We maintain office facilities in Bermuda, the U.S., Europe, Singapore, Canada, and the Middle East. We own the property in which our office is located in Dublin, Ireland, and we lease office space in the other countries. We renew and enter into new leases in the ordinary course of business as required. Our global headquarters is located at 92 Pitts Bay Road, AXIS House, Pembroke HM 08, Bermuda. We believe that our office space is sufficient for us to conduct our operations for the foreseeable future.
Net income available to common shareholders of $282.4 million, or $3.37 per common share and $3.34 per diluted common share
Operating income(1) of $213 million, or $2.52 per diluted common share(1)
Estimated pre-tax catastrophe and weather-related losses, net of reinsurance and reinstatement premiums, of $336 million (Insurance: $84 million; Reinsurance: $252 million), or 7.5 points on the current accident year loss ratio, primarily related to Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, Australian Wildfires, and other weather-related events
Debt of $1.8 billion and a debt to total capital ratio(3) of 24.6%
Common shareholders’ equity of $4.8 billion; book value per diluted common share of $55.79
Operating income (loss) and operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measures, net income (loss) and earnings (loss) per diluted common share, respectively, are provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Results of Operations' and a discussion of the rationale for the presentation of these items is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Non GAAP Financial Measures'.
We 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 portfolio of risks, consistent with our risk appetite and the development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks. The execution of our business strategy in 2019 included the following:
increasing our relevance in a select number of attractive specialty lines insurance and treaty reinsurance markets, and continuing the implementation of a more focused distribution strategy;
continuing to re-balance our portfolio towards less volatile lines of business that carry attractive rates;
broadening risk-funding sources and the development of vehicles that utilize third-party capital; and
growing our corporate citizenship program to give back to our communities and help contribute to a more sustainable future.
For discussion of our results of operations and changes in financial condition for year ended December 31, 2018 compared to year ended December 31, 2017 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Form 10-K which was filed with the SEC on February 26, 2019 and such discussions are incorporated herein by reference.
We continue to closely monitor developments related to the coronavirus (COVID-19) outbreak to assess any potential impact on our business. We currently do not anticipate that this outbreak will have a material impact on our results of operations, financial condition or liquidity, however, due to the evolving and highly uncertain nature of this event, it currently is not possible to provide an estimate of potential insurance or reinsurance exposure or the indirect effects the outbreak may have on our results of operations, financial condition or liquidity.
In the insurance market, rates and terms and conditions across most lines generally continued to see accelerating improvement. We are well-positioned in the markets that are seeing the strongest pricing actions, including Lloyd’s, U.S. E&S and Professional Lines, and we expect more business will meet our return adequacy hurdles in the coming year. We continue to pursue opportunities for profitable growth in the businesses where we have expertise and existing leadership positions.
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our individual underwriting operations, these costs are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss). General and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, also includes corporate expenses.
Interest expense and financing costs primarily relate to interest payable on our debt. As these expenses are not incremental and/or directly attributable to our individual underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).
Bargain purchase gain, recognized on the acquisition of Compagnie Belge d'Assurances Aviation NV/SA ("Aviabel"), reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred and is not indicative of future revenues, therefore, this revenue is excluded from consolidated underwriting income (loss).
Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses, interest in income (loss) of equity method investments, revaluation of net deferred tax asset and bargain purchase gain.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on net insurance-related liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized on the sale of our available for sale investments and equity securities in net investment gains (losses). We also recognize unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss). These unrealized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported in net income (loss) available (attributable) to common shareholders, thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As a result, the foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a fair representation of the performance of our business.
Transaction and reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss).
The revaluation of net deferred tax asset represents a tax expense recognized in the fourth quarter of 2017 related to the revaluation of our net deferred tax asset, due to the reduction in the U.S. corporate income tax rate from 35% to 21% enacted as part of the Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform"). The nature and timing of the tax expense associated with the U.S. Tax Reform is not related to the underwriting process, therefore, this expense is excluded from operating income (loss).
On October 2, 2017, we acquired Novae. At the acquisition date, we identified VOBA, which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction. In addition, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet at the acquisition date as the value of policies in-force on that date are considered within VOBA. Consequently, underwriting income (loss) in 2019 and 2018 included the recognition of premiums attributable to Novae's balance sheet at the acquisition date without the recognition of the associated acquisition costs.
Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP financial measure, also included corporate expenses of $129 million, $108 million and $130 million for the years ended December 31, 2019, 2018 and 2017, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Other (Expenses) Revenues, Net' for further details. Refer also to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures' for further details.
Tax (benefit) of $(7) million, $(11) million and $(3) million for the years ended December 31, 2019, 2018 and 2017, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
We also present operating income (loss) per diluted common share and operating return on average common equity ("operating ROACE"), which are derived from the operating income (loss) measure and can be reconciled to the most comparable GAAP financial measures as follows:
Operating income (loss) per diluted common share is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to earnings (loss) per diluted common share, the most comparable GAAP financial measure is presented in the table above, and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures'.
Operating ROACE, a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K, is calculated by dividing operating income (loss) for the year by the average common shareholders' equity determined using the common shareholders’ equity balances at the beginning and end of the year. The reconciliation to ROACE, the most comparable GAAP financial measure is presented in the table above and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures'.
Ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and ex-PGAAP operating ROACE are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measures, net income (loss) available (attributable) to common shareholders, earnings (loss) per diluted common share, and ROACE, respectively, are presented in the table above, and a discussion of the rationale for the presentation of these items is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures'.
Ex-PGAAP operating ROACE is calculated by dividing ex-PGAAP operating income (loss) for the year by the average common shareholders' equity determined using the common shareholders’ equity balances at the beginning and end of the year.
Tax cost of $2 million, $24 million and $6 million for the years ended December 31, 2019, 2018, and 2017, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
2019 versus 2018: Underwriting income in 2019 was $29 million, a decrease of $95 million compared to underwriting income of $124 million in 2018. The decrease in underwriting income was primarily driven by a decrease in net premiums earned and a decrease in net favorable prior year reserve development, together with an increase in the acquisition cost ratio and an increase in the general and administrative expense ratio, partially offset by a decrease in catastrophe and weather-related losses and a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses.
The insurance segment underwriting income in 2019 was $44 million, a decrease of $33 million compared to underwriting income of $77 million in 2018. The decrease in underwriting income was primarily driven by a decrease in net premiums earned and a decrease in net favorable prior year reserve development, together with an increase in the acquisition cost ratio and an increase in the general and administrative expense ratio, partially offset by a decrease in catastrophe and weather-related losses and a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses.
The reinsurance segment underwriting loss in 2019 was $16 million compared to underwriting income of $47 million in 2018. The underwriting loss in 2019 was primarily driven by a decrease in net favorable prior year reserve development and a decrease in net premiums earned, together with an increase in catastrophe and weather-related losses, partially offset by a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses and a decrease in the general and administrative expense ratio.
Net investment income was $479 million in 2019 compared to $439 million in 2018, an increase of $40 million, primarily attributable to an increase in income from fixed maturities due to the increase in yields and a larger allocation of the portfolio to fixed maturities, together with a realized gain associated with the sale of a privately held investment, partially offset by lower returns from CLO-equities.
Net investment gains were $91 million in 2019 compared to net investment losses of $150 million in 2018.
Corporate expenses were $129 million in 2019 compared to $108 million in 2018. The increase was primarily related to ongoing investments in information technology and digital capabilities, personnel costs and professional fees, partially offset by an increase in the allocation of corporate costs to the insurance and reinsurance segments.
The foreign exchange gains of $12 million in 2019 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the re-measurement of net insurance-related liabilities in pound sterling.
The foreign exchange gains of $29 million in 2018 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities mainly denominated in pound sterling and euro.
(1) Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss), the most comparable GAAP financial measure, is provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Results of Operation'.
Reorganization expenses were $37 million in 2019 compared to $67 million in 2018, related to the transformation program which was launched in 2017. This program encompasses the integration of Novae which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. These expenses were not included in operating income.
(1) Book value per diluted common share represents common shareholders’ equity divided by the number of diluted common share outstanding determined using the treasury stock method. Cash settled restricted stock units are excluded
We consider book value per diluted common share to be an appropriate measure of returns to common shareholders, as we believe growth in book value on a diluted basis will ultimately translate into appreciation of our stock price.
2019 versus 2018: Gross premiums written in 2019 decreased by $11 million or 0.2% (increased $88 million or 1% on a constant currency basis(1)) compared to 2018 due to a decrease in the insurance segment, partially offset by an increase in the reinsurance segment.
The increase in the reinsurance segment's gross premiums written of $110 million or 4% ($163 million, or 5% on a constant currency basis) was primarily attributable to increases in catastrophe, liability, accident and health, and marine and other lines, partially offset by decreases in motor, credit & surety, and property lines.
Ceded premiums written in 2019 were $2.4 billion, or 35% of gross premiums written, compared to $2.3 billion, or 33%, in 2018 due to an increase in the reinsurance segment, partially offset by a decrease in the insurance segment.
In January 2019, we obtained protection for the insurance and reinsurance segments through a reinsurance agreement with Alturas. In connection with the reinsurance agreement, Alturas issued notes on December 19, 2018 to unrelated investors in an amount equal to the full $130 million of coverage provided under the reinsurance agreement covering a one-year period. At the time of the agreement, we concluded that we do not have a variable interest in Alturas as the variability in results is expected to be absorbed entirely by the investors in Alturas. Accordingly, the results of Alturas are not included in the consolidated financial statements. The premium ceded to Alturas for the year ended December 31, 2019 was $78 million.
In July 2019, we obtained protection for the reinsurance segment through a reinsurance agreement with Alturas. In connection with the reinsurance agreement, Alturas issued notes on June 28, 2019 to unrelated investors in an amount equal to the full $39 million of coverage provided under the reinsurance agreement covering a one-year period. At the time of the agreement, we concluded that we do not have a variable interest in Alturas as the variability in results is expected to be absorbed entirely by the investors in Alturas. Accordingly, the results of Alturas are not included in the consolidated financial statements. The premium ceded to Alturas for the year ended December 31, 2019 was $10 million.
2019 versus 2018: Net premiums earned in 2019 decreased by $204 million or 4% ($156 million or 3% on a constant currency basis) compared to 2018 due to decreases in the insurance and reinsurance segments.
Net premiums earned in the insurance segment in 2019 decreased by $173 million or 7% ($138 million or 6% on a constant currency basis) compared to 2018 primarily attributable to decreases in property, accident and health, discontinued lines - Novae, marine, and aviation lines, partially offset by increases in professional lines, and liability lines.
Other insurance related income in 2019 was $16 million compared to other insurance related income in 2018 of $11 million, an increase of $6 million, primarily related to the reinsurance segment.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 60.6% in 2019 from 61.7% in 2018. The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of improved pricing over loss trends and changes in business mix.
