The following is a discussion and analysis of our results of operations for the years ended December 31, 2013, 2012 and 2011 and our financial condition at December 31, 2013 and 2012. This should be read in conjunction with the Consolidated Financial Statements and related notes included in Item 8 of this report. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.
Net income available to common shareholders of $684 million, or $6.02 per common share and $5.93 per diluted common share
Operating income of $633 million, or $5.49 per diluted common share(1)
Reserve for losses and loss expenses of $9.6 billion and reinsurance recoverable of $1.9 billion
Total debt of $996 million and a debt to total capital ratio of 14.6%
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 leading global, diversified specialty insurance and reinsurance company, as measured by quality, sustainability and profitability. Our execution on this mission in 2013 included:
the addition of a number of underwriting and support staff, including growth in specialized areas such as surety, primary casualty, weather and commodity markets and third party capital, as we continue to build-out the Company's global platform, explore opportunities in new and existing lines of business and grow our business internationally;
Our insurance segment's underwriting income increased by $19 million in 2013. Underwriting income for 2012 included pre-tax net losses (inclusive of related premiums to reinstate reinsurance protection) of $178 million for Storm Sandy and an aggregate $44 million for Hurricane Isaac and first and second quarter 2012 U.S. weather events. Comparatively, in 2013, we incurred $93 million of pre-tax aggregate net losses related to worldwide natural catastrophe and weather-related events. 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 the 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. In 2012, we recognized pre-tax net losses (net of related reinstatement premiums) of $153 million for Storm Sandy and an aggregate $60 million for the impact of severe drought conditions on U.S. crops, Hurricane Isaac and first and second quarter 2012 U.S. weather events. Comparatively, in 2013, we incurred $105 million of pre-tax aggregate net losses (net of related reinstatement premiums) related to worldwide natural catastrophe and weather-related events. Other positive factors included a $46 million increase in net favorable prior year reserve development and an increase in net premiums earned. These were partially offset by an increases in the current accident year loss ratio, exclusive of the natural catastrophe and weather-related losses, and an increase in general and administrative expenses.
2012 versus 2011: The $590 million improvement in our underwriting result during 2012 was largely due to a reduction in the frequency and severity of natural catastrophe and weather-related losses. During 2011, we recognized aggregate pre-tax net losses (net of related reinstatement premiums) of $931 million for numerous catastrophe and weather events, including: the 2011 New Zealand earthquakes, the Japanese earthquake and tsunami, the series of severe U.S. storms and tornadoes in April/May 2011, Australian weather events (January floods and Cyclone Yasi), floods in Thailand and Denmark, Hurricane Irene and Tropical Storm Lee. Comparatively, in 2012, we recognized pre-tax aggregate natural catastrophe and weather-related net losses (net of related reinstatement premiums) of $436 million. Growth in net premiums earned in our insurance segment and improvements in the current accident year loss ratios, exclusive of the natural catastrophe and weather-related losses, for both segments further contributed; this was partially offset by a $13 million reduction in net favorable prior year reserve development and growth in general and administrative expenses.
Our insurance segment's underwriting income for 2011 included aggregate pre-tax net losses (inclusive of premiums to reinstate reinsurance protection) of $157 million related to the 2011 natural catastrophe and weather-related events noted above. Comparatively, underwriting income for 2012 included pre-tax net losses (inclusive of related premiums to reinstate reinsurance protection) of $222 million for 2012 natural catastrophe and weather-related events. Despite increased catastrophe and weather-related losses in 2012, underwriting income for the segment improved due to growth in net premiums earned, an improvement in the current accident year loss ratio, exclusive of catastrophe and weather activity and a $19 million increase in net favorable prior year reserve development. This was partially offset by commensurate growth in acquisition costs and general and administrative expenses.
The net investment income increase in 2013 compared to 2012 and in 2012 compared 2011, respectively, was primarily due to the performance of our Other investments. Income from this portfolio increased by $41 million in 2013 compared to 2012, driven by the continued strong performance of our hedge funds, which reflected the strong performance of both global equities and bank loans. Similarly, income from other investments increased $56 million in 2012 compared to 2011, due to improved performance of both global equities and bank loans over the prior year.
The $36 million decrease in 2013 was primarily driven by the reduction in corporate expenses and reflected the impact of the senior leadership transition costs discussed above on 2012.
The increase in preferred share dividends in 2013 and 2012 was driven by the increase in preferred equity capital.
During the first half of 2013 we issued $225 million of 5.50% Series D preferred shares. The increase in preferred share dividends for 2013 includes the accrual and payment of dividends relating to the new Series D issue and is partially offset by the reduction in the weighted average annual dividend rate on our preferred equity capital base described above (see 'Business Overview'). The Series D preferred share proceeds were partially used to redeem the $100 million of 7.25% Series A preferred shares outstanding. The redemption of the Series A preferred shares resulted in a recognition of a loss on repurchase of preferred shares, reflecting initial issue costs of $3 million.
During 2012, in conjunction with the issuance of our 6.875% Series C preferred shares in the first quarter of 2012, we redeemed $150 million of our 7.25% Series A preferred shares and repurchased $247 million of our 7.50% Series B preferred shares via tender offer. The Series B tender offer resulted in the recognition of a $9 million loss, with $7 million of the loss relating to the premium paid to repurchase the shares in advance of the first eligible redemption date. The remaining $2 million loss, as well as a $5 million loss associated with the Series A redemption, related to the recognition of the proportionate share of issue costs as an expense; as these issue costs were recognized in shareholders' equity in the period of issuance, these amounts did not impact book value.
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.
