond mutual funds. For common stocks and exchange-traded funds, we classified these within Level 1 as their fair values are based on unadjusted quoted market prices in active markets. Our investments in non-U.S. bond mutual funds have daily liquidity, with redemption based on the net asset value (''NAV'') of the funds. Accordingly, we have classified these investments as Level 2.
As a practical expedient, we estimate fair values for hedge funds, direct lending funds and the CLO fund using NAVs as advised by external fund managers or third party administrators. For each of these funds, the NAV is based on the manager's or administrator's valuation of the underlying holdings in accordance with the fund's governing documents and in accordance with U.S. GAAP. For any funds for which we have not yet received a NAV concurrent with our period end date, we record an estimate of the change in fair value for the period subsequent to the most recent NAV. Such estimates are based on return estimates for the period between the most recently issued NAV and the period end date; these estimates are obtained from the relevant fund managers. Accordingly, we do not typically have a reporting lag in our fair value measurements for these funds. Historically, our valuation estimates incorporating these return estimates have not significantly diverged from the subsequent NAVs.
For our hedge fund investments with liquidity terms allowing us to fully redeem our holdings at the applicable NAV in the near term, we have classified these investments as Level 2. Certain investments in hedge funds, all of our direct lending funds and our CLO fund have redemption restrictions (see Note 5(b) for further details) that prevent us from redeeming in the near term and therefore we have classified these investments as Level 3.
During 2014 and 2013, we had no transfers between Levels 1 and 2.
Except for hedge funds, direct lending funds and our CLO fund priced using NAV as a practical expedient and certain fixed maturities priced using broker-dealer quotes (underlying inputs are not available), the following table quantifies the significant unobservable inputs we have used in estimating fair value at December 31, 2014 for our investments classified as Level 3 in the fair value hierarchy. These significant unobservable inputs have not changed significantly from December 31, 2013.
The CLO - Equities market continues to be mostly inactive with only a small number of transactions being observed in the market and fewer still involving transactions in our CLO - Equities. Accordingly, we continue to rely on the use of our internal discounted cash flow model (income approach) to estimate fair value of our direct investments in CLO - Equities. Of the significant inputs into this model, the default and loss severity rates are the most judgmental unobservable market inputs to which the valuation of CLO - Equities is most sensitive. A significant increase (decrease) in either of these significant inputs in isolation would result in lower (higher) fair value estimates for direct investments in our CLO - Equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs as they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (decrease) in either of these significant inputs in isolation would result in higher (lower) fair value estimates for direct investments in our CLO - Equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
In general, weather curves are the most significant contributing input to fair value determination; changes in this variable can result in higher or lower fair value depending on the underlying position. In addition, changes in any or all of the unobservable inputs identified above may contribute positively or negatively to overall portfolio value. The correlation input will quantify the interrelationship, if any, amongst the other variables.
Gains and losses included in other comprehensive income (“OCI”) on fixed maturities are included in unrealized gains (losses) arising during the period.
Change in unrealized investment gain/(loss) relating to assets held at the reporting date.
The transfers to Level 3 from Level 2 made during 2014 were due to redemption provisions in hedge fund holdings and the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities. There were no transfers from level 2 into level 3 during 2013.
Refer to Note 5 - Investments for information on reverse repurchase agreements.
During 2012, we sold all available for sale fixed maturities in the portfolios that qualified for hedge accounting and settled all of the associated foreign exchange forward contracts. The hedges were designated and qualified as fair value hedges, resulting in the net impact of the hedges recognized in net realized investment gains (losses).
Our investment portfolio contains a large percentage of fixed maturities which exposes us to significant interest rate risk. As part of our overall management of this risk, we may use interest rate swaps. The interest rate swaps held at December 31, 2014 convert part of our overall fixed rate exposure to a variable rate exposure which effectively reduces the duration of our overall portfolio.
We write business with loss experience generally characterized as low frequency and high severity in nature, which can result in volatility in our financial results. During 2014, 2013 and 2012, respectively, we recognized aggregate net losses and loss expenses of $93 million, $201 million and $438 million in relation to natural catastrophe and weather-related events.
