•Total cash and investments of $15.8 billion; fixed maturities, cash and short-term securities comprise 87% of total cash and investments and have an average credit rating of AA-
(2)Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measures, net income (loss), is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Results of Operations', 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 Reconciliation'.
•re-balancing our portfolio towards less volatile lines of business that carry attractive rates;
•improving the effectiveness and efficiency of our operating platforms and processes;
We are committed to leadership in specialty insurance and global reinsurance, where we have depth of talent and expertise. We believe we are well-positioned to succeed in the rapidly evolving marketplace. Through our hybrid strategy, we have developed substantial platforms, providing us with both balance and diversification, enabling us to take advantage of positive opportunities in either market to generate the most attractive risk-return portfolio for our shareholders. We believe our market positioning, underwriting expertise, best-in-class claims management capabilities and strong relationships with our distributors and clients will provide opportunities for increased profitability, with differences among our lines driven by our tactical response to market conditions.
On March 11, 2020, COVID-19, a novel coronavirus outbreak, was declared a pandemic by the World Health Organization. The COVID-19 crisis upended the marketplace and society on a global scale, and its impact is still being felt within the insurance and reinsurance industry and at AXIS.
While we believe our estimate of loss reserves is adequate for losses and loss expenses that have been incurred at December 31, 2020, based on current facts and circumstances, we continue to monitor the appropriateness of our assumptions as new information comes to light and adjustments are made to the estimate of ultimate losses related to the COVID-19 pandemic, if there are developments that are different from previous expectations (refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment' and Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for further details).
Our underwriters have reassessed risk appetite in light of the COVID-19 pandemic, in particular as it relates to exposure to communicable diseases, viruses, pathogens and other similar risks. We have taken appropriate steps to mitigate exposure to these types of risks, including increasing pricing and adding policy terms and conditions, including exclusions. During 2020, premium volume was adversely impacted due to the disruption to society and the insurance and reinsurance marketplace on a global scale. We anticipate this trend will continue in 2021. Adjustments to premiums in subsequent periods could be material.
(1)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 $102 million, $129 million, and $108 million for 2020, 2019, and 2018, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Other Expenses (Revenues), Net'' for additional information on corporate expenses. Refer also to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures Reconciliation' for further details.
Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment' for further details on underwriting revenues.
Gross premiums written in 2020 increased by $342 million, or 9%, compared to 2019. The increase was primarily attributable to professional lines, liability, property, accident and health, and aviation lines.
Ceded premiums written in 2020 was $1,661 million, or 41% of gross premiums written, compared to $1,467 million, or 40% in 2019. The increase in ceded premiums written of $194 million, or 13% was primarily driven by increases in professional lines, property, liability, and marine lines, partially offset by decreases in credit and political risk, and aviation lines.
The current accident year loss ratio increased to 74.2% in 2020 from 60.8% in 2019. The increase in the current accident year loss ratio was impacted by a higher level of catastrophe and weather-related losses. During 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $443 million, or 19.1 points, primarily attributable to the COVID-19 pandemic, Hurricanes Laura, Sally, Zeta and Delta, and other weather-related events. During 2020, catastrophe and weather-related losses included $204 million, or 8.8 points, attributable to the COVID-19 pandemic largely associated with property-related coverages, but also included event cancellation coverages. Comparatively, in 2019, catastrophe and weather-related losses were $84 million, or 3.8 points, primarily attributable to Hurricanes Dorian, and other weather-related events.
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for details on the reserve classes, the expected claim tails, and prior year development.
The acquisition cost ratio decreased to 20.1% in 2020 from 21.4% in 2019, associated with 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 $1 million and $12 million of acquisition expense in 2020 and 2019, respectively, did not significantly benefit the acquisition cost ratio in 2020 and benefited the acquisition cost ratio by 0.6 points in 2019. Adjusting the acquisition cost ratio for these amounts, the acquisition cost ratio decreased by 1.9 points in 2020, compared to 2019, principally related to changes in business mix in property lines and reflecting the increase in professional lines and liability lines written in recent periods.
Gross premiums written in 2020 decreased by $414 million, or 13%, ($401 million, or 12% on a constant currency basis), compared to 2019. The decrease was primarily attributable to catastrophe, agriculture, accident and health, property, credit and surety, engineering, and motor lines, partially offset by increases in liability and professional lines.
The decreases in catastrophe, agriculture, and property lines were driven by non-renewals and decreased line sizes associated with the repositioning of the portfolio. The decrease in accident and health lines was due to non-renewals following the decision to exit the Middle East business. The decrease in credit and surety lines was attributable to reduced business opportunities due to the COVID-19 pandemic. The decrease in engineering lines was due to non-renewals following the decision to exit this line of business. The decrease in motor lines was largely attributable to premium adjustments. The increases in liability and professional lines were driven by premium adjustments, and favorable market conditions associated with renewals and new business.