Our objective is to generate superior returns on capital that appropriately reward our common shareholders for the risks we assume and to grow revenue only when we expect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any one year may make it difficult to achieve a profitability target in any specific period and, therefore, established a ROACE target of 15% over the full underwriting cycle. Our average annual ROACE since inception is approximately 14%, tracking closely to our long-term goal.
The improvement in our underwriting result, driven by the lower level of natural catastrophe and weather-related losses previously discussed, was the primary contributor to the improved operating ROACE in 2013 compared to 2012, and in 2012 compared to 2011. The increases in both periods were also aided by growth in net investment income. A decrease in corporate expenses contributed favorably to the increase in the ROACE for 2013. In contrast, in 2012, the increase in corporate expenses discussed above had a negative impact on the ROACE.
In addition to the items noted above for operating ROACE, ROACE is also impacted by net realized investment gains, foreign exchange losses (gains) and the loss on repurchase of preferred shares. The magnitude of our net realized investment gains resulted in these amounts contributing favorably, in aggregate, to our results for both 2013 and 2012; thus ROACE exceeded operating ROACE.
During 2013, our diluted book value per common share appreciated by 7%, driven by $684 million in net income available to common shareholders. This was partially offset by the reduction in the unrealized gains on investments included in accumulated other comprehensive income due to the rise in sovereign yield curves during the year. During 2012, our diluted book value per common share appreciated by 13%, driven by $495 million in net income available to common shareholders, an overall improvement in valuations for our available-for-sale securities and, to a lesser extent, the execution of common share repurchases at a discount to book value.
Taken together, we believe that growth in diluted book value per common share and common share dividends declared represent the total value created for our common shareholders. Despite the impact of catastrophe events, 2013 and 2012 reflected positive value creation for our shareholders. In 2013 our net income, in addition to the dividends declared, more than offset the impact of the upward shift in the sovereign yield curves. In 2012 our net income, combined with valuation improvements on our available-for-sale securities and common share repurchases executed at a discount to book value led the increases in diluted book value per common share; dividends declared provided additional value for our common shareholders. The global frequency and severity of catastrophe activity in 2011 drove a small reduction in shareholder value for that year.
The following table provides our group underwriting results for the periods indicated. Underwriting income (loss) 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.
Group (or consolidated) underwriting income (loss) is a non-GAAP financial measure as defined in SEC Regulation G. See Item 8, Note 3 to the Consolidated Financial Statements, for a reconciliation of consolidated underwriting income (loss) to the nearest GAAP financial measures (income before income taxes) for the periods indicated above. Also, refer to 'Non-GAAP Financial Measures' for additional information related to the presentation of consolidated underwriting income (loss).
The five point decrease in the ceded premium ratio for our insurance segment was driven by 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.
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 2013 was $14 million.
2012 versus 2011: Gross premiums written growth was driven by a $188 million increase in our insurance segment. The increase was driven by professional and liability lines reflecting new business opportunities and rate improvements. Our recently established accident & health line also continued to generate new business. Partially offsetting this growth was a reduction in gross premiums written in our reinsurance segment, primarily related to the repositioning of our catastrophe reinsurance portfolio throughout 2012. Other reductions were noted in the property line due to reduced purchasing by certain
The three point increase in the ceded premium ratio for our insurance segment was driven by changes in our reinsurance purchasing, primarily higher cession rates on our professional lines quota share reinsurance program. Business mix changes, driven by growth in our liability business, also contributed.
2013 versus 2012: Growth in net premiums earned of 9% reflects increases in both segments. Growth in the insurance segment was primarily driven by the recent growth in gross premiums written in our accident & 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 discussed above. The increase in the gross premiums written in the agriculture line during 2013, described above, was the primary driver of the increase in net premiums earned for our reinsurance segment.
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 includes $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 includes $436 million (net of reinstatements) or 12.7 points of natural catastrophe and weather-related losses. The most significant natural catastrophe event of 2012 was Storm Sandy with pre-tax net losses (net of reinstatement premiums) of $331 million, with approximately half of this amount recognized in each of our
insurance and reinsurance segments. In addition, during 2012 we recognized pre-tax net losses of $37 million in relation to the impact of severe drought conditions on U.S. crops and an aggregate $68 million (net of reinstatement premiums) for first and second quarter U.S. weather events and Hurricane Isaac. While the crop-related losses were exclusive to our reinsurance segment, the other events impacted both of our segments.
2012 versus 2011: A decrease in the natural catastrophe and weather-related losses was the primary driver of the 20 point reduction in the 2012 current accident year loss ratio, although the ratios for both years were significantly impacted by natural catastrophe events. In 2012, we recognized aggregate pre-tax net losses (net of related reinstatement premiums) of $436 million primarily related to Storm Sandy. Comparatively, numerous notable natural catastrophe and significant weather events impacted our results in 2011, including earthquakes in New Zealand, the Japanese earthquake and tsunami, a series of severe U.S. storms and tornadoes, various Australian weather events, floods in Thailand and Denmark, Hurricane Irene and Tropical Storm Lee. In aggregate, we recognized pre-tax net losses (net of related reinstatement premiums) of $931 million in relation to these events during 2011.
We continue to monitor paid and incurred loss development for catastrophe events of prior years and update our estimates of ultimate losses accordingly. Relating to the aggregate estimate for catastrophe events of 2010 to 2012, updated information received during 2013 resulted in revisions to our estimated ultimate losses for the 2010 and 2011 New Zealand earthquakes; our estimate for the 2010 accident year event increased by $27 million and our estimates for the 2011 accident year events increased by $32 million. These increases were largely offset by favorable development on other 2010 to 2012 natural catastrophe events.
The frequency and severity of natural catastrophe and weather-related activity was high in recent years and our December 31, 2013 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 related to short-tail lines of business. Net favorable prior year reserve development for liability reinsurance also contributed significantly in 2013 with professional lines contributing notably in 2012 and 2011. Favorable development in 2013 was partially offset by adverse development in the insurance professional and liability lines.