Overall, the majority of the net favorable prior year reserve development in 2014 related to short-tail lines of business. Net favorable prior year reserve development for reinsurance professional, liability and motor lines also contributed significantly and was partially offset by adverse development in insurance liability lines. Favorable reserve development in reinsurance liability and professional lines contributed in 2013 and was partially offset by adverse development in the insurance professional and insurance liability lines. Favorable development in professional lines contributed notably in 2012.
The frequency and severity of natural catastrophe and weather-related activity was high for 2012 and prior periods and our December 31, 2014 net reserve for losses and loss expenses continues to include estimated amounts for numerous events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular Storm Sandy, the Japanese earthquake and tsunami and the three New Zealand earthquakes, inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.
During the year ended December 31, 2014, we recognized ceded losses and loss expenses of $401 million (2013: $415 million; 2012: $396 million).
Our provision for unrecoverable reinsurance was $18 million at December 31, 2014 (2013: $18 million). At December 31, 2014, 98.5% (2013: 98.8%) of our gross reinsurance recoverables were collectible from reinsurers rated A- or better by A.M. Best.
We have the option to redeem the Senior Notes at any time and from time to time, in whole or in part, at a ''make-whole'' redemption price, which is equal to the greater of the aggregate principal amount or the sum of the present values of the 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. We were in compliance with all the covenants contained in the indentures at December 31, 2014.
On March 31, 2014, AXIS Capital's subsidiary, AXIS Specialty Limited, terminated the $170 million secured letter of credit facility with ING Bank N.V., London Branch. The Funds at Lloyd's requirements for the Company's subsidiary, AXIS Corporate Capital UK Limited, to support the underwriting capacity of the Company's Lloyd's syndicate, AXIS Syndicate 1686, are now being met by capital pledged in the form of fixed income securities deposited directly with Lloyd's.
Our investment portfolio is managed by external investment managers in accordance with our investment guidelines. We limit 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, we limit our concentration of credit risk to any single corporate issuer to 2% or less of our fixed maturities portfolio for securities rated A- or above and 1% or less of our fixed maturities portfolio for securities rated below A-. At December 31, 2014, we were in compliance with these limits.
With respect to our reinsurance recoverable balances, we are exposed to the risk of a reinsurer failing to meet its obligations under coverage we have purchased. To mitigate this risk, all reinsurance coverage we purchase is subject to requirements established by our Reinsurance Security Committee. This Committee maintains a list of approved reinsurers, performs credit risk assessments for potential new reinsurers, regularly monitors approved reinsurers with consideration for events which may have a material impact on their creditworthiness, recommends counterparty tolerance levels for different types of ceded business and monitors concentrations of credit risk. The assessment of each reinsurer considers a range of attributes,
including a review of financial strength, industry position and other qualitative factors. Generally, the Committee requires that reinsurers who do not meet specified requirements provide collateral.
These contractual rights contribute to the mitigation of credit risk, as does our monitoring of aged receivable balances. In light of these mitigating factors, and considering that a significant portion of our premiums receivable are not currently due based on the terms of the underlying contracts, we do not utilize specific credit quality indicators to monitor our premiums receivable balance. At December 31, 2014, we recorded an allowance for estimated uncollectible premiums receivable of $4 million (2013: $3 million). The corresponding bad debts expense charges for 2014, 2013 and 2012 were insignificant.
We are not party to any material legal proceedings arising outside the ordinary course of business.
During 2014, the total cash dividends declared per common share were $1.10 (2013: $1.02; 2012: $0.97).
Represents privately negotiated repurchases of 3,000,000 of our common shares from Trident II, L.P and affiliated entities in both 2013 and 2012.
For 2014 and 2013, the total dividends declared and paid on Series C preferred shares were $1.7188 per share in each year. For 2012, the total dividends declared on Series C preferred shares were $1.4132 per share. Of this amount, $0.9835 was paid in 2012 and the remaining $0.4297 was subsequently paid in 2013.
In 2014, total dividends declared and paid on Series D preferred shares were $1.3750 per share. In 2013, the total dividends declared on Series D preferred shares were $0.6875 per share. Of this amount, $0.3438 was paid in 2013 and the remaining $0.3438 was subsequently paid in 2014.
During November 2013, the Company formed AXIS Ventures Reinsurance Limited ("Ventures Re"), a Bermuda domiciled insurer. Ventures Re was formed to write reinsurance on a fully collateralized basis.