We continue to monitor paid and incurred loss development for catastrophe events of prior years and update estimates of ultimate losses accordingly.
The net adverse prior year reserve development of $133 million recognized by the reinsurance property and other reserve class was due to an increase in loss estimates attributable to Hurricanes Irma and Michael consistent with industry trends, an increase in loss estimates attributable Typhoon Jebi consistent with updated industry insured loss estimates, and reserve strengthening within the U.S. regional and commercial proportional property books of business and the European proportional property book of business.
Insurance professional lines reserve class recorded net favorable prior year reserve development of $12 million and $32 million in 2019 and 2018, respectively, reflecting generally favorable experience on older accident years as we continued to transition to more experience based actuarial methods.
Insurance liability reserve class recognized net adverse prior year reserve development of $25 million and $22 million in 2019 and 2018, respectively. The net adverse prior year reserve development in 2019 was primarily related to reserve strengthening within the U.S. excess casualty and U.S. primary casualty books of business. The net adverse prior year reserve development in 2018 was primarily related to reserve strengthening within the U.S. excess casualty book of business.
Reinsurance liability reserve class recognized net favorable prior year reserve development of $31 million and $23 million in 2019 and 2018, respectively. The net favorable prior year reserve development in 2019 and 2018 was due to progressively increased weight given by management to experience based indications on older accident years.
Reinsurance motor reserve class recognized net favorable prior year reserve development of $71 million and $23 million in 2019 and 2018, respectively. The net favorable prior year reserve development in 2019 was impacted by the increase in the Ogden discount rate and changes in related actuarial assumptions. The Ogden Rate which is used to calculate lump sum awards in U.K. bodily injury cases, changed from minus 0.75% to minus 0.25%, effective August 5, 2019. The net favorable prior year reserve development in 2018 was primarily attributable to non proportional treaty business on older accident years.
The following tables map lines of business to reserve classes and the expected claim tails:
$19 million of net favorable prior year reserve development on credit and political risk business primarily due to better than expected loss emergence related to recent accident years.
$12 million of net favorable prior year reserve development on professional lines business reflecting generally favorable experience on older accident years as we continued to transition to more experience based actuarial methods.
In 2018, we recognized $107 million of net favorable prior year reserve development, the principal components of which were:
$33 million of net favorable prior year reserve development on credit and surety business primarily due to generally better than expected loss emergence, mainly related to accident years 2013 and 2014.
$23 million of net favorable prior year reserve development on motor business primarily due to non proportional treaty business related to older accident years.
$23 million of net favorable prior year reserve development on liability business primarily due to increased weight given by management to experience based indications on older accident years.
$21 million of net favorable prior year reserve development on professional lines business reflecting the generally favorable experience on older accident years as we continued to transition to more experience based actuarial methods.
2019 versus 2018: Ceded premiums written in 2019 were $1,467 million, or 40%, of gross premiums written, compared to $1,473 million, or 39%, in 2018. The decrease in ceded premiums written of $6 million was primarily driven by a decrease in property lines, partially offset by an increase in liability lines.
2019 versus 2018: Net premiums earned in 2019 decreased by $173 million or 7% ($138 million or 6% on a constant currency basis) compared to 2018. The decrease was driven by decreases in the gross premiums earned in property, accident and health, discontinued lines - Novae, marine and aviation lines together with an increase in ceded premiums earned in liability lines, partially offset by increases in gross premiums earned in liability and professional lines together with decreases in ceded premiums earned in discontinued lines - Novae and property lines.
The increase in the acquisition cost ratio to 21.4% in 2019 from 16.9% in 2018 was principally related to the acquisition of Novae. At the acquisition date, the allocation of the purchase price to the assets acquired and liabilities assumed based on estimated fair values at that date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet as the value of policies in-force on that date are considered within VOBA. Consequently, the absence of $12 million and $121 million of acquisition expense in 2019 and 2018, respectively, benefited the acquisition cost ratio by 0.6 points and 5.1 points, respectively. Adjusting the acquisition cost ratio for these amounts, the acquisition cost ratio in 2019 was comparable to 2018.
2019 versus 2018: Ceded premiums written in 2019 were $942 million, or 29%, of gross premiums written, compared to $778 million, or 25%, in 2018. The increase in ceded premiums written was primarily attributable to catastrophe, liability, credit and surety, and accident and health lines, partially offset by decreases in property and agriculture lines.
The increase in catastrophe lines was attributable to an increase in premiums ceded to a new aggregate excess of loss treaty and to the new quota share retrocessional treaties with Alturas, together with additional costs associated with the purchase of catastrophe bond protection and an increase in premium ceded to strategic capital partners. The increases in liability, and accident and health lines were attributable to the increase in premiums ceded to the retrocessional cover with Harrington Re. The increase in credit and surety lines was attributable to an increase in premiums ceded to a new quota share retrocessional treaty.
2019 versus 2018: The current accident year loss ratio increased to 74.7% in 2019 from 74.2% in 2018. The increase in the current accident year loss ratio was impacted by a higher level of catastrophe and weather-related losses. During 2019, we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $252 million, or 10.7 points primarily attributable to Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, Australia Wildfires and other weather-related events. Comparatively, in 2018 we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $226 million or 9.4 points primarily attributable to California Wildfires, Hurricanes Michael and Florence, Typhoon Jebi and other weather-related events.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 64.0% in 2019 from 64.8% in 2018. The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of changes in business mix, a decrease in loss experience in property and engineering lines, partially offset by an increase in loss experience in aviation, agriculture and motor lines.
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 2.8% and 2.3% in 2019 and 2018, respectively.
The increase in corporate expenses in 2019 compared to 2018 was primarily related to ongoing investments in information technology and digital capabilities, an increase in personnel costs and professional fees, partially offset by an increase in the allocation of corporate costs to the insurance and reinsurance segments.
Foreign exchange gains in 2018 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities mainly denominated in pound sterling and euro.
Interest expense and financing costs increased by $1 million in 2019 compared to 2018, due to the issuance of the 3.900% Senior Notes on June 19, 2019, and the issuance of the Junior Subordinated Notes on December 10, 2019, partially offset by the repayment of the 2.650% Senior Notes on April 1, 2019 and the repayment of the Dekania Notes on November 15, 2018.
2019 versus 2018: Net investment income in 2019 increased by $28 million or 8%, compared to 2018 due to an increase in yields and a larger allocation of the portfolio to fixed maturities.
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments, indirect investments in CLO-Equities and overseas deposits. These investments are recorded at fair value, with changes in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially year over year, particularly during volatile equity and credit markets.
2019 versus 2018: Net investment gains in 2019 were $91 million compared to net investment losses of $150 million in 2018. Net investment gains reported in 2019 mainly reflected net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency RMBS securities. Net investment losses reported in 2018 mainly reflected net realized investment losses on the sale of agency RMBS, U.S. government and corporate debt securities and net unrealized losses on equity securities of $67 million.
During 2019, foreign exchange hedges resulted in $2 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2019. We also recorded net losses of $4 million related to interest rate swaps.
During 2018, foreign exchange hedges resulted in $3 million of net gains which primarily related to securities denominated in euro and pound sterling as each of these currencies experienced volatility during 2018. We also recorded net gains of $2 million related to interest rate swaps.
Change in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
Includes restricted cash and cash equivalents of $335 million and $597 million for 2019 and 2018, respectively.
The fair value of total investments increased by $1.1 billion in 2019, driven by the investment of cash balances, the
An analysis of our investment portfolio by asset class is detailed below:
At December 31, 2019, fixed maturities had a weighted average credit rating of AA- (2018: AA-), a book yield of 2.8% (2018: 3.1%), and an average duration of 3.2 years (2018: 3.0 years). The interest rate swap positions, which reduced duration to 2.8 years at December 31, 2018, were closed during 2019. At December 31, 2019, fixed maturities together with short-term investments and cash and cash equivalents (i.e. total investments of $14.1 billion), had a weighted average credit rating of AA- (2018: AA-) and an average duration of 2.9 years (2018: 2.6 years). At December 31, 2018, duration inclusive of interest rate swaps was 2.5 years.
Our methodology for assigning credit ratings to 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 only one agency rates a security, that rating 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, 2019, the fair value of fixed maturities not rated was $33.5 million (2018: $55.9 million).
In addition to managing credit risk exposure within our fixed maturities portfolio we also monitor the aggregation of country risk exposure on a group-wide basis (refer to Item 1 'Risk and Capital Management' for further details). Country risk exposure is the risk that events in a country, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors in the country to honor their obligations. For corporate debt and structured securities, we measure the country of risk exposure based on a number of factors including, but not limited to, location of management, principal operations and country of revenues.
Agency RMBS consist of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association which are primarily AAA rated and are supported by loans which are diversified across geographical areas. At December 31, 2019, agency RMBS had an average duration of 3.4 years (2018: 3.9 years).
CMBS mainly include investment-grade bonds originated by non-agencies. At December 31, 2019, approximately 99% (2018: 99%) of our CMBS were rated AA or better. At December 31, 2019, the weighted average estimated subordination percentage of the portfolio was 29% (2018: 31%), 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, 2019, CMBS had an average duration of 5.1 years (2018: 4.7 years) and weighted average life of 6.1 years (2018: 5.5 years).
ABS mainly include investment-grade bonds backed by pools of loans with a variety of underlying collateral, including auto loans, student loans, credit card receivables and collateralized loan obligations ("CLOs") originated by a variety of financial institutions.
At December 31, 2019, the average duration our ABS portfolio was 0.7 years (2018: 0.7 years) and the weighted average life was 3.5 years (2018: 3.6 years).
Municipals comprise revenue and general obligation bonds issued by U.S. domiciled state and municipal entities and are primarily held in the taxable portfolios of our U.S. subsidiaries.
The decrease in gross unrealized losses on investment-grade fixed maturities reflected the decrease in interest rates and the impact of the tightening of credit spreads on investment grade corporate debt securities.
The decrease in gross unrealized losses on non-investment grade fixed maturities reflected the impact of the tightening of credit spreads on non-investment grade high yield corporate debt securities.
During 2019, investment in commercial mortgage loans increased to $433 million from $299 million, an increase of $134 million. The commercial mortgage loans are high quality and collateralized by a variety of commercial properties and are diversified geographically throughout the U.S. and by property type to reduce the risk of concentration. At December 31, 2019 and 2018, there were no credit losses or past due amounts associated with our commercial mortgage loans portfolio.
Refer to Item 8, Note 5(g) to the Consolidated Financial Statements 'Investments'.
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet the short-term and long-term cash requirements of its business operations. We manage liquidity at both the holding company and operating subsidiary level.