$37 million of net favorable prior year reserve development on marine business, spanning a number of accident years and largely related to better than expected loss emergence. The majority of this, $21 million, related to offshore energy business.
$50 million of net favorable prior year reserve development on professional lines business. We recognized a total of $60 million of net favorable development for 2004 through 2007 accident years, largely due to the reasons discussed in the overview. Partially offsetting this was the recognition of $8 million of net adverse development on the 2010 accident year.
$21 million of net adverse prior year reserve development on liability business, primarily emanating from the 2010 accident year and related to the receipt of two notable claims.
$63 million of net favorable prior year reserve development on catastrophe and property business. Net favorable development was evident across all accident years, with the exception of 2011, and was largely due to better than expected loss emergence. We recognized net adverse development of $18 million on the 2011 accident year, driven by the revision in our estimates for the New Zealand earthquakes.
$16 million of net favorable prior year reserve development on crop business, largely related to the 2011 accident year and due to better than expected loss emergence. Of this amount, $6 million related to updated information for one particular claim; the remainder was due to better than expected loss emergence.
2012 versus 2011: Premiums ceded in 2012 were $787 million, or 34%, of gross premiums written, compared to $656 million, or 31%, in 2011. The increase in the ceded premium ratio was largely due to changes in our reinsurance purchasing, most notably a higher cession rate on our professional lines quota share reinsurance program on renewal during the second quarter. Business mix changes also contributed to the increase, most notably in relation to the growth in our liability business, for which we purchase significant reinsurance.
2012 versus 2011: Growth in the accident & health line was the primary driver for the increase. Growth in professional lines business in recent quarters, arising from geographic expansion (including our European, Australian and Canadian operations) and targeted initiatives, also contributed to the increases; however, the impact of this growth was tempered in the second half of 2012 by the increase in quota share premium cessions.
2013 versus 2012: Natural catastrophe and weather-related losses impacted the current accident year loss ratios for both periods.
In 2013, we incurred $93 million of aggregate pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) related to worldwide natural catastrophe and weather-related events. During 2012, we recognized estimated pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) of $178 million for Storm Sandy. In addition, we recognized aggregate pre-tax net losses of $44 million for Hurricane Isaac and first and second quarter 2012 U.S. weather events.
a reduction in the loss ratio for our credit & political risk line of business.
2013 versus 2012: Gross premiums written increased by $308 million, with growth across most lines of business. Our agriculture initiative was the primary driver of the expansion in gross premiums written, contributing $113 million to the increase; quota share business in the United States comprised the majority of the increase, with excess of loss business in Asia also contributing. The main driver of growth in our professional lines was new business growth, primarily in the United States, which was partially offset by non-renewals and cancellations. Our property line of business increased primarily due to new business and the expansion of our worldwide client relationships. The increase in our catastrophe line of business was due to the expansion of our European portfolio, while growth in our liability line of business primarily reflected expansion in the U.S. including increased participations with existing clients.
2013 versus 2012: Expansion of our agriculture business in 2013, described above, was the primary driver of the increase in net premiums earned.
2013 versus 2012: The significant decrease in the level of natural catastrophe and weather-related activity was the primary driver of the decrease in the current accident year loss ratio.
During 2013, we recognized estimated aggregate pre-tax net losses (net of related reinstatement premiums) of $105 million for worldwide natural catastrophe and weather-related events. Comparatively, in 2012, we recognized pre-tax net losses (net of related reinstatement premiums) of $153 million related to the impact of Storm Sandy. In addition, we recognized aggregate pre-tax net losses (net of related reinstatement premiums) of $60 million for the impact of severe drought conditions on U.S. crops, Hurricane Isaac and first and second quarter 2012 U.S. weather events.
2012 versus 2011: While natural catastrophe and weather-related losses contributed to the current accident year loss ratios for both periods, the impact was less significant in 2012.
During 2012, we recognized aggregate pre-tax net losses (net of related reinstatement premiums) of $213 million for the impact of Storm Sandy, severe drought conditions on U.S. crops, Hurricane Isaac and various U.S. weather events. Comparatively, during 2011, we recognized estimated pre-tax net losses (net of related reinstatement premiums) of $775 million in relation to earthquakes in New Zealand, the Japanese earthquake and tsunami, Australian weather events, U.S. storms and tornadoes, floods in Thailand and Denmark, and Hurricane Irene.
Acquisition Cost Ratio: The decrease in the reinsurance segment’s acquisition cost ratio in 2013 was driven by accruals related to loss-sensitive features in reinsurance contracts that reduced the segment's acquisition cost ratio; conversely, such accruals increased the acquisition cost ratio in 2012. This decrease in the current year was partially offset by higher acquisition costs incurred due to higher acquisition costs in certain lines of business.
2013 versus 2012: The 4% reduction in investment income from fixed maturities reflected lower reinvestment yields as book yields continue to decline towards market yields. This decline was partially offset by the 5% growth in our average fixed maturities balances during 2013 as additional investments in fixed maturities were funded primarily by reinvestment of net investment income.
2012 versus 2011: The 10% reduction in investment income from fixed maturities reflected lower reinvestment yields primarily due to the downward shift in U.S. and European risk-free yield curves. Spread tightening, primarily on investment-grade and high yield corporate debt, also contributed to lower reinvestment yields. The reduction was partially offset by growth of 6% in our average fixed maturities balances during 2012 as additional investments in fixed maturities were funded primarily by reinvestment of net investment income.
2013 versus 2012: The increase was primarily due to higher third party investment manager fees, resulting from the increased use of managers in specialized fixed income strategies that have higher management fees than core fixed income.