Following the formation of Ventures Re, third party investors purchased $50 million of Class A non-voting redeemable preferred share capital issued by this entity. The Ventures Re Class A preferred shares are redeemable at the sole discretion of Ventures Re's Board of Directors. During the third quarter of 2014, $10 million was returned to the Ventures Re Class A preferred share capital holders as part of a reduction of Ventures Re's share premium account.
During the third quarter of 2014, third party investors purchased $25 million of Class B non-voting redeemable preferred share capital issued by Ventures Re. The Ventures Re Class B preferred shares are redeemable at the sole discretion of Ventures Re's Board of Directors.
Ventures Re is considered to be a variable interest entity. The Company has concluded that it is the primary beneficiary of Ventures Re as it has the power to direct, and has more than an insignificant economic interest in, the activities of this entity. Following this determination, Ventures Re was consolidated by the Company. Shareholders' equity attributable to Ventures Re's third party investors is recorded in the Consolidated Financial Statements as noncontrolling interests.
At December 31, 2014, total assets of Ventures Re were $97 million (2013: $50 million), consisting primarily of cash and cash equivalents and insurance receivables. Total liabilities were $38 million (2013: $nil) consisting primarily of loss reserves. The assets of Ventures Re can only be used to settle its own liabilities, and there is no recourse to the Company for any liabilities incurred by this entity.
We also provided supplemental executive retirement plans (“SERP”) to both the Chairman and the former CEO. We settled all obligations under our SERP during the third quarter of 2012, resulting in the recognition of an insignificant loss.
In May 2007, our shareholders approved the establishment of the AXIS Capital Holdings Limited 2007 Long-Term Equity Compensation Plan (“2007 Plan”). The 2007 Plan provides for, among other things, the grant of restricted stock, restricted stock units, non-qualified and incentive stock options, and other equity-based awards to our employees and directors. The 2007 Plan authorized the issuance of a total of 5,000,000 shares. In May of 2009 and 2012, our shareholders approved amendments to the 2007 Plan to increase the number of common shares authorized for issuance by 4,000,000 and 6,000,000 respectively, to bring the total number of common shares authorized for issuance to 15,000,000. As a result of the adoption of the 2007 Plan, the 2003 Long-Term Equity Compensation and 2003 Directors Long-Term Equity Compensation Plan were terminated, except that all related outstanding awards will remain in effect.
We have granted stock options under the 2003 Plans; however, none have been issued since 2005. All outstanding stock options are fully vested and exercisable, and expire ten years from the date of the grant. All outstanding options were exercised on or before January 12, 2015.
The following table provides a reconciliation of the beginning and ending balance of nonvested restricted stock (including restricted stock units) for the year ended December 31, 2014:
During 2014, we incurred a compensation cost of $73 million (2013: $57 million; 2012: $68 million) in respect of all restricted stock, restricted stock units, and cash awards, and recorded tax benefits thereon of $14 million (2013: $10 million; 2012: $8 million). Compensation costs incurred in 2012 includes $20 million of accelerated and incremental expenses associated with the transition in our senior leadership. The retirement of one senior leader resulted in the modification of that leader's outstanding restricted stock awards to eliminate the previously existing service condition. The unanticipated termination without cause of another senior officer lead to the early satisfaction of employment obligations and resulted in the service condition associated with that officer's outstanding restricted stock awards being fully satisfied.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price at December 31, 2014 and the exercisable price, multiplied by the number of in-the-money-options) that would have been received by the stock option holder had all stock option holders exercised their stock options on December 31, 2014.
The total intrinsic value of stock options exercised during 2014 was $4 million (2013: $10 million) and we received proceeds of $5 million (2013: $17 million). For these exercised stock options, we issued new shares from the authorized share capital pool rather than from our treasury pool.
The transactions listed below are classified as related party transactions as each counterparty had or has had either a direct or indirect shareholding in us or has been a board member during any period covered by the financial statements.
In the ordinary course of business, we engage SKY Harbor Capital Management, LLC for asset management services for certain of our short duration high yield debt portfolios and StoneRiver RegEd for broker and adjuster licensing, appointment and compliance services. During 2014, total fees paid to these Stone Point Group companies were $4 million (2013: $2 million; 2012: $2 million).