Financing cash inflows were due to net proceeds from the issuance of $300 million 3.900% Senior Notes and $425 million of Junior Subordinated Notes. Financing cash outflows primarily related to the repayment of $250 million 2.650% Senior Notes and dividends paid to common and preferred shareholders of $180 million in 2019 (2018: $176 million). Cash outflows also included common share repurchases associated with the vesting of share-settled restricted stock units of $10 million in 2019 ( 2018: $10 million). Any future share repurchases are discretionary, the timing and amount of repurchase transactions depend on a variety of factors including, but not limited to, global insurance and reinsurance, and financial market conditions and opportunities, capital management and regulatory considerations (refer to 'Capital Resources - Share Repurchases' below for further details). In 2018, we also fully redeemed the $36 million of Dekania Notes at par.
Our diversified underwriting portfolio has demonstrated an ability to withstand catastrophic losses. We have generated positive operating cash flows in all years since 2003, with the exception of 2009 which was impacted by the global financial crisis. These positive cash flows were generated notwithstanding the impacts of the global financial crisis and the recognition of significant natural catastrophe-related losses during the period.
Net losses and loss expenses, gross of reinstatement premiums, included $257 million for the Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, and the Australia Wildfires in 2019, $327 million for Hurricanes Michael and Florence, the California Wildfires, and Typhoon Jebi in 2018, and $744 million for Hurricanes Harvey, Irma and Maria, and the two earthquakes in Mexico and the California Wildfires in 2017. There remains significant uncertainty associated with estimates of net losses for certain of these events (refer to 'Underwriting Results - Consolidated - Current Accident Year Loss Ratio' for further details), as well as the timing of the associated cash outflows.
Should claim payment obligations accelerate beyond our ability to fund payments from operating cash flows, we would utilize 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 $13.6 billion of cash and invested assets at December 31, 2019 could be available in one to three business days under normal market conditions; of this amount, $5.3 billion related to restricted assets, which primarily support our obligations in regulatory jurisdictions where we operate as a non-admitted carrier (refer to Item 8, Note 5(g) to the Consolidated Financial Statements 'Investments' 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) was approximately $428 million, net of reinsurance. 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 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 Item 1 'Risk and Capital Management' for further details).
The 4.000% Senior Notes issued in 2017 were issued to refinance the 2.650% Senior Notes that matured and were repaid on April 1, 2019. The 3.900% Senior Notes and 4.900% Junior Subordinated Notes were issued to refinance the 5.875% Senior Notes maturing on June 1, 2020 and to finance the redemption of our Series D preferred shares on January 17, 2020 (refer to 'Preferred Shares' below for further details).
On November 7, 2016, we issued $550 million of 5.50% Series E preferred shares with a liquidation preference of $2,500 per share (equivalent to $25 per depositary share). Dividends on the Series E preferred shares are non-cumulative. To the extent declared, dividends will accumulate, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum (equivalent to $137.50 per Series E preferred share and $1.375 per depositary share). We may redeem these shares on or after November 7, 2021 at a redemption price of $2,500 per Series E preferred share (equivalent to $25 per depositary share).
Underlying movements in common equity over the past two years were as follows:
On December 31, 2017, authorization under the Board-authorized share repurchase plan for common share repurchases through 2017 expired. A common share repurchase plan has not been authorized since that date.
On December 24, 2019, the Participating Subsidiaries also amended an existing $500 million secured letter of credit facility (the "$500 million Facility") with Citibank Europe plc to extend the expiration date to December 31, 2023.
Letters of credit issued under the $250 million facility and the $500 million facility are principally be used to support the reinsurance obligations of the Participating Subsidiaries. These facilities are subject to certain covenants, including the requirement to maintain sufficient collateral to cover the obligations outstanding under the facilities. 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 facility to any or all of the Participating Subsidiaries.
At December 31, 2019, letters of credit outstanding were $357 million (refer to Item 8, Note 10 to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).
Our principal insurance and reinsurance operating subsidiaries are assigned financial strength ratings from internationally recognized rating agencies, including Standard & Poor’s, A.M. Best and Moody’s Investors Service. These ratings are publicly announced and are available directly from the agencies, as well as on our website.
Financial strength ratings represent the opinions of the rating agencies on the overall financial strength of a company and its capacity to meet the obligations of its insurance and reinsurance contracts. Independent ratings are one of the important factors that establish a competitive position in insurance and reinsurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based on factors considered by the rating agencies to be relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Ratings are not recommendations to buy, sell or hold securities.
(2) On February 16, 2018, A.M. Best revised its outlook from stable to negative. The revised outlook was based on unfavorable trends in operating performance, particularly emanating from the insurance segment.
(3) In April 2019, Moody's Investor Service revised its outlook from stable to negative reflecting higher operational and financial leverage and lower capitalization relative to peers.
At December 31, 2019, contractual obligations and commitments by period due were:
We are obligated to pay claims for specified loss events covered by the insurance and reinsurance contracts that we write. Loss payments represent our most significant future payment obligation. In contrast to our other contractual obligations, cash payments are not determinable from the terms specified within the underlying contracts. Our best estimate of reserve for losses and loss expenses is reflected in the table above. Actual amounts and timing may differ materially from our best estimate (refer to ‘Critical Accounting Estimates - Reserve for Losses and Loss Expenses’ for further details). We have not taken into account corresponding reinsurance recoverable on unpaid amounts that would be due to us.
Debt (interest payments) includes $17 million of unamortized discount and debt insurance expenses.
reinsurance recoverable on unpaid losses and loss expenses, including the provision for uncollectible amounts;
We believe that the amounts included in the consolidated financial statements reflect its best judgment. However, factors such as those described in Item 1A 'Risk Factors' could cause actual events or results to differ materially from the underlying assumptions and estimates which could lead to a material adverse impact on our results of operations, financial condition or liquidity.
We believe the most significant accounting judgment we make is the estimate of reserve for losses and loss expenses ("loss reserves"). Loss reserves represent management’s estimate of the unpaid portion of our ultimate liability for losses and loss expenses ("ultimate losses") for insured and reinsured events that have occurred at or before the balance sheet date. Loss reserves reflect both claims that have been reported ("case reserves") to us and claims that have been incurred but not reported ("IBNR") to us. Loss reserves represent our best estimate of what the ultimate settlement and administration of claims will cost, based on our assessment of facts and circumstances known at that particular point in time.
Loss reserves are not an exact calculation of the liability but instead, are complex estimates. The process of estimating loss reserves involves a number of variables (refer to 'Selection of Reported Reserves - Management's Best Estimate' below for further details). We review estimates of loss reserves each reporting period and consider all significant facts and circumstances known at that particular point in time. As additional experience and other data become available and/or laws and legal interpretations change, we may adjust previous estimates of loss reserves. Adjustments are recognized in the period in which they are determined therefore they can impact that period's underwriting results either favorably (indicating that current estimates are lower than previous estimates) or adversely (indicating that current estimates are higher than previous estimates).
With respect to insurance business, we are generally notified of losses by our insureds and/or their brokers. Based on this information, our claims personnel estimate ultimate losses arising from the claim, including the cost of administering the claims settlement process. These estimates reflect the judgment of our claims personnel based on general reserving practices, the experience and knowledge of such personnel regarding the nature of the specific claim and, where appropriate, the advice of legal counsel, loss adjusters and other relevant consultants.
In deciding whether to provide treaty reinsurance, we carefully review and analyze a cedant’s underwriting and risk management practices to ensure appropriate underwriting, data capture and reporting procedures. We also undertake an extensive program of cedant audits, using outsourced legal and industry experience where necessary. This allows us to review cedants’ claims administration practices to ensure that reserves are consistent with exposures, adequately established, and properly reported in a timely manner.
As part of our quarterly loss reserving 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 reserve 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 ultimate loss estimates for previous
In earlier years, we placed significant reliance on industry benchmarks in establishing expected loss ratios and selecting loss development patterns. Over time, we have placed more reliance on our historical loss experience in establishing these ratios and selecting these patterns where we believe the weight of our experience has become sufficiently credible for consideration. The weight given to our experience differs for each of the three claim tail classes (refer to 'Claim Tail Analysis' below for further details). In establishing expected loss ratios for the 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 the reinsurance segment, expected loss ratios are based on a contract-by-contract review, which considers information provided by clients together with estimates provided by our underwriters and actuaries about the impact of changes in pricing, terms and conditions and coverage. We also have considered the market experience of some classes of business as compiled and analyzed by an independent actuarial firm, as appropriate.
Gross loss reserves for each of the reportable segments, segregated between case reserves and IBNR and by significant reserve class were as follows:
In order to capture the key dynamics of loss reserve development and potential volatility, reserve classes should be considered according to their potential expected length of loss emergence and settlement, generally referred to as the "tail". We consider our business to consist of three claim tail classes: short-tail, medium-tail and long-tail. Favorable development on prior accident year reserves indicates that current estimates are lower than previous estimates, while adverse development on prior accident year reserves indicates that current estimates are higher than previous estimates. Below is a discussion of the specifics of our loss reserve process as it applies to each claim tail class, as well as commentary on the factors contributing to our historical loss reserve development for each class.
The key actuarial assumptions for short-tail business in early accident years were primarily developed with reference to industry benchmarks for expected loss ratios and loss development patterns. As our historical loss experience amassed, it gained credibility and became relevant for consideration in establishing these key actuarial assumptions. As a result, we gradually increased the weighting assigned to our historical loss experience in selecting the expected loss ratios and loss development patterns utilized to establish estimates of ultimate losses for an accident year.
Although estimates of ultimate losses for short-tail business are inherently more certain than for medium and long-tail business, significant judgment is still required. For example, much of our excess insurance and excess of loss reinsurance business has high attachment points, therefore, it is often difficult to estimate whether claims will exceed those attachment points. Also, the inherent uncertainties relating to catastrophe events further add to the complexity of estimating potential exposure. In addition, we use managing general agents ("MGAs") and other producers for certain business in the insurance
segment which can delay the reporting of loss information to us. We expect that the majority of development for an accident year or underwriting year will be recognized in the subsequent one to three years.
Medium-tail business generally has claim reporting and settlement periods that are longer than those of short-tail reserve classes. Our medium-tail business primarily consists of insurance and reinsurance professional lines, reinsurance credit and surety, aviation liability business in the insurance and discontinued lines - Novae in the insurance segment. We also consider insurance credit and political risk business to have a medium tail, due to the complex nature of claims and the potential additional time that may be required to realize subrogation assets.