2012 versus 2011: The increase was primarily due to increased third party investment manager fees relating to higher investment balances created by improved valuations and additional allocations to specialized fixed income strategies and common stocks, both of which have higher management fees than core fixed income.
Our 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, hedged, or impaired. Additionally, changes in the fair value of investment derivatives, mainly foreign exchange forward contracts and interest rate swaps, are recorded in net realized investment gains/losses.
The level of OTTI losses decreased in 2013 compared to 2012 due mainly to losses recorded on equity exchange traded funds ("ETFs") in 2012, where we were no longer able to assert that we had the intent to hold the securities until full recovery of cost due to the anticipated future reallocation to other asset classes.
From time to time, we may economically hedge the foreign exchange exposure of non-U.S. denominated securities by entering into foreign exchange forward contracts. During 2013, our foreign exchange hedges resulted in $11 million of net gains which related primarily to securities denominated in the Australian dollar, Canadian dollar and Mexican peso. The Australian dollar declined 14% against the U.S. dollar during 2013 while the Canadian dollar and Mexican peso experienced significant intra-year volatility.
During 2013, we introduced the use of interest rate swaps to reduce duration risk of our fixed income portfolio. During the year, we recorded $3 million of net losses relating to our interest rate swaps.
Includes restricted cash and cash equivalents of $65 million and $91 million for 2013 and 2012, respectively.
The cost of our total investments increased by $386 million from December 31, 2012, primarily due to investing a portion of our operating cash flows.
Our methodology for assigning credit ratings to our fixed maturities is in line with the methodology used for the Barclays U.S. Aggregate Bond index. This methodology uses the middle of Standard & Poor's (S&P), Moody's and Fitch ratings. When ratings from only two of these agencies are available, the lower rating is used. When a rating from only one agency is available, it is used.
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, 2013, the fair value of fixed maturities not rated was $1 million (2012: $7 million).
During 2013, we continued to reduce our exposure to eurozone sovereign debt. The primary driver of the increase in "other concentrations" is the additional allocation to our local currency emerging market debt portfolio during 2013. At December 31, 2013, this portfolio had a weighted average credit rating of A- (2012: BBB+), a duration of 5.0 years (2012: 3.9 years) and a yield-to-worst of 7.2% (2012: 5.2%).
During 2013, our holdings of non-agency RMBS declined due to paydowns and a reallocation to other asset classes. At December 31, 2013, the average duration and weighted average life was 0.5 years (2012: 0.3 years) and 4.0 years (2012: 3.5 years), respectively, for non-agency RMBS.
Our CMBS portfolio continues to be rated highly, with approximately 81% rated AA or better (2012: 90%). Additionally, the weighted average estimated subordination percentage for the portfolio was 30% at December 31, 2013 (2012: 30%), which represents the current weighted average estimated percentage of the capital structure subordinated to the investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. At December 31, 2013, the average duration and weighted average life was 2.5 years (2012: 2.8 years) and 2.6 years (2012: 3.1 years), respectively.
During 2013, we decreased our allocation to global equities, mainly through sales of common stocks. The proceeds of these sales were used to fund incremental investments in hedge funds. At December 31, 2013, our equities portfolio had net unrealized gains of $136 million (2012: $58 million); the increase of $78 million was a result of the strong performance of global equity markets during 2013.
The $169 million increase in the fair value of our total hedge funds in 2013 was driven by $68 million of net subscriptions as well as $101 million of increased valuations as our hedge funds tracked the strong performance of the global equity and credit markets. Certain of these funds may be subject to restrictions on redemptions which may limit our ability to liquidate these investments in the short term. See Item 8, Note 5(b) of our Consolidated Financial Statements for further details on these restrictions.
We have made total commitments of $110 million to managers of direct lending funds. To date, $22 million of this commitment has been called. During 2013, we made a $60 million commitment as a limited partner in a multi-strategy hedge fund, of which $6 million has been called to date. Further, during 2013, we made a $60 million commitment as a limited partner in a fund that invests primarily in CLO equities ("CLO fund"), of which $33 million has been called to date. See Item 8, Note 5(b) of our Consolidated Financial Statements for further details on the investment terms relating to these commitments.
On a combined basis, these five transactions resulted in a 99 basis point reduction in the weighted average annual dividend rate on our preferred equity.
In addition to replacing our expiring credit facility in 2013, we also entered into an amendment to the Credit Facility 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.
During 2013, A.M. Best upgraded the financial strength rating of each of our principal operating insurance and reinsurance subsidiaries to a financial strength rating of A+ (Stable). This rating as defined by A.M. Best is assigned to companies that have, in their opinion, a "superior ability to meet ongoing insurance obligations." The 'A+' grouping is the second highest ratings category out of fifteen. Rating outlooks ('Positive', 'Negative' and 'Stable') are assigned to indicate a rating's potential direction over an intermediate term, generally defined as 12 - 36 months.
For further details on the terms of our senior unsecured debt, see Item 8, Note 10(a) to the Consolidated Financial Statements.
We began operations in late 2001. In our earlier years, we placed significant reliance on industry benchmarks in establishing our expected loss ratios. Over time, we have placed more reliance on our historical loss experience in establishing these ratios where we believe the weight of our own actual experience has become sufficiently credible for consideration. The weight given to our experience differs for each of our three claim tail classes and is discussed further in the ‘Claim Tail Analysis’ section below. In establishing expected loss ratios for our insurance segment, we give consideration to a number of other factors, including exposure trends, rate adequacy on new and renewal business, ceded reinsurance costs, changes in claims emergence and our underwriters’ view of terms and conditions in the market environment. For our reinsurance segment, expected loss ratios are based on a contract-by-contract review, which considers information provided by clients together with estimates provided by our underwriters and actuaries about the impact of changes in pricing, terms and conditions and coverage. We also consider the market experience of an independent actuarial firm, as appropriate.