Ceded premiums written in 2020 was $830 million, or 30%, of gross premiums written, compared to $942 million, or 29%, in 2019. The decrease in ceded premiums written of $113 million, or 12%, was primarily driven by decreases in catastrophe, accident and health, credit and surety, and agriculture lines, partially offset by increases in liability, professional lines, and motor lines.
Net premiums earned in 2020 decreased by $325 million, or 14%, ($294 million or 12% on a constant currency basis), compared to 2019. The decrease was primarily driven by decreases in gross premiums earned in agriculture, motor, catastrophe, property, and credit and surety lines, together with an increase in ceded premiums earned in liability lines, partially offset by decreases in ceded premiums earned in catastrophe and agriculture lines, and an increase in gross premiums earned in liability lines.
The current accident year loss ratio increased to 76.8% in 2020 from 74.7% in 2019. The increase in the current accident year loss ratio was impacted by a higher level of catastrophe and weather-related losses. During 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $330 million, or 16.2 points, primarily attributable to the COVID-19 pandemic, the Midwest derecho, Hurricane Laura, wildfires across the West Coast of the United States, and other weather-related events. During 2020, catastrophe and weather-related losses included $156 million, or 7.6 points, attributable to the COVID-19 pandemic largely associated with property-related coverages, but also included accident and health, and mortgage-related coverages.
Net investment income from our cash and investment portfolio by major asset class was as follows:
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments, an indirect investment 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.
2020 versus 2019: Pre-tax return on other investments in 2020 decreased to 2.2% compared to 8.5% in 2019. The decrease was primarily attributable to lower returns from direct lending and real estate funds and a realized gain of $13 million associated with the sale of a privately held investment in 2019.
Equity securities are reported at fair value. Realized gains (losses) on equity securities are also reported in net investment gains (losses) when securities are sold or impaired. In addition, changes in the fair values of equity securities are reported in net investment gains (losses).
(1) Related to instances where the Company intends to sell securities, or it is more likely than not that the Company will be required to sell securities before their anticipated recovery.
2020 versus 2019: Impairment losses in 2020 were $1 million compared to OTTI losses of $7 million in 2019. The impairment losses in 2020 were principally due to impairments of non-investment grade corporate debt securities that we intend to sell or more likely than not will be required to sell. OTTI losses in 2019 included impairments on non-U.S. denominated securities due to foreign exchange losses associated with the strengthening of the U.S. dollar against the pound sterling and the euro and impairments on non-investment grade corporate debt securities that had declined significantly in value.
During 2020, foreign exchange hedges resulted in $2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020.
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net investment gains (losses), the change in unrealized gains (losses) on fixed maturities, and interest in income (loss) of equity method investments generated by our investment portfolio.
(2)The average cash and investments balance is calculated by taking the average of the period end fair value balances.
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses in 2020 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and the euro.
Interest expense and financing costs are related to interest due on the 5.875% senior unsecured notes ("5.875% Senior Notes") issued in 2010 and repaid in June 2020, the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% senior unsecured notes ("3.900% Senior Notes"), and the 4.900% fixed-rate reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the U.S. and Europe. Our effective tax rate, which is calculated as income tax expense (benefit), divided by income (loss) before tax including interest in income (loss) of equity method investments, was 9.3%, 6.8%, and (217.9%) in 2020, 2019, and 2018, respectively. This effective rate can vary between years depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors
The tax benefit of $12 million in 2020 was principally due to the generation of pre-tax losses in our U.K. operations.
(1) Return on average common equity ("ROACE") is calculated by dividing net income (loss) available (attributable) to common shareholders for the year by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the year.
(2) Operating return on average common equity ("operating ROACE"), a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, ROACE, 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 Reconciliation'.
(3) 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.
ROACE reflects the impact of net income (loss) available (attributable) to common shareholders, including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in ROACE in 2020 compared to 2019, was primarily driven by the underwriting loss, a decrease in net investment income, and the foreign exchange losses, partially offset by an increase in net investment gains, the income tax benefit, and decreases in corporate expenses, reorganization expenses, and the amortization of value of business acquired ("VOBA") associated with the acquisition of Novae.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
In 2020, book value per diluted common share decreased by 1%, due to the net loss generated and common dividends declared, partially offset by net unrealized investment gains reported in other comprehensive income.
Taken together, we believe that growth in book value per diluted common share and common share dividends declared represent the total value created for common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe that investors use the book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.
In 2020, the increase in total value of $0.95, or 2%, was driven by net unrealized investment gains recognized in other comprehensive income, partially offset by the net loss generated for the year.