For our earliest accident and underwriting years, initial key actuarial expected loss ratio and loss development assumptions were established utilizing industry benchmarks. Due to the longer claim tail, the length of time required to develop credible loss history for use in the loss reserving process is greater for medium-tail business than for short-tail business. Our reserving approach for medium-tail business is tailored by line of business, with significant lines of business being specifically addressed below:
For professional lines business and discontinued lines - Novae, claim payment and reporting patterns are typically medium to long-tail in nature. This business is predominantly written on a claims-made basis.
inherent uncertainties about loss trends, claims inflation (e.g. medical, judicial, social) and general economic conditions; and
To date, key actuarial assumptions for long-tail business have been derived from a combination of industry benchmarks supplemented our historical loss experience. While we consider industry benchmarks that we believe reflect the nature and coverage of our business, actual loss experience may differ from the benchmarks based on industry averages.
Commencing with the fourth quarter 2012 loss reserving process, we began to give weight to actuarial methods that reflect our 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 2019, we continued to give weight to experience-based methods on the earlier years for insurance and reinsurance liability lines of business leading to the recognition of net favorable prior year reserve development on the reinsurance liability reserve class.
An important and distinguishing feature of many of these contracts is the contractual right, subsequent to payment of a claim to an insured, to be subrogated to, or otherwise have an interest in, the insured’s rights of recovery under an insured loan or facility agreement. These estimated recoveries are recorded as an offset to credit and political risk loss reserves. The lag between the date of a claim payment and the ultimate recovery from the corresponding security can result in negative case reserves at a point in time (as was the case at December 31, 2019 and 2018). The nature of the underlying collateral is specific to each transaction therefore we estimate the value of this collateral on a contract-by-contract basis. This valuation process is inherently subjective and involves the application of management’s judgment because active markets for the collateral often do not exist. Estimates of values are based on numerous inputs, including information provided by our insureds, as well as third-party sources including rating agencies, asset valuation specialists and other publicly available information. We also assess any post-event circumstances, including restructurings, liquidations and possession of asset proposals/agreements.
In some instances, on becoming aware of a loss event related to credit and political risk business, we negotiate a final settlement of all of our policy liabilities for a fixed amount. In most circumstances, this occurs when the insured moves to realize the benefit of the collateral that underlies the insured loan or facility and presents us with a net settlement proposal that represents a full and final payment by us under the terms of the policy. In consideration for this payment, we secure a cancellation of the policy, or a release of all claims, and waive our right to pursue a recovery of these settlement payments
against the security that may have been available to us under the insured loan or facility agreement. In certain circumstances, cancellation by way of net settlement or full payment can result in an adjustment to the premium associated with the policy.
a review of our portfolio of contracts to identify those contracts which may be exposed to the catastrophic event;
We generally use a blend of these information sources to arrive at 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 estimates of ultimate losses for each event if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified.
Beginning in 2013, we significantly enhanced the capabilities and resources dedicated to the actuarial reserving function. Consequently, from the first quarter of 2014, management began to rely on its internal actuarial reserving function for its quarterly loss reserving process rather than utilizing the services of an independent actuarial firm. On an annual basis, we use an independent actuarial firm to provide an actuarial opinion on the reasonableness of loss reserves for each of our operating subsidiaries and statutory reporting entities as these 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.
Expected loss ratios are a key assumption in estimates of ultimate losses for business at an early stage of development. A higher expected loss ratio results in a higher ultimate loss estimate, and vice versa. Assumed loss development patterns are another significant assumption in estimating loss reserves. Accelerating a loss reporting pattern (i.e. shortening the claim tail) results in lower ultimate losses, as the estimated proportion of losses already incurred would be higher. The uncertainty in the timing of the emergence of claims (i.e. the length of the development pattern) is generally greater for a company with a relatively limited operating history therefore, we rely on industry benchmarks to a certain extent when establishing loss reserve estimates.
The effect on estimates of gross loss reserves of reasonably likely changes in the two key assumptions used to estimate gross loss reserves at December 31, 2019 was as follows:
The results show the cumulative increase (decrease) in loss reserves across all accident years. For example, if assumed loss development pattern for insurance property and other business was three months shorter with no accompanying change in ELR assumption, loss reserves may decrease by approximately $70 million. Each of the impacts set forth in the tables is estimated individually, without consideration for any correlation among key assumptions or among reserve 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 historical loss 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 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.
The composition of reinsurance recoverable on unpaid losses and loss expenses ("reinsurance recoverable") for each of the reportable segments, segregated between reinsurance recoverable related to case reserves and reinsurance recoverable related to IBNR and by line of business was as follows:
The second estimate is the amount of the reinsurance recoverable balance that we believe ultimately will not be collected from reinsurers. We are selective in choosing reinsurers, buying reinsurance principally from reinsurers with a strong financial condition and industry ratings. The amount we ultimately collect may differ from our estimate due to the ability and willingness of reinsurers to pay claims, which may be negatively impacted by factors such as insolvency, contractual disputes over contract language or coverage and/or other reasons. In addition, economic conditions and/or operational performance of a particular reinsurer may deteriorate and this could also affect the ability and willingness of a reinsurer to meet their contractual obligations.
At December 31, 2019 and 2018, the provision for uncollectible amounts was $18 million and $21 million, respectively. We have not written off any significant reinsurance recoverable balances in the last three years.
For the majority of our insurance business, a fixed premium which is identified in the policy is recorded at the inception of the policy. This premium is adjusted if underlying insured values change. We actively monitor underlying insured values and any adjustments to premiums are recognized in the period in which they are determined. Gross premiums written on a fixed premium basis accounted for 87% and 88% of the segment’s gross premiums written for the years ended December 31, 2019 and 2018, respectively. Some 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, premiums are recorded based on monthly statements received from MGAs or best estimates based on historical experience.
For multi-year contracts premiums are recorded at the inception of the contract based on management’s best estimate of premiums to be received. Premiums are recognized on an annual basis for multi-year contracts where the cedant has the ability to unilaterally commute or cancel coverage within the term of the contract.
Excess of loss reinsurance contracts with cedants typically include minimum or deposit premium provisions. For excess of loss reinsurance contracts, minimum or deposit premiums are generally considered to be the best estimate of premiums at the inception of the contract. The minimum or 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. Any adjustments to minimum or deposit premiums are recognized in the period in which they are determined. Gross premiums written for excess of loss reinsurance contracts accounted for 48% and 38% of the reinsurance segment’s gross premiums written for the years ended December 31, 2019 and 2018, respectively.
changes in renewal rates or rates of new business accepted by cedants (changes could result from changes in the relevant insurance market that could affect more than one of our cedants or could be a consequence of changes in the marketing strategy or risk appetite of an individual cedant);
Premiums estimates for proportional reinsurance contracts incepting during the year were as follows:
Historical experience has shown that cumulative adjustments to initial premium estimates for proportional reinsurance contracts have ranged from 0% to 4% over the last 5 years. Giving more weight to recent years where premium volume was
comparable to current levels, we believe that a reasonably likely change to 2019 initial premium estimates for proportional reinsurance contracts would be 3% in either direction. A change in initial premium estimates of this magnitude would result in a change in gross premiums written of approximately $47 million. A change in initial premium estimates of this magnitude would not have a material impact on pre-tax net income after considering current losses and loss expenses ratios. However, larger variations, positive or negative, are possible.
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. In addition, the valuation of financial instruments is more subjective when markets are less liquid due to the lack of available 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 valuation technique (from market to cash flow 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 a financial instrument to be reclassified between levels of the fair value hierarchy.
At December 31, 2019, the fair values of 95% (2018: 92%) of total fixed maturities and equity securities 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.
Generally, we obtain quotes directly from broker-dealers who are active in the corresponding markets when prices are unavailable from independent pricing services. This may also be the case if the pricing from pricing services is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based
At December 31, 2019 and 2018, we had invested indirectly, through a fund structure in CLO-Equities, also known as "cash flow CLOs" in the industry. During 2019, the CLO-Equity market continued to be relatively inactive with only a small number of transactions being observed, particularly related to transactions involving our CLO-Equities. Our indirect investment in CLO-Equities is valued using a discounted cash flow model prepared by an external manager. At December 31, 2019 and 2018, the estimated fair value of our indirect investment in CLO-Equities was $14 million (2018: $21 million).
A fixed maturity is impaired if the fair value of the investment is below amortized cost.
On a quarterly basis, we review all impaired securities to determine if impairments are other-than-temporary. The OTTI assessment is inherently judgmental, especially when securities have experienced severe declines in fair value over a short period. Our impairment review process begins with a quantitative analysis to identify securities to be evaluated for potential OTTI. For identified securities, fundamental analysis is performed that considers the following quantitative and qualitative factors:
the length of time and extent to which the fair value is less than the amortized cost.
the financial condition, near-term and long-term prospects for the issuer of the security, including relevant industry conditions and trends, and the implications of rating agency actions, and offering prices.
the collateral structure and credit support of the security, if applicable.
During 2019, we recorded an OTTI charge in net income of $7 million (2018: $10 million) (refer to 'Net Investment Income and Net Investment Gains (Losses)' for further details).
In instances where we intend to hold the impaired fixed maturity, and we do not anticipate to fully recover the amortized cost based on projected cash flows to be collected from the security (i.e. a credit loss exists), the credit loss component of the impairment is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations. On recognition of an OTTI charge, the new cost basis for the security is the amortized cost basis less the OTTI charge recognized in net income. The new cost basis is not adjusted for subsequent increases in fair value. The difference between the new cost basis and the cash flows expected to be collected is accreted or amortized on a quarterly basis to net
investment income over the remaining life of the fixed maturity. The non-credit component (e.g. interest rates, market conditions, etc.) of the OTTI charge is recognized in other comprehensive income.
Our parameters focus primarily on the duration and the extent of the decline, including but not limited to:
The credit loss component of an OTTI charge recognized in net income is calculated based on the difference between the amortized cost of the security and the net present value of projected future cash flows expected to be collected from the security. The significant inputs and the methodology used to estimate credit losses are disclosed in Item 8, Note 5 (f) to the Consolidated Financial Statements 'Investments'.
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020 expressed an unqualified opinion on the Company's internal control over financial reporting.
The Company’s estimate of loss and loss expense reserves is derived using expected trends in claim severity and frequency and other factors that may vary significantly as claims are settled. The estimate is sensitive to significant assumptions, including the initial expected loss ratio and loss development factors. The estimate is also sensitive to the selection of actuarial methods and weighting of these methods applied to project the ultimate losses, the estimation of ultimate reserves associated with catastrophic events, and other factors. Further, not all catastrophic events can be modeled using traditional actuarial methodologies, which increases the degree of judgment needed in estimating loss reserves for such events.
We tested the completeness and accuracy of the underlying data that served as the basis for the Company’s actuarial analysis, including historical claims data, to test the reasonableness of key inputs to the actuarial estimate.