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. At the end of 2013, the transition had begun for the 2010 and prior accident years for certain underlying reserve classes. With the exception of the experience in the insurance professional lines during 2013, 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. See 'Underwriting Results - Group - Prior Year Development' for a discussion of the development recognized during the last three years.
For our trade credit and surety reinsurance business, our initial and most recent accident year loss reserves are generally based on the ELR method, with consideration given to qualitative factors. Given that there is a more stable reporting pattern for trade credit business, we generally commence the transition to experience-based methods sooner than for the surety business.
As previously described, the estimation of the value of our recoveries on credit and political risk business requires significant management judgment. At December 31, 2013, our total estimated recoveries on credit insurance business were $84 million, while comparatively, at December 31, 2012, our estimated recoveries were $106 million. The reduction in 2013 largely reflected the reduction in recovery estimates for three claims based on updated information.
did not recognize any favorable loss emergence. As a result, during each of the past three years, we recognized net adverse development for our liability insurance business in light of unfavorable loss emergence for certain reserving class and accident year combinations.
Commencing with our fourth quarter 2012 reserving process, we began to give weight to actuarial methods that reflect our actual experience for liability business as we believed that our oldest accident years were at a stage of expected development where such methods would produce meaningful actuarial indications. In 2013, we began to give weight to experience-based methods for the insurance liability classes for accident years 2006 and prior, which did not have a significant impact on our results. For the reinsurance liability lines, we began to give weight to experience-based methods for accident years 2008 and prior, resulting in the the recognition of $87 million of net favorable prior year reserve development for these years.
The results show the cumulative increase (decrease) in our loss reserves across all accident years. For example, if our assumed loss development pattern for our property and other insurance business was three months shorter with no accompanying change in our ELR assumption, our loss reserves may decrease by approximately $24 million. Each of the impacts set forth in the tables is estimated individually, without consideration for any correlation among key assumptions or among reserving classes. Therefore, it would be inappropriate to take each of the amounts and add them together in an attempt to estimate total volatility. While we believe the variations in the expected loss ratios and loss development patterns presented could be reasonably expected, our own historical data regarding variability is generally limited and actual variations may be greater or less than these amounts. It is also important to note that the variations are not meant to be a “best-case” or “worst-case” series of scenarios and, therefore, it is possible that future variations in our loss reserves may be more or less than the amounts presented. While we believe that these are reasonably likely scenarios, we do not believe this sensitivity analysis should be considered an actual reserve range.
In the normal course of business, we purchase reinsurance to protect our business from losses due to exposure aggregation and to limit ultimate losses from catastrophic events. The purchase of reinsurance does not discharge our liabilities under contracts written by us. Consequently, an exposure exists with respect to reinsurance recoverable to the extent that any of our reinsurers are unwilling or unable to pay our claims.
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.
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. The principal components of the default analysis are reinsurance recoverable by reinsurer and default factors applied to estimate uncollectible amounts based on our reinsurers’ credit ratings. The default factors are based on a model developed by a major rating agency. The provision recorded against reinsurance recoverable was $18 million and $16 million at December 31, 2013 and 2012, respectively. We have not written off any significant reinsurance recoverable balances in the last three years. At December 31, 2013, the use of different assumptions within our approach could have a material effect on our provision for uncollectible reinsurance recoverable. To the extent the creditworthiness of our reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than our provision. Given the various considerations used to estimate our uncollectible provision, we cannot precisely quantify the effect a specific industry event may have on our provision.
Our revenues are primarily generated from gross premiums written originating from our underwriting operations. The basis for our recognized gross premiums written varies by contract type.
For the majority of our insurance business, we receive a fixed premium which is identified in the policy and recorded as unearned premium on the inception date of the contract. This premium will be adjusted only if the underlying insured values ultimately differ. Accordingly, we actively monitor underlying insured values and record adjustment premiums in the period in which amounts are reasonably determinable. Gross premiums written on a fixed premium basis accounted for approximately 90%, 93% and 92% of the segment’s total for the years ended December 31, 2013, 2012 and 2011, 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.
Since inception, our historical experience has shown that cumulative adjustments to our annual initial premium estimates on proportional reinsurance contracts have ranged from a negative revision of 4% to a favorable revision of 9%. Giving more weight to recent years where premium volume was comparable to current levels, we believe that a reasonably likely change in our 2013 proportional reinsurance gross premiums written estimate would be 5% in either direction. Such a change would result in a variance in our gross premiums written of approximately $60 million and an immaterial impact on our pre-tax net income. However, larger variations, both positive and negative, are possible.
Since 2009, significant liquidity has returned to the financial markets, resulting in an increase in observable market prices for our financial instruments. At December 31, 2013, the fair value for 94% (2012: 96%) 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, 2013 and 2012, 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 $34 million (2012: $71 million), less than 1% of total fixed maturities and equities. Refer to Item 8, Note 6 to our Consolidated Financial Statements for further information.
We have also invested directly in CLO Equities, also known as “cash flow CLOs” in the industry. In 2013, the CLO - Equity market continues to be mostly inactive with only a small number of transactions being observed in the market and even fewer still involving deals we hold. Accordingly, we continue to rely on the use of our internal discounted cash flow model (income approach) to estimate the fair value of CLO - Equities. At December 31, 2013, the estimated fair value for CLO - Equities was $40 million (2012: $62 million), based on the following significant inputs used in our valuation model.
Actual default rates at November 30, 2013 for our CLO - Equities varied from 0.5% to 3.0% (November 30, 2012: 0.2% to 4.5%) on the remaining underlying collateral. While, on average, these default rates are much lower than our default rate assumptions noted above, we remain cautious on this favorable development given the continuing global economic uncertainty. Due to the use of significant unobservable inputs in our discounted cash flow model, we continue to classify the CLO - Equities as Level 3.