We currently have $30 million committed to the NXT Capital Senior Loan Fund II. The manager of NXT Capital Senior Loan Fund II is an indirect subsidiary of NXT Capital Holdings, L.P. ("NXT Capital"). Stone Point Capital, LLC, through an affiliated fund, owns approximately 45% of NXT Capital. During 2014, fees paid to NXT Capital totaled less than $1 million.
Our Chairman, Mr. Butt, received $1 million in consulting fee payments in 2014 pursuant to the terms of a consulting agreement by and between Mr. Butt and the Company dated May 3, 2012, as amended December 5, 2013, and December 4, 2014 (2013: $1 million; 2012: nil).
In Canada, our U.S. reinsurance company operates through a branch and our 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 generally remain subject to examination for tax years 2010 through 2014.
We also have subsidiaries in Ireland, the United Kingdom (U.K.), Australia and Brazil. These subsidiaries and their branches, are not under examination, but generally remain subject to examination in all applicable jurisdictions for tax years 2010 through 2014.
At December 31, 2014 and 2013, we established a full valuation allowance on: (1) operating loss carryforwards relating to branch operations in Australia and Singapore due to cumulative losses in recent years; (2) unutilized foreign tax credits available in Ireland and (3) certain other deferred tax assets related to branch operations.
There were no unrecognized tax benefits at December 31, 2014 and 2013.
Amounts in parentheses are debits to net income available to common shareholders
The statutory capital and surplus in each of our most significant regulatory jurisdictions at December 31, 2014 and 2013 was as follows:
Under the Insurance Act 1978, amendments thereto and Related Regulations of Bermuda (the "Act"), our Bermuda subsidiary, AXIS Specialty Bermuda is required to maintain minimum statutory capital and surplus equal to the greater of a minimum solvency margin ("MSM") and the Enhanced Capital Requirement ("ECR"). The MSM is the greater of $100 million, 50% of net written premiums or 15% of the net reserve for losses and loss adjustment expenses and the ECR is calculated based on either an internally developed risk-based capital model or a standard risk-based capital model developed by the Bermuda Monetary Authority. Under the Act, AXIS Specialty Bermuda is restricted as to the payment of dividends and/or distributions for amounts greater than 25% of the prior year’s statutory capital and surplus, whereby a signed affidavit by at least two members of the Board of Directors attesting that a dividend and/or distribution in excess of this amount would
Our Irish subsidiaries, AXIS Specialty Europe SE and AXIS Re SE, are required to maintain minimum levels of statutory and capital surplus. At December 31, 2014, our subsidiaries were in compliance with these requirements. Our Irish subsidiaries may declare dividends out of retained earnings subject to meeting their solvency and capital requirements, which are to hold statutory capital and surplus equal to or exceeding the Required Solvency Margin ("RSM"). The RSM is calculated with reference to Solvency I regulations. The maximum dividend is limited to "profits available for distribution", which consists of accumulated realized profits less accumulated realized losses and statutory reserves. At December 31, 2014, the maximum dividend our Irish subsidiaries could pay out of retained earnings, after obtaining prior approval from the Irish regulator, was approximately $177 million.
Our U.S. operations required statutory capital and surplus is determined using risk based capital tests, which is the threshold that constitutes the authorized control level. If a company falls below the control level, the commissioner is authorized to take whatever regulatory actions may be considered necessary to protect policyholders and creditors. The maximum dividend that may be paid by our U.S. insurance subsidiaries is restricted by the regulatory requirements of the domiciliary states. Generally, the maximum dividend that may be paid by each of our U.S. insurance subsidiaries is limited to unassigned surplus (statutory equivalent of retained earnings) and may also be limited to statutory net income, net investment income or 10% of total statutory capital and surplus. At December 31, 2014, the maximum dividend that our U.S. insurance operations could pay without regulatory approval was approximately $144 million.
Our operating subsidiaries in Bermuda and the United States maintain branch offices in Singapore and Canada, respectively. Our Irish operating subsidiaries maintain branch offices in Switzerland, Australia and the United Kingdom. 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. Our Singaporean, Australian and Canadian branch offices are subject to additional minimum capital or asset requirements in their countries of domicile. At December 31, 2014 and 2013, the actual capital/assets for each of these branches exceeded the relevant local regulatory requirements.