In 2019, non-cash foreign exchange gains were attributable to the reclassification of the cumulative translation adjustment balance related to Aviabel Re S.A. from accumulated other comprehensive income in the consolidated balance sheet to foreign exchange losses (gains) in the consolidated statement of operations due to the liquidation of that entity (refer to Note 8 'Reserve for Losses and Loss Expenses' and Note 20 'Other Comprehensive Income (Loss)').
In 2017, non-cash foreign exchange losses were attributable to the reclassification of the cumulative translation adjustment balance related to AXIS Specialty Australia from accumulated other comprehensive income in the consolidated balance sheet to foreign exchange losses (gains) in the consolidated statement of operations due to the wind-down of that operation which was substantially complete at March 31, 2017 (refer to Note 8 'Reserve for Losses and Loss Expenses' and Note 20 'Other Comprehensive Income (Loss)').
AXIS Specialty Europe SE ("AXIS Specialty Europe") is a European public limited liability company, incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with company law of the E.U. AXIS Specialty Europe also conducts insurance business through its branch in the United Kingdom, AXIS Specialty Europe SE ("UK Branch"). Effective January 1, 2019, the shares of Compagnie Belge d’Assurances Aviation NV/SA ("Aviabel") were transferred to AXIS Specialty Europe from AXIS Specialty Holdings Ireland Limited and Aviabel was merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established new branches in Belgium and the Netherlands, AXIS Specialty Europe SE (Belgium Branch) and AXIS Specialty Europe SE (Netherlands Branch), respectively. Effective January 1, 2019, AXIS Specialty Europe conducts insurance business through its new branches in Belgium and the Netherlands.
AXIS Re SE is a European public limited liability company, incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE). AXIS Re SE also conducts reinsurance business through its branch in Switzerland, AXIS Re SE, Dublin (Zurich Branch).
On October 2, 2017, AXIS Specialty UK Holdings Limited, a wholly owned subsidiary of the Company, acquired a 100% ownership interest in Novae Group plc ("Novae"). AXIS Corporate Capital UK II Limited is the sole corporate member of Novae Syndicate 2007 ("Syndicate 2007"). Novae Syndicates Limited ("NSL") managed Syndicate 2007 until January 1, 2018, when the Company received authorization from Lloyd’s for AXIS Managing Agency to commence management and oversight of Syndicate 2007. Effective January 1, 2019, Syndicate 2007 ceased accepting new business and was placed into run-off.
During the three months ended March 31, 2018, the Company realigned its accident and health business by integrating this business and its operations into the Company's insurance and reinsurance segments. Through this realignment, the Company's accident and health business benefited from the greater scale and market presence of the Company's property and casualty insurance and reinsurance businesses and operations. Financial results relating to the Company's accident and health lines of business were previously included in the Company's insurance segment. Effective January 1, 2018, accident and health results are included in the results of both the insurance and reinsurance segments of the Company. As a result of the realignment, gross premiums written for the year ended December 31, 2017 of $313 million and underwriting income for the year ended December 31, 2017 of $14 million were reclassified from the Company's insurance segment to the Company's reinsurance segment.
the financial condition, near-term and long-term prospects of the issuer of the security;
Equity securities are reported at fair value (refer to Note 6 'Fair Value Measurements'). Subsequent to the adoption of Accounting Standards Update ("ASU") 2016-01, "Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities," on January 1, 2018, the change in the fair values of equity securities, net of tax is recognized in net investment gains (losses) in the consolidated statements of operations.
Equity securities are reported at fair value. Prior to the adoption of ASU 2016-01, the change in the fair values of equity securities, net of tax was recognized in AOCI in the consolidated statement of changes in shareholders’ equity. An equity security is impaired if the fair value of the investment is below cost. On a quarterly basis, the Company assessed whether unrealized losses on equity securities represented impairments that were other-than-temporary and recognized impairments on equity securities in an unrealized loss position when the Company did not have the ability and intent to hold the security for a reasonable period of time to allow for a full recovery. The full amount of the impairment was charged to net income and was included in net investment gains (losses) in the consolidated statements of operations. On recognition of an OTTI charge, the new cost basis for the equity security was the cost for an equity security less the OTTI charge recognized in net income. The new cost basis was not adjusted for subsequent increases in fair value.
Other investments are recorded at fair value (refer to Note 6 'Fair Value Measurements'), with changes in fair value and realized gains (losses) reported in net investment income in the consolidated statements of operations.
Short-term investments primarily comprise highly liquid debt securities with maturities greater than three months but less than one year from the date of purchase. These investments are carried at amortized cost, which approximates fair value.
Reinstatement premiums are recognized and earned at the time a loss event occurs and losses are recorded, where the coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The recognition of reinstatement premiums is based on estimates of losses and loss expenses, which reflects management’s judgment, as described in Note 2(d) 'Losses and Loss Expenses' below.
In the normal course of business, the Company purchases treaty and facultative reinsurance protection to limit its ultimate losses from catastrophic events and to reduce its loss aggregation risk. The premiums paid to reinsurers (i.e. ceded premiums written) are recognized over the coverage period. Prepaid reinsurance premiums represent the portion of premiums ceded which relate to the unexpired term of the contracts in force. Reinstatement premiums are recognized and earned at the time a loss event occurs and losses are recorded, where the coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms.
Reinsurance recoverable on unpaid and paid losses and loss expenses ("reinsurance recoverable") related to case reserves is estimated on a case-by-case basis by applying the terms of applicable reinsurance cover to individual case reserve estimates. Reinsurance recoverable related to IBNR is generally developed as part of the Company's loss reserving process, therefore, its estimation is subject to similar risks and uncertainties as the estimation of IBNR.
The estimates of reinsurance recoverable and the provision for uncollectible amounts require management’s judgment and are reviewed in detail on a quarterly basis. Any adjustments to the provision for uncollectible amounts are recognized in the period in which they are determined.
Retroactive reinsurance reimburses a ceding company for liabilities incurred as a result of past insurable events covered under contracts subject to the reinsurance. In certain instances, reinsurance contracts cover losses both on a prospective basis and on a retroactive basis and where practical the Company bifurcates the prospective and retrospective elements of these reinsurance contracts and accounts for each element separately. Initial gains in connection with retroactive reinsurance contracts are deferred and amortized into income over the settlement period while losses are recognized immediately. When changes in the estimated amount recoverable from the reinsurer or in the timing of receipts related to that amount occur, a cumulative amortization adjustment is recognized in net income in the period in which the change is determined so that the
deferred gain reflects the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction.
Monetary assets and liabilities denominated in foreign currency are remeasured to functional currency at the rates of exchange in effect at the balance sheet date with the resulting foreign exchange losses (gains) generally being recognized in the consolidated statements of operations. Foreign exchange losses (gains) related to available for sale investments denominated in foreign currency represent an unrealized appreciation (depreciation) in the market value of the securities and are included in AOCI. Non-monetary assets and liabilities denominated in foreign currency are not subsequently remeasured.
The Company is authorized to issue restricted shares, restricted stock units, performance units, stock options, stock appreciation rights and other equity-based awards to its employees and directors. The Company's plan includes share-settled and cash-settled service and performance awards.
The fair value of the cash-settled service and performance awards is recognized as a liability in the consolidated balance sheets and is remeasured at the end of each reporting period.
During 2013, the Company began to write derivative based risk management products designed to address weather and commodity price risks, with the objective of generating profits on a portfolio basis. Effective July 1, 2017, the Company ceased writing derivative-based risk management products which address weather risks.
The Company measures all derivative instruments at fair value (refer to Note 6 'Fair Value Measurements') and recognizes these instruments 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.
Common shares repurchased by the Company and not subsequently canceled are classified as treasury shares and are recorded at cost. This results in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the average cost method to determine the cost of shares reissued from treasury.
In addition, the Company adopted ASU 2018-11, "Leases (Topic 842) - Targeted Improvements," which provides an additional (and optional) transition method to adopt the new lease guidance. Under the alternative transition method, the Company's reporting for the comparative periods presented in its financial statements will be in accordance with the pre-effective date lease accounting requirements (Topic 840).
In addition to electing the package of practical expedients, the Company made an accounting policy election to account for non-lease components separately from lease components. As a result, the non-lease components associated with the Company's leases are not included in the lease liabilities and right-of-use assets in the Company's consolidated balance sheet at December 31, 2019.
Effective January 1, 2019, the Company adopted ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for certain purchased callable debt securities held at a premium. The adoption of this guidance did not impact the Company's results of operations, financial condition or liquidity.
Effective January 1, 2019, the Company adopted ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which aims to improve the effectiveness of fair value measurement disclosures. The adoption of this guidance did not impact the Company's results of operations, financial condition, or liquidity.
The Company will also be impacted by the targeted changes to the impairment model for available for sale securities introduced in ASU 2016-13. Credit losses relating to available for sale debt securities will be recorded through an allowance for credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of this guidance on its results of operations, financial condition and liquidity.
The Company's insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The product lines in this segment are property, marine, terrorism, aviation, credit and political risk, professional lines, liability, accident and health, and discontinued lines - Novae.
The Company's reinsurance segment provides 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, marine and other, accident and health, and discontinued lines - Novae. The reinsurance segment also wrote derivative based risk management products designed to address weather and commodity price risks until July 1, 2017.
In connection with the acquisition of Novae, the Company identified finite lived intangible assets of $385 million, including Value of Business Acquired ("VOBA") which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction, of $257 million and other finite lived intangible assets primarily related to distribution networks of $128 million. In addition, the Company identified indefinite lived intangible assets related to Lloyd's syndicate capacity of $95 million. The Company also recognized goodwill of $54 million.
The Company's impairment review of goodwill and indefinite lived intangibles did not result in the recognition of an impairment loss for the years ended December 31, 2019 and 2017. For the year ended December 31 2018, an impairment loss
(2) On April 1, 2015, the Company completed its acquisition of Ternian Insurance Group LLC and recognized definite life intangible assets detailed above.
(1) During the year ended December 31, 2018, an impairment charge of $3,500 was recognized related to the termination of the MGA contract intangible asset identified in connection with the acquisition of Novae.
Asset-backed securities ("ABS") include debt tranched securities collateralized primarily by auto loans, student loans, credit card receivables and collateralized loan obligations ("CLOs").
The following table provides the cost and fair values of the Company's equity securities:
The Company also invests in limited partnerships which represent 55% of the Company's other investments. The investments in limited partnerships include hedge funds, direct lending funds, private equity funds and real estate funds as well as CLO equity tranched securities, which are variable interests issued by VIEs (refer to Note 5(c) 'Other Investments'). The Company does not have the power to direct the activities that are most significant to the economic performance of these VIEs therefore the Company is not the primary beneficiary of these VIEs.
The maximum exposure to loss on these interests is limited to the amount of investment made by the Company. The
Company has not provided financial or other support to these structured securities other than the original investment.