For impaired securities held within our high yield portfolios (i.e. managed under a mandate to invest primarily in non-investment grade securities), we have established separate parameters for our credit loss assessment. Due to the additional volatility inherent in high yield securities relative to investment-grade securities, we focus on the severity of the impairment and work closely with our external high yield investment managers to identify securities with significant potential credit impairments.
At December 31, 2013, there were no recently issued accounting pronouncements where our adoption of such guidance was pending.
In this report, we present operating income (loss), consolidated underwriting income (loss) and underwriting-related general and administrative expenses, which are “non-GAAP financial measures” as defined in Regulation G.
Tax cost (benefit) of ($2,039), $11,615 and $1,703 for 2013, 2012 and 2011, 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.
In this regard, certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (losses), foreign exchange losses (gains) and losses on repurchase of preferred shares to understand the profitability of recurring sources of income.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012 and 2011
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, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
A VIE is an entity that either: (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. We are the primary beneficiary of a VIE if we have a controlling financial interest in the VIE, based on the following two characteristics: a) the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE, and b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Our fixed maturities and equities classified as “available for sale” are reported at fair value at the balance sheet date. See Note 6 - Fair Value Measurements for additional information regarding the determination of fair value. The change in fair value (net unrealized gain or loss) on our available for sale investments, net of tax, is included as a separate component of accumulated other comprehensive income (loss) (“AOCI”) in shareholders’ equity.
We measure all derivative instruments at fair value (see Note 6 - Fair Value Measurements) and recognize 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.
Effective January 1, 2013, we adopted Financial Accounting Standards Board ("FASB") guidance requiring additional disclosures about financial instruments and derivative instruments that are either: (1) offset for balance sheet presentation purposes or (2) subject to an enforceable master netting arrangement or similar arrangement, regardless of whether they are offset for balance sheet presentation purposes. The disclosure requirements of this guidance are limited to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing/lending transactions. As this guidance is disclosure-related only and did not amend existing balance sheet offsetting guidance, adoption did not impact our results of operations, financial condition or liquidity. The additional disclosures are provided in Note 7 - Derivative Instruments.
Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Reinsurance. Therefore we have determined that we have two reportable segments, insurance and reinsurance. We do not allocate our assets by segment, with the exception of goodwill and intangible assets, as we evaluate the underwriting results of each segment separately from the results of our investment portfolio.
Our 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 other.
Intangible assets with an indefinite life consist primarily of U.S. state licenses that provide a legal right to transact business indefinitely. Our impairment reviews for goodwill and indefinite lived intangibles did not result in the recognition of impairment losses for the years ended December 31, 2013, 2012 and 2011.
In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we also invest in limited partnerships (hedge funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 5(b)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly we are not the primary beneficiary for any of these VIEs. Our maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.
At December 31, 2013, 1,127 fixed maturities (2012: 478) were in an unrealized loss position of $180 million (2012: $18 million) of which $2 million (2012: $3 million) was related to securities below investment grade or not rated.
At December 31, 2013, 99 securities (2012: 146) had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $272 million (2012: $268 million). Following our credit impairment review, we concluded that these
At December 31, 2013, we have $88 million (2012: $40 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.
During 2013, we made a $60 million commitment as a limited partner in a fund that invests primarily in CLO equities ("CLO fund"). We will not be eligible to redeem our investment until December, 2017 but expect to receive interest distributions on a quarterly basis. At December 31, 2013, $27 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the CLO - Equities line of the table above. The CLO - Equities line also includes direct investment in the equity tranches of CLOs.
A significant portion of the unrealized losses on ABS at December 31, 2013, and 2012, were related to CLO debt tranched securities (“CLO Debt”) purchased prior to the credit crisis with a current carrying value of $30 million (2012: $53 million). We used the following significant inputs to estimate the credit loss for these securities:
Our assumptions on default and loss severity rates are established based on an assessment of actual experience to date for each CLO Debt and review of recent credit rating agencies’ default and loss severity forecasts. Based on the underlying collateral values and our projected cash flows at December 31, 2013, we do not expect any credit losses on our CLO Debt as the current unrealized loss is reflective of the securities' low coupon relative to the higher market yields available for similar securities.
The OTTI losses on common stocks in 2013 and 2012 are primarily due to the severity and duration of their unrealized loss positions, for which we concluded the forecasted recovery period was uncertain. The recognition of such losses does not necessarily indicate that sales will occur or that sales are imminent or planned. During 2013, we recorded $1 million (2012: $9 million) of OTTI losses on our exchange-traded funds as we no longer had the intent to hold these underwater securities through full recovery of cost. At December 31, 2013, the fair value of our equities was $702 million (2012: $667 million), which included $6 million (2012: $7 million) of gross unrealized losses.
At December 31, 2013, we held $34 million (2012: $39 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of cash and cash equivalents on our consolidated balance sheet. The required collateral for these loans is either cash or U.S. Treasuries at a minimum rate of 102% of the loan principal. Upon maturity, we receive principal and interest income.
U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. As the fair values of our U.S. Treasury securities are based on unadjusted market prices in active markets, they are classified within Level 1. The fair values of U.S. government agency securities are priced using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. government agency securities are classified within Level 2.
Our municipal portfolio comprises revenue and general obligation bonds issued by U.S. domiciled state and municipal entities. The fair value of these securities is determined using spreads obtained from broker-dealers, trade prices and the new issue market. As the significant inputs used to price the municipals are observable market inputs, municipals are classified within Level 2.