The primary credit quality indicator for commercial mortgage loans is the debt service coverage ratio which compares a property’s net operating income to amounts needed to service the principal and interest due under the loan, (generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss) and the loan-to-value ratio which compares the unpaid principal balance of the loan to the estimated fair value of the underlying collateral (generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss). The debt service coverage ratio and loan-to-value ratio, as well as the values utilized in calculating these ratios, are updated annually, on a rolling basis.
The Company has a high quality mortgage loan portfolio with a weighted average debt service coverage ratio of 2.1x and a weighted average loan-to-value ratio of 57%. At December 31, 2019 and 2018, there were no credit losses or past due amounts associated with the commercial mortgage loans held by the Company.
At December 31, 2019, the Company had $82 million (2018: $147 million) of unfunded commitments as a limited partner in funds which invest in real estate and real estate securities and businesses. These funds include an open-ended fund and funds with investment terms ranging from seven years to the dissolution of the underlying fund.
Effective January 1, 2018, the Company adopted ASU No. 2016-01 which requires the change in fair value of equity securities to be recognized in net income.
The credit loss component of an OTTI charge recognized in net income is calculated based on the difference between the amortized cost of the security and the net present value of its projected future cash flows. A summary of credit loss activity by asset class, the significant inputs and the methodology used to estimate credit losses are described below.
Unrealized losses on securities issued or backed, either explicitly or implicitly by the U.S. government are not analyzed for OTTI. The Company has concluded that the possibility of a credit loss on these securities is highly unlikely due to the explicit U.S. government guarantee related to certain securities (e.g. Government National Mortgage Association issuances) and the implicit guarantee related to other securities that has been validated by past actions (e.g. U.S. government bailout of Federal National Mortgage Association and Federal Home Loan Mortgage Corporation during the 2008 credit crisis). Although these securities are not analyzed for credit losses, they are evaluated for intention to sell and likely requirement to sell.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company's own judgments about assumptions that market participants might use.
The valuation techniques, including significant inputs and assumptions generally used to determine the fair values of the Company's financial instruments as well as the classification of the fair values of its financial instruments in the fair value hierarchy are described in detail below.
Non-U.S. government securities include bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair values of these securities are based on prices obtained from international indices or valuation models that include inputs such as interest rate yield curves, cross-currency basis index spreads and country credit spreads for structures similar to the sovereign bond in terms of issuer, maturity and seniority. As the significant inputs used to price these securities are observable market inputs, the fair values of non-U.S. government securities are classified as Level 2.
ABS mainly include investment-grade bonds backed by pools of loans with a variety of underlying collateral, including auto loans, student loans, credit card receivables and collateralized loan obligations ("CLOs") originated by a variety of financial institutions. The fair values of these securities are determined using a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price these securities are observable market inputs, the fair values of ABS are generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.
Municipals comprise revenue and general obligation bonds issued by U.S. domiciled state and municipal entities. The fair values of these securities are determined using spreads obtained from the new issue market, trade prices and broker-dealers quotes. As the significant inputs used to price these securities are observable market inputs, the fair values of municipals are classified as Level 2.
Equity securities include common stocks, exchange-traded funds and bond mutual funds. As the fair values of common stocks and exchange-traded funds are based on unadjusted quoted market prices in active markets, the fair values of these securities are classified as Level 1. As bond mutual funds have daily liquidity, the fair values of these securities are classified as Level 2.
Other privately held investments include convertible preferred shares, common shares, convertible notes and notes payable. These securities are initially valued at cost, which approximates fair value. In subsequent measurement periods, the fair values of these investments are generally determined using capital statements obtained from each investee company. In order to assess the reasonableness of the information received from each investee company, the Company maintains an understanding of current market conditions, historical results, and emerging trends that may impact the results of operations, financial condition or liquidity of investee companies. In addition, the Company engages in regular communication with management at the investee companies. In 2018, the fair values of some of these investments were determined using an internally developed discounted cash flow model. As the significant inputs used to price these securities are unobservable, the fair values of other privately held investments are classified as Level 3.
Overseas deposits include investments in private funds held by Syndicate 2007 where the underlying investments are primarily U.S. government, non-U.S. government and corporate debt securities. The funds do not trade on an exchange, therefore are not included in available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.
Insurance-linked securities comprise an investment in a catastrophe bond. As pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate the fair value of this security. Pricing is generally unavailable when there is a low volume of trading activity and current transactions are not orderly therefore, the fair value of this security is classified as Level 3.
The following table quantifies the significant unobservable inputs used in estimating fair values at December 31, 2019 of investments classified as Level 3 in the fair value hierarchy:
reasonableness of the inputs the Company uses in the discounted cash flow model, the Company maintains an understanding of current market conditions, historical results, as well as contract specific information that may impact future cash flows.
Realized gains (losses) on fixed maturities, and realized and unrealized gains (losses) on other assets and other liabilities included in net income are included in net investment gains (losses). Realized and unrealized gains (losses) on other investments included in net income are included in net investment income.
Unrealized gains (losses) on fixed maturities are included in other comprehensive income ("OCI").
Change in unrealized gains (losses) relating to assets held at the reporting date.
There were no transfers into Level 3 from Level 2 during 2019. The transfers into Level 3 from Level 2 made during 2018 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities.
The transfers out of Level 3 into Level 2 made during 2019 and 2018 were primarily due to the availability of observable market inputs and multiple quotes from pricing vendors for certain fixed maturities.
For direct lending funds, private equity funds, real estate funds and two of the Company's hedge funds, valuation statements are typically released on a reporting lag therefore, the Company estimates the fair value of these funds by starting with the most recent fund valuations and adjusting for capital calls, redemptions, drawdowns and distributions. Return estimates are not available from the relevant fund managers for these funds therefore the Company typically has a reporting lag in its fair value measurements of these funds. In 2019, funds reported on a lag represented 68% (2018: 61%) of the Company's total other investments balance.
The Company often does not have access to financial information relating to the underlying securities held within the funds therefore management is unable to corroborate the fair values placed on the securities underlying the asset valuations provided by fund managers or fund administrators. In order to assess the reasonableness of the NAVs, the Company performs a number of monitoring procedures on a quarterly basis, to assess the quality of the information provided by fund managers and fund administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager, regular evaluation of fund performance against applicable benchmarks and the backtesting of the Company's fair value estimates against subsequently received NAVs. Backtesting involves comparing the Company's previously reported fair values for each fund against NAVs per audited financial statements (for year-end values) and final NAVs from fund managers and fund administrators (for interim values).
At December 31, 2019, the Company's debt was recorded at amortized cost with a carrying value of $1,808 million (2018: $1,342 million) and a fair value of $1,896 million (2018: $1,334 million). The fair value of the Company's debt is based on prices obtained from a third-party pricing service and is determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair value of the Company's debt is classified as Level 2.
The notional amounts of derivative contracts represent the basis on which amounts paid or received are calculated and are presented in the above table to quantify the volume of the Company's derivative activities. Notional amounts are not reflective of credit risk.
The Company's derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements which establish terms that apply to all transactions. In the event of a bankruptcy or other stipulated event, master netting agreements provide that individual positions be replaced with a new amount, usually referred to as the termination amount, determined by taking into account market prices and converting into a single currency. Effectively, this contractual close-out netting reduces credit exposure from gross to net exposure.
Net asset and liability derivatives are classified within other assets and other liabilities in the consolidated balance sheets.
Loss Development Method (also referred to as the "Chain Ladder Method" or "Link Ratio Method"): This method assumes that the losses incurred/paid for each accident year or underwriting year at a particular development stage follow a relatively similar pattern. It assumes that on average, every accident year or underwriting year will display the same percentage of ultimate losses incurred/paid at the same point in time after the inception of that year. The percentages incurred/paid are established for each development stage (e.g. 12 months, 24 months, etc.) after examining averages from historical loss development data and/or external industry benchmark information. Ultimate losses are then estimated by multiplying the actual incurred/paid losses by the reciprocal of the established incurred/paid percentage. The strengths of this method are that it reacts to loss emergence/payments and that it makes full use of historical claim emergence/payment experience. However, this method has weaknesses when the underlying assumption of stable loss development/payment patterns is not valid. This could be the consequence of changes in business mix, claim inflation trends or claim reporting practices and/or the presence of large claims, among other things. Furthermore, this method
tends to produce volatile estimates of ultimate losses where there is volatility in the underlying incurred/paid patterns. In particular, where the expected percentage of incurred/paid losses is low, small deviations between actual and expected claims can lead to very volatile estimates of ultimate losses. As a result, this method is often unsuitable at early development stages for an accident year or underwriting year.
Bornhuetter-Ferguson Method ("BF Method"): This method can be seen as a combination of the ELR and Loss Development Methods, under which the Loss Development Method is given progressively more weight as an accident year or underwriting year matures. The main advantage of the BF Method is that it provides a more stable estimate of ultimate losses than the Loss Development Method at earlier stages of development, while remaining more responsive to emerging loss development than the ELR Method. In addition, the BF Method allows for the incorporation of external market information through the use of expected loss ratios, whereas the Loss Development Method does not incorporate such information.
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. The key actuarial assumptions for short-tail business in early accident years were primarily developed with reference to industry benchmarks for expected loss ratios and loss development patterns. As the Company's historical loss experience amassed, it gained credibility and became relevant for consideration in establishing these key actuarial assumptions. As a result, the Company gradually increased the weighting assigned to its historical loss experience in selecting the expected loss ratios and loss development patterns utilized to establish estimates of ultimate losses for an accident year. Due to the relatively short reporting and settlement patterns for short-tail business, more weight is generally placed on experience-based methods and other qualitative considerations in establishing reserves for recent and more mature accident years. The majority of development for an accident year or underwriting year is expected to be recognized in the subsequent one to three years.
Medium-tail business generally has claim reporting and settlement periods that are longer than those of short-tail reserve classes. For the Company's earliest accident and underwriting years, initial key actuarial expected loss ratio and loss development assumptions were established utilizing industry benchmarks. Due to the longer claim tail, the length of time required to develop credible loss history for use in the reserve process is greater for medium-tail business than for short-tail business.
In contrast to short and medium-tail business, the claim tail for long-tail business is expected to be notably longer, as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. As a general rule, estimates of accident year or underwriting year ultimate losses for long-tail business are notably more uncertain than those for short and medium-tail business. To date, key actuarial assumptions for long-tail business have been derived from a combination of industry benchmarks supplemented with Company historical loss experience. While industry benchmarks that the Company believes reflect the nature and coverage of its business are considered, actual loss experience may differ from the benchmarks based on industry averages. Due to the length of the development tail for this business, reserve estimates for most accident years and underwriting years are predominantly based on the BF Method or ELR Method and the consideration of qualitative factors.
discussions of the impact of the event with customers and brokers; and
On October 2, 2017, the Company acquired 100% ownership interest in Novae. At December 31, 2017, foreign exchange and other included reserves for losses and loss expenses of $2,126 million and reinsurance recoverable on unpaid and paid losses of $788 million related to this acquisition.
The transfer of the insurance business of AXIS Specialty Australia to a reinsurer was approved by the Irish High Court on February 1, 2017 and the Federal Court of Australia of February 10, 2017. Consequently, the insurance policies, assets and liabilities of AXIS Specialty Australia were transferred to the reinsurer with effect from February 13, 2017. This resulted in the reduction of reserves for losses and loss expenses by $223 million and a reduction in reinsurance recoverable on unpaid and paid losses by $223 million.
At December 31, 2019, net reserve for losses and loss expenses included estimated amounts for numerous catastrophe events. The magnitude and/or complexity of losses arising from these events, in particular Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian and the Australia Wildfires which occurred in 2019 together with Hurricanes Michael and Florence, California Wildfires and Typhoon Jebi which occurred in 2018 as well as Hurricanes Harvey, Irma and Maria, and the California Wildfires which occurred in 2017 inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at estimated net reserves for losses and loss expenses. As a result, actual losses for these events may ultimately differ materially from current estimates.
These reserve classes recognized net adverse prior year reserve development of $85 million in 2019 including net adverse prior year reserve development of $133 million recognized by the reinsurance property and other reserve class, partially offset by net favorable prior year reserve development of $33 million contributed by the insurance marine reserve class and net favorable prior year reserve development of $11 million contributed by the insurance property and other reserve class.
These reserve classes contributed net favorable prior year reserve development of $86 million in 2018 reflecting overall better than expected loss emergence related to the 2017 catastrophe events.
These reserve classes contributed $60 million of net favorable prior year reserve development in 2017 reflecting overall better than expected loss emergence.
For the year ended December 31, 2019, the reinsurance credit and surety reserve class recorded net favorable prior year reserve development of $53 million (2018: $33 million, 2017: $33 million), reflecting generally better than expected loss emergence.
For the year ended December 31, 2019, the reinsurance motor reserve class recognized net favorable prior year reserve development of $71 million (2018: $23 million 2017: $1 million). The net favorable prior year reserve development in 2019 was impacted by the increase in the Ogden discount rate and changes in related actuarial assumptions. The Ogden Rate which is used to calculate lump sum awards in U.K. bodily injury cases, changed from minus 0.75% to minus 0.25%, effective August 5, 2019. The net favorable prior year reserve development in 2018 was primarily attributable to non proportional treaty business on older accident years. The net favorable prior year development in 2017 was impacted by the decrease in the Ogden Rate, which changed from plus 2.5% to minus 0.75%, effective March 20, 2017.
The property line of business provides physical loss or damage, business interruption and machinery breakdown cover for virtually all types of property, including commercial buildings, residential premises, construction projects and onshore energy installations. This line of business includes primary and excess risks, some of which are catastrophe-exposed.
The accident and health line of business includes accidental death, travel insurance and specialty health products for employer and affinity groups. The accident and health line of business contributed net premiums earned of $144 million to this reserve class for the year ended December 31, 2019. A large increase in reported claims related to this line of business was observed from 2012. In particular, an increase in limited benefits medical business written in 2017 resulted in a significant increase in reported claims observed in that year.
The presentation of net incurred and paid claims development tables by accident year for the reinsurance segment is challenging due to the need to allocate loss information related to proportional treaties to the appropriate accident years. Information related to proportional treaty reinsurance contracts is generally submitted to the Company using quarterly bordereau reporting by underwriting year, with a supplemental listing of large losses. Large losses can be allocated to the corresponding accident years accurately. The remaining losses can generally only be allocated to accident years based on estimated premiums earned and loss reporting patterns. To the extent management’s assumptions and allocation procedures differ from the actual loss development patterns, the actual loss development may differ materially from the net incurred and paid claims development presented in the tables below.
This reserve class includes catastrophe, property, agriculture, engineering, marine and other, accident and health, and discontinued lines - Novae.
The agriculture line of business provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail, and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. This business is written on a proportional and aggregate stop loss reinsurance basis.
The marine and other line of business includes marine and aviation reinsurance.
The accident and health line of business includes personal accident, specialty health, accidental death, travel, life and disability reinsurance products which are offered on a proportional and catastrophic or per life excess of events loss basis. .
This reserve class includes the professional line of business which provides protection for directors' and officers' liability, employment practices liability, medical malpractice, professional indemnity, environmental liability and miscellaneous errors and omissions insurance risks. The underlying business is predominantly written on a claims-made basis. This business is written on a proportional and excess of loss basis. Typically, this reserve class is anticipated to exhibit medium to long-tail claim reporting and payment patterns.
In the normal course of business, the Company purchases treaty and facultative reinsurance protection to limit ultimate losses from catastrophic events and reduce loss aggregation risk.
Treaty reinsurance provides cover for a specified type or category of risks. The Company's treaty reinsurance agreements provide this cover on either an excess of loss or a proportional basis. Excess of loss covers provide a contractually set amount of coverage after a specified loss amount has been reached. These treaties can provide cover for a number of lines of business within one contract. Under proportional reinsurance, the Company cedes an agreed proportion of the premiums and the losses and loss expenses on the policies it underwrites. These treaties provide the Company with a specified percentage of coverage from the first dollar of loss.
The changes were made to permit the 5.150% Senior Notes to qualify as Tier 3 ancillary capital under eligible capital requirements of the Bermuda Monetary Authority. Because this amendment does not materially adversely affect the interests of the holders of the 5.150% Senior Notes, the First Supplemental Indenture was entered into without consent of any holders of the 5.150% Senior Notes. The First Supplemental Indenture relates to the 5.150% Senior Notes only and does not affect any other series of securities issued under the Indenture.
Interest expense recognized in relation to the Dekania Notes included interest payable, amortization of the offering discounts and amortization of debt offering expenses. The offering discounts and debt offering expenses were amortized over the period of time during which the Dekania Notes were outstanding. For the year ended December 31, 2018, the Company incurred interest expense of $2 million (2017: $2 million).
The following table provides the scheduled maturity of the Company's debt obligations at December 31, 2019:
On March 31, 2015, the Participating Subsidiaries entered into an amendment to reduce the maximum aggregate utilization capacity of the $750 million Facility to $500 million (the "$500 million Facility"). All other material terms and conditions remained unchanged.
At December 31, 2019, letters of credit outstanding under the LOC Facility were $357 million (2018: $395 million). At December 31, 2019, the Participating Subsidiaries were in compliance with all LOC Facility covenants.
The Company's investment portfolio is managed by external investment managers in accordance with its investment guidelines. The Company limits credit risk through diversification, issuer exposure limits graded by ratings and, with respect to custodians, through contractual and other legal remedies. Excluding U.S. government and agency securities, the Company limits its concentration of credit risk to any single corporate issuer to 2% or less of its investment grade fixed maturities portfolio for securities rated A- or above and 1% or less of its investment grade fixed maturities portfolio for securities rated below A-.
At December 31, 2019, 89.1% (December 31, 2018: 89.5%) of the Company's reinsurance recoverable on unpaid and paid losses and loss expenses, net of collateral were collectible from reinsurers rated the equivalent of A- or better by A.M. Best.
In the normal course of business, the Company purchases reinsurance and retrocessional (collectively referred to as "reinsurance") protection for its insurance and reinsurance business. Minimum reinsurance premiums are contractually due in advance on a quarterly basis. At December 31, 2019, the Company had outstanding reinsurance purchase commitments of $57 million (2018: $39 million), all of which is due before June 30, 2023. Actual payments under the reinsurance contracts will depend on the underlying subject premium and may exceed the minimum reinsurance premiums.
At December 31, 2019 the Company has $588 million (2018: $507 million) of unfunded investment commitments related to its other investment portfolio, which are callable by investment managers (refer to Note 5(c) 'Investments'). At December 31, 2019 the Company has $32 million (2018: $4 million) of unfunded investment commitments to purchase commercial mortgage loans.
As the lease contracts generally do not provide an implicit discount rate, the Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. The incremental borrowing rate is based on a borrowing with a term that is similar to the term of the associated lease. The Company has made an accounting policy election not to include renewal, termination, or purchase options that are not reasonably certain of exercise when determining the term of the borrowing.
Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the commencement date. For the year ended December 31, 2019, the total lease expense was $28 million.
(2) Sublease income largely relates to office property in London, England.
(4) Weighted-average discount was calculated on the basis of the discount rate for the lease that was used to calculate the lease liability balance for each lease at the reporting date and the remaining balance of the lease payments for each lease at the reporting date.
On July 5, 2017, the Company and the board of directors of Novae announced that it had agreed on terms of a recommended offer to be made by the Company to acquire the entire issued and to be issued share capital of Novae. Following the offer, the Company suspended its open market share repurchase plan.
The following table presents common shares repurchased from shares held in Treasury:
Shares are repurchased from employees to satisfy withholding tax liabilities that arise on the vesting of share-settled restricted stock units.
On March 19, 2012, the Company 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. The Company could 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 were non-cumulative. Holders of the Series C preferred shares were 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. To the extent declared, these dividends accumulated, with respect to each dividend period, in an amount per share equal to 6.875% of the liquidation preference per annum.
On May 20, 2013, the Company 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. The Company could 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 were non-cumulative. Holders of the Series D preferred shares were 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. To the extent declared, these dividends accumulated, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum.
On November 7, 2016, the Company issued $550 million of 5.50% Series E preferred shares, par value $0.0125 per share, with a liquidation preference of $2,500 per share. The Company may redeem the Series E preferred shares on or after November 7, 2021 at a redemption price of $2,500 per share. Dividends on the Series E preferred shares are non-cumulative. Holders of the Series E 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 January 15, 2017. 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.
In 2016, the Company established the AXIS Executive Restricted Stock Unit Retirement Plan (the "Plan") to reward certain eligible long-term employees of the Company for their dedicated service. The Plan was implemented in 2017. Subject to certain conditions being met, eligible employees will not forfeit all of their outstanding share-settled restricted stock units or cash-settled restricted stock units on or following their retirement. Absent the Plan, outstanding restricted stock units are generally forfeited on termination of employment.
(4) The fair value of share-settled restricted stock units and cash-settled restricted stock units that vested in 2017 included $44 million attributable to service restricted stock units which were granted in 2014 and were subject to a three year cliff vesting period.