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
At December 31, 2013, our direct investments in CLO - Equities were classified within Level 3 as we estimated the fair value for these securities using an income approach valuation technique (discounted cash flow model) due to the lack of observable and relevant trades in the secondary markets.
Short-term investments primarily comprise highly liquid securities with maturities greater than three months but less than one year from the date of purchase. These securities are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value.
During 2013 and 2012, 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, 2013 for our investments classified as Level 3 in the fair value hierarchy. These significant unobservable inputs have not changed significantly from December 31, 2012. Where appropriate, this table has been reconciled back to the asset class' total Level 3 holdings.
(2) Measured in Heating Degree Days ("HDD") which is the number of degrees the daily temperature is below a reference temperature. The cumulative HDD for the duration of the derivatives contract is compared to the strike value to determine the necessary settlement.
On a quarterly basis, our valuation processes for both CLO Debt and CLO - Equities include a review of the underlying cash flows and key assumptions used in the discounted cash flow models. We review and update the above significant unobservable inputs based on information obtained from secondary markets, including from the managers of the CLOs we hold. These inputs are the responsibility of management and, in order to ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we update our assumptions through regular communication with industry participants and ongoing monitoring of the deals in which we participate (e.g. default and loss severity rate trends), we maintain a current understanding of the market conditions, historical results, as well as emerging trends that may impact future cash flows. By maintaining this current understanding, we are able to assess the reasonableness of the inputs we ultimately use in our models.
The transfers to Level 3 from Level 2 made during 2012 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities. No such transfers were made during 2013.
The carrying values of cash equivalents (including restricted amounts), accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated their fair values at December 31, 2013, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At December 31, 2013, our senior notes are recorded at amortized cost with a carrying value of $996 million (2012: $995 million) and have a fair value of $1,073 million (2012: $1,091 million). The fair values of these securities were obtained from a third party pricing service and pricing was based on 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 these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our senior notes are classified within Level 2.
The following table provides the total impact on earnings of applying hedge accounting for foreign exchange contracts designated as fair value hedges along with the impact of the related hedged investment portfolio for the periods indicated:
Our professional lines business recognized $29 million of net adverse development in 2013. This increase in the reserves was due to a $51 million adverse development in the insurance segment, reflecting worse than expected loss experience for the 2011-2012 accident years, due to worse than expected loss experience on certain parts of our U.S. D&O business, and the 2008-2009 accident years, due to developments on certain global financial crisis-related claims. Comparably in 2012 and 2011 professional lines contributed net favorable prior year reserve developments of $54 million and $105 million, respectively. The 2012 and 2011 favorable prior year reserve developments were driven by increased weight being given to experience-based actuarial methods in selecting our ultimate loss estimates for accident years 2009 and prior. During 2013, the transition to the experience-based actuarial methods also had a favorable impact on 2009 and prior years, which partially offset the adverse development discussed above.
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, 2013.
On March 26, 2013, in advance of the scheduled August expiration, we terminated and replaced our previously existing credit facility. AXIS Capital and certain subsidiaries are now party to a $250 million credit facility (the "Credit Facility"), which was issued by a syndication of lenders pursuant to a Credit Agreement and other ancillary documents (together, the "Facility Documents") and will expire in March 2017. At the request of the Company and subject to the satisfaction of certain conditions, the aggregate commitment available under the Credit Facility may be increased by up to $150 million. Under the terms of the Credit Facility, loans are available for general corporate purposes and letters of credit may be issued in the ordinary course of business, with total usage not to exceed the aggregate commitment available. Interest on loans issued under the Credit Facility is payable based on underlying market rates at the time of loan issuance. While loans under the Credit Facility are unsecured, we have the option to issue letters of credit on a secured basis in order to reduce associated fees. Letters of credit issued under the Credit Facility would principally be used to support the (re)insurance obligations of our operating subsidiaries. Each of AXIS Capital, AXIS Specialty Finance and AXIS Specialty Holdings Bermuda Limited guarantees the obligations of the other parties to the Credit Facility. The Credit Facility is subject to certain non-financial covenants, including limitations on fundamental changes, the incurrence of additional indebtedness and liens and certain transactions with affiliates and investments, as defined in the Facility Documents. The Credit Facility also requires
On November 20, 2013, certain of AXIS Capital’s operating subsidiaries entered into an amendment to extend the term of the Company's secured $750 million letter of credit facility (the “LOC Facility”) with Citibank Europe plc (“Citibank”) pursuant to a Master Reimbursement Agreement and other ancillary documents (together, the “LOC Facility Documents”). The LOC Facility may be terminated by Citibank on December 31, 2016 upon thirty days prior notice. Under the terms of the LOC Facility, letters of credit to a maximum aggregate amount of $750 million are available for issuance on behalf of the operating subsidiaries. These letters of credit will principally be used to support the reinsurance obligations of the operating subsidiaries. The LOC 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 Citibank. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the LOC Facility to any or all of the operating subsidiaries party to the LOC Facility Documents.
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, 2013, we were in compliance with these limits.
The three largest balances by reinsurer accounted for 14%, 11% and 11% of total reinsurance recoverable on unpaid and paid losses at December 31, 2013 (2012: 13%, 10% and 10%). Amounts related to our reinsurers with the ten largest balances comprised 77% of December 31, 2013 balance (2012: 72%) and had a weighted average A.M. Best rating of A+ (2012: A+).
We produce our business through brokers and direct relationships with insurance companies. During 2013, three brokers accounted for 61% (2012: 61%; 2011: 63%) of our total gross premiums written. Aon Corporation accounted for 26% (2012: 27%; 2011: 27%), Marsh, Inc. (including its subsidiary Guy Carpenter and Company) for 23% (2012: 22%; 2011: 23%), and
Willis Group Holdings Ltd. for 12% (2012: 12%; 2011: 13%). No other broker and no one insured or reinsured accounted for more than 10% of our gross premiums written in any of the last three years.