A member of the Company’s Board of Directors, Mr. Charles Davis, is the Chief Executive Officer of Stone Point Capital, LLC ("Stone Point"). In the ordinary course of business, the Company engages SKY Harbor Capital Management, LLC, an affiliate of Stone Point, to provide asset management services for certain short duration high yield debt portfolios. For the year ended December 31, 2019, total fees paid to SKY Harbor Capital Management, LLC, were $3 million (2018: $2 million; 2017: $2 million).
The Company has invested $11 million in NXT Capital Senior Loan Fund II, LP and $19 million in NXT Capital Senior Loan Fund III, LP. The manager of these funds is an indirect subsidiary of NXT Capital Inc. ("NXT Capital"). Investment funds managed by Stone Point indirectly owned approximately 43% of NXT Capital until this ownership interest was sold in August 2018. For the year ended December 31, 2018, fees paid to NXT Capital were $1 million (2017: $1 million).
In addition, the Company has invested $52 million in the Freedom Consumer Credit Fund, LLC - Series B. The manager of this fund is Freedom Financial Asset Management, LLC ("Freedom") which is an indirect subsidiary of Pantheon Partners, LLC ("Pantheon"). Investment funds managed by Stone Point own approximately 14.5% of Pantheon. For the year ended December 31, 2019, fees paid to Freedom were $3 million (2018: $2 million; 2017: $1 million).
On November 5, 2013, the Company formed AXIS Ventures Reinsurance Limited ("Ventures Re"), a Bermuda domiciled insurer. With effect from January 1, 2015, Ventures Re is no longer consolidated in the financial statements of the Company. All of Ventures Re's directors are employees of the Company. In the normal course of business, the Company enters into certain reinsurance contracts with Ventures Re. For the year ended December 31, 2019, the Company ceded premiums of $192 million (2018: $182 million; 2017: $107 million) and ceded losses of $140 million (2018: $138 million; 2017: $126 million) to Ventures Re. In addition, Ventures Re paid certain acquisition costs and administrative fees to the Company. At December 31, 2019, the amount of reinsurance recoverable on unpaid and paid losses was $199 million (2018: $186 million) and the amount of ceded reinsurance payable included in insurance and reinsurance balances payable was $46 million (2018: $67 million) in the consolidated balance sheets. All transactions were conducted at market rates consistent with negotiated arms-length contracts.
For the year ended December 31, 2019, reorganization expenses were $37 million (2018: $67 million), respectively, related to the Company's transformation program which was launched in 2017. This program encompasses the integration of Novae which commenced in the fourth quarter of 2017, the realignment of the Company's accident and health business, together with other initiatives designed to increase efficiency and enhance profitability while delivering a customer-centric operating model.
For the year ended December 31, 2017, transaction and reorganization expenses were $27 million which included transaction costs incurred in connection with the acquisition of Novae, such as due diligence, legal, accounting, investment banking fees and expenses, as well as integration expenses related to the integration of Novae into the Company's operations and compensation-related costs associated with the termination of certain employees.
In Canada, AXIS Capital's U.S. reinsurance company operates through a branch and its U.S. service company has an unlimited liability company subsidiary based in Canada. The Canadian operations are subject to the relevant taxes in that jurisdiction and remain subject to examination for tax years 2015 through 2019.
AXIS Capital had subsidiaries in Ireland, the U.K., Australia, Belgium, Luxembourg, Brazil and Dubai in 2018 and 2017. The Company ceased operations in Australia in 2017. Effective January 1, 2019, AXIS Capital's subsidiary in Belgium was merged into AXIS Specialty Europe. In addition, the Company ceased operations in Luxembourg in December 2019. Consequently, AXIS Capital had subsidiaries in Ireland, the U.K., Brazil and Dubai in 2019. AXIS Capital's Irish operations had branches in the U.K. and Switzerland in 2018 and 2017. Effective January 1, 2019, following the merger of AXIS Specialty Europe and Aviabel SA., AXIS Capital also has branches in Belgium and the Netherlands. Except for Ireland, with respect to a 2016 and 2017 revenue audit, these subsidiaries and their branches are not under examination, but remain subject to examination in all applicable jurisdictions for tax years 2015 through 2019.
In the U.K., the Company operates through Lloyd’s syndicates whose income is subject to tax in the U.K., payable by its corporate members. The income from operations at Lloyd’s is also subject to taxes in other jurisdictions in which Lloyd's operates, including the U.S. Under a Closing Agreement between Lloyd’s and the IRS, Lloyd's corporate members pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. To the extent that the Lloyd’s syndicates suffer taxes outside the U.K., they may claim a credit for foreign taxes suffered, limited to the U.K. equivalent tax on the same income.
The following table provides an analysis of income tax expense and net tax assets:
At December 31, 2019 and 2018, the total operating loss carryforwards includes Lloyd's deferred year of account losses of $50 million and $68 million, respectively.
The following table shows an analysis of the movement in the Company's valuation allowance:
At December 31, 2019 and 2018, the Company established a full valuation allowance on: (1) operating loss carryforwards relating to operations in Singapore; (2) un-utilized foreign tax credits available in Ireland and (3) certain other deferred tax assets related to branch operations. At December 31, 2019, the valuation allowance on certain unrealized investment losses was released as the Company was in an unrealized investment gain position.
Although realization is not assured, management believes it is more likely than not that the tax benefit of the recorded net deferred tax assets will be realized. In evaluating the Company's ability to recover these tax assets within the jurisdiction from which they arise, it considered all available positive and negative evidence, including historical results, operating loss carry-back potential and scheduled reversals of deferred tax liabilities. The Company believes its U.S. and U.K. operations
The Company released the cumulative translation adjustment related to Aviabel Re S.A of $6 million from AOCI in the consolidation balance sheet to foreign exchange losses (gains) in the consolidated statement of operations associated with the liquidation of that entity on December 18, 2019.
The Company's Irish subsidiaries may declare dividends subject to meeting their solvency and capital requirements. The maximum dividend is limited to "excess eligible own funds" which is defined as excess Solvency II capital over the SCR and may also be limited to "profits available for distribution'', which is defined as accumulated realized profits less accumulated realized losses and statutory reserves. At December 31, 2019, the maximum dividend the Company's Irish subsidiaries could pay, having met their solvency and capital requirements was approximately $70 million (2018: $37 million).
The Company operates in the Lloyd’s market through its corporate members, AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited, which provide 70% and 30%, respectively, of Syndicate 1686's capital support. AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686 until December 31, 2018. Syndicate 1686 was managed by a third-party managing agency, Asta Managing Agency Limited, until August 2017, when the Company received final authorization from Lloyd's, the Prudential Regulation Authority ("PRA"), and the Financial Conduct Authority ("FCA") for its own Lloyd's managing agent, AXIS Managing Agency Ltd. ("AXIS Managing Agency"). Effective August 4, 2017, AXIS Managing Agency assumed management of Syndicate 1686, replacing the Company's third-party managing agency agreement with Asta Managing Agency Limited, which had been in place since 2014.
SPA 6129 commenced trading on January 1, 2016, as a collaboration between Novae and Securis Investment Partners LLP, an insurance linked securities fund manager. For the three months ended December 31, 2017, NSL received a managing agency fee from SPA 6129. For the year ended December 31, 2018, AXIS Managing Agency received a managing agency fee from SPA 6129. The Company ended its collaboration with SPA 6129 in 2018.
Corporate members of Lloyd’s and Lloyd’s syndicates are bound by the rules of Lloyd’s, which are prescribed by Bye-laws and Requirements made by the Council of Lloyd’s under powers conferred by the Lloyd’s Act 1982. These rules prescribe members’ membership subscription, the level of their contribution to the Lloyd’s Central Fund and the assets they must deposit with Lloyd’s in support of their underwriting. The Council of Lloyd’s has broad powers to sanction breaches of its rules, including the power to restrict or prohibit a member’s participation on Lloyd’s syndicates.
FAL may be satisfied by cash, certain investments and letters of credit provided by approved banks. At December 31, 2019, fixed maturities and short-term investments with a fair value of $725 million (2018: $715 million) and cash of $22 million (2018: $8 million), respectively, were restricted to satisfy AXIS Corporate Capital UK Limited FAL requirements. At December 31, 2019, fixed maturities and short-term investments with a fair value of $513 million (2018: $528 million), equity securities with a fair value of $49 million (2018: $40 million), and cash of $5 million (2018: $16 million) were restricted to satisfy AXIS Corporate Capital UK II Limited FAL requirements (refer to Note 5 'Investments').
The Company's operating subsidiaries in Bermuda and the U.S. maintain branch offices in Singapore and Canada, respectively. The Company's Irish operating subsidiaries maintain branch offices in Switzerland, the U.K, Belgium, and the Netherlands. In 2017, the Company ceased operations in Australia. As branch offices are not considered separate entities for regulatory purposes, the required and actual statutory capital and surplus amounts for each jurisdiction in the table above, include amounts related to the applicable branch offices. The Company's branch offices in Singapore and Canada are subject to additional minimum capital or asset requirements in their countries of domicile. At December 31, 2019 and 2018, the actual capital/assets for each of these branches exceeded the relevant local regulatory requirements.
Total statutory net income (loss) of the Company's operating subsidiaries was $364 million, $268 million, $(94) million for 2019, 2018 and 2017, respectively. The differences between statutory financial statements and statements prepared in accordance with U.S. GAAP vary by jurisdiction, however, the primary differences are that statutory financial statements may not reflect deferred acquisition costs, certain net deferred tax assets, goodwill and intangible assets, unrealized gains (losses) on fixed maturities or certain unauthorized reinsurance recoverable balances.
Underwriting-related general and administrative expenses includes those general and administrative expenses that are incremental and/or directly attributable to the Company's underwriting operations. Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP financial measure, also included corporate expenses of $129 million, $108 million and $130 million for the years ended December 31, 2019, 2018 and 2017, respectively. Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to the Company's underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses.
During the quarters ended March 31, June 30, September 30 and December 31, 2019, the Company recognized reorganization expenses of $15 million, $3 million, $11 million and $8 million, respectively, related to its transformation program which was launched in 2017. This program encompasses the integration of Novae which commenced in the fourth quarter of 2017, the realignment of the accident and health business, together with other initiatives designed to increase the Company's efficiency and enhance the Company's profitability while delivering a customer-centric operating model. During the quarters ended March 31, June 30, September 30 and December 31, 2018, the Company recognized reorganization expenses of $13 million, $19 million, $16 million and $19 million, respectively (refer to Note 18 'Transaction and Reorganization Expense').
During the quarters ended March 31, June 30, September 30 and December 31, 2019, the Company recognized amortization of VOBA of $13 million, $7 million, $4 million, $2 million, respectively, related to the acquisition of Novae. During the quarters ended March 31, June 30, September 30 and December 31, 2018, the Company recognized amortization of VOBA of $57 million, $53 million, $39 million and $23 million (refer to Note 4 'Goodwill and Intangible Assets').