The following table presents our common shares issued and outstanding, excluding restricted shares under our stock compensation plans (see Note 16 - Share-based Compensation):
During 2013, the total cash dividends declared per common share were $1.02 (2012: $0.97; 2011: $0.93).
During 2011, our founding shareholders exercised all remaining warrants. These warrants were exercised on a cashless basis pursuant to the terms of the applicable warrant agreements, resulting in a lower number of shares being issued than the number of warrants exercised. Accordingly, we issued 12,893,483 common shares upon the exercise of 19,827,760 warrants. In connection with the warrant exercise, we paid deferred dividends of $93 million to those warrant holders who chose the deferred cash option for dividends declared.
On December 9, 2013, our Board of Directors authorized a new share repurchase plan for up to $750 million of our common shares through December 31, 2015. The new plan is effective January 1, 2014.
We privately negotiated with Trident II, L.P. and affiliated entities to repurchase 3,000,000 (2012: 3,000,000; 2011: none) of our common shares.
During June 2013, we redeemed the remaining 4,000,000 Series A preferred shares outstanding, representing an aggregate liquidation preference of $100 million. In connection with this redemption, we recognized a $3 million loss.
For 2013, the total dividends declared on Series A preferred shares were $0.9063 per share. In 2013, dividends of $1.3594 per share were paid, of which $0.4531 had been declared in 2012. For 2012 and 2011, the total dividends declared and paid on Series A preferred shares were $1.8125 per share.
During March 2012, we issued $400 million of 6.875% Series C preferred shares, par value $0.0125 per share, with a liquidation preference of $25.00 per share. We may redeem the Series C preferred shares on or after April 15, 2017 at a redemption price of $25.00 per share. Dividends on the Series C preferred shares are non-cumulative. Consequently, if the board of directors does not authorize and declare a dividend for any period, holders of the Series C preferred shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accumulate and be payable. Holders of the Series C preferred shares will be entitled to receive, only when, as and if declared by the board of directors, non-cumulative cash dividends from the original issue date, quarterly in arrears on the fifteenth day of January, April, July and October of each year, commencing on July 15, 2012, without accumulation of any undeclared dividends. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 6.875% of the liquidation preference per annum.
For 2013 the total dividends declared and paid on Series C preferred shares were $1.7188 per share. 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.
During May 2013, we issued $225 million of 5.50% Series D preferred shares, par value $0.0125 per share, with a liquidation preference of $25.00 per share. We may redeem the Series D preferred shares on or after June 1, 2018 at a redemption price of $25.00 per share. Dividends on the Series D preferred shares are non-cumulative. Consequently, if the Board of Directors does not authorize and declare a dividend for any period, holders of the Series D preferred shares will not be entitled to receive a dividend for such period, and such undeclared dividend will not accumulate and be payable. Holders of the Series D 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 September 1, 2013, without accumulation of any undeclared dividends. To the extent declared, these dividends will accumulate, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum.
We believe that this matter was quantitatively and qualitatively immaterial to our previously issued financial statements and that the recognition of the adjustment in 2012 was similarly immaterial.
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.
At December 31, 2013, total assets of Ventures Re were $50 million, consisting of cash and cash equivalents. 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 currently issue restricted stock and restricted stock units to our employees with service conditions, vesting generally over a period of 4 years with 25% of the award vesting annually. We also grant performance-based stock awards to certain employees in order to promote long-term growth and profitability. Performance-based awards represent the right to receive a specified number of common shares in the future, based upon the achievement of established performance criteria during the applicable performance period. At December 31, 2013, we anticipate that the established performance based criterion for these awards are likely to be achieved.
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, 2013:
During 2013, we granted 1,007,425 restricted stock awards (2012: 2,447,700; 2011: 1,839,250) to our employees with a weighted average grant-date fair value per share of $39.52 (2012: $32.20; 2011: $36.12).
The total intrinsic value of stock options exercised during 2013 was $10 million (2012: $11 million) and we received proceeds of $17 million (2012: $3 million). For these exercised stock options, we issued new shares from the authorized share capital pool rather than from our treasury pool.
June 30, 2012, Blackstone Group ceased to be a related party. Fees due or paid for the six months ended June 30, 2012 were $1 million. In 2011, total fees paid were $2 million.
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 2009 through 2013. During the year, our Canadian reinsurance branch was audited by the Canada Revenue Agency for income taxes for tax years 2009 and 2010, with no material adjustments.
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 2009 through 2013.
At December 31, 2013, the total operating loss carryforwards for our Singapore and Australian branches were $115 million (2012: $117 million) and $45 million (2012: $51 million), respectively. Such operating losses are currently available to offset future taxable income of the branches and may be carried forward indefinitely in each jurisdiction. At December 31, 2013, our European subsidiaries have a $4 million (2012: $3 million) foreign tax credit which can be carried forward indefinitely. In addition, at December 31, 2013, our U.S. companies have a $7 million (2012: $5 million) alternative minimum tax credit that can be carried forward indefinitely.
There were no unrecognized tax benefits at December 31, 2013 and 2012.
The tax effects allocated to each component of other comprehensive income (loss) were as follows:
The statutory capital and surplus in each of our most significant regulatory jurisdictions at December 31, 2013 and 2012 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 not cause the company to fail to meet its relevant margins is required. At December 31, 2013, the maximum dividend/
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, 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. At December 31, 2013, the maximum dividend our Irish subsidiaries could pay out of retained earnings, after obtaining prior approval from the Irish regulator, was approximately $141 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, 2013 and 2012, the actual capital/assets for each of these branches exceeded the relevant local regulatory requirements.