(2)Tax cost (benefit) of $(4) million, $1 million and $(4) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(3)Tax (benefit) of $(1) million, $(7) million and $(11) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(4)Tax cost (benefit) of $nil for the years ended December 31, 2020, 2019, respectively and $0.3 million for the year ended December 31, 2018, Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(5)Loss per diluted common share and operating loss per diluted common share for the year ended December 31, 2020, were calculated using weighted average common shares outstanding due to the net loss attributable to common shareholders and the operating loss recognized in the year.
Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our underwriting operations. While this measure is presented in Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Consolidated Results of Operations'.
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 underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).
Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments.
Although the investment of premiums to generate income and investment gains (losses) is an integral part of our operations, the determination to realize investment gains (losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (losses) is somewhat opportunistic for many companies.
Interest in income (loss) of equity method investments is primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income (loss).
We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. The reconciliation of operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented above.
We present gross premiums written, net premiums written and net premiums earned on a constant currency basis in this MD&A. The amounts presented on a constant currency basis are calculated by applying the average foreign exchange rate from the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze growth in gross premiums written, net premiums written and net premiums earned on a constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment'.
Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income (loss), net investments gains (losses), interest in income (loss) of equity method investments and change in unrealized gains (losses) generated by average cash and investment balances. The reconciliation of pre-tax total return on cash and investments excluding foreign exchange movements to pre-tax total return on cash and investments, the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net Investment Income and Net Investment Gains (Losses)'. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investment portfolio.
On October 2, 2017, we acquired Novae. At the acquisition date, we identified 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. 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 2020, 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.
(1)Includes restricted cash and cash equivalents of $600 million and $335 million for 2020 and 2019, respectively.
The fair value of total investments decreased by $44 million in 2020, as cash inflows from operations and the increase in market value of fixed maturities and equities was more than offset by the repayment of $500 million of 5.875% Senior Notes and the redemption of $225 million of 5.50% Series D preferred shares.
At December 31, 2020, fixed maturities had a weighted average credit rating of AA- (2019: AA-), a book yield of 2.3% (2019: 2.8%), and an average duration of 3.3 years (2019: 3.2 years). At December 31, 2020, fixed maturities together with short-term investments and cash and cash equivalents (i.e. total investments of $13.7 billion), had a weighted average credit rating of AA- (2019: AA-) and an average duration of 3.0 years (2019: 2.9 years).
To calculate the weighted average credit rating for fixed maturities, we assign points to each rating with 29 points for the highest rating (AAA) and 2 points for the lowest rating (D) and then calculate the weighted average based on the fair values of the individual securities. Securities that are not rated by S&P, Moody’s or Fitch are excluded from weighted average calculations. At December 31, 2020, the fair value of fixed maturities not rated was $50 million (2019: $34 million).
At December 31, 2020, net unrealized gains on non-U.S. government securities was $38 million (2019: $12 million) which included gross unrealized foreign exchange losses of $1 million (2019: $3 million), mainly related to U.K. government bonds.
Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries.
At December 31, 2020, our non-investment grade portfolio had a fair value of $935 million (2019: $994 million), a weighted average credit rating of B (2019: B+) and duration of 2.0 years (2019: 1.5 years). At December 31, 2020, our corporate debt portfolio, including non-investment grade securities, had a duration of 3.7 years (2019: 3.1 years).
Non-agency RMBS mainly include investment-grade bonds originated by non-agencies. At December 31, 2020, non-agency RMBS had an average duration of 1.5 years (2019: 2.1 years) and weighted average life of 4.7 years (2019: 6.1 years).
At December 31, 2020, the gross unrealized losses on our fixed maturities portfolio were $19 million (2019: $32 million).
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 the holding company and operating subsidiary level.
As a holding company, AXIS Capital has no operations of its own and its assets consist primarily of investments in its subsidiaries. Accordingly, AXIS Capital’s future cash flows depend on the availability of dividends or other statutorily permissible distributions, such as returns of capital, from its subsidiaries. The ability to pay such dividends and/or distributions is limited by the applicable laws and regulations of the various countries and states in which AXIS Capital’s subsidiaries operate (refer to Item 8, Note 21 to the Consolidated Financial Statements 'Statutory Financial Information' for further details), as well as the need to maintain capital levels to adequately support insurance and reinsurance operations, and to preserve financial strength ratings issued by independent rating agencies. During 2020, AXIS Capital received $350 million (2019: $250 million) of distributions from its subsidiaries. AXIS Capital’s primary uses of funds are dividend payments to common and preferred shareholders, interest and principal payments on debt, capital investments in subsidiaries, and payment of corporate operating expenses. We believe the dividend/distribution capacity of AXIS Capital’s subsidiaries, which was $0.9 billion at December 31, 2020, will provide AXIS Capital with sufficient liquidity for the foreseeable future.
(1) Refer to Item 8, 'Consolidated Statements of Cash Flows' for further details.
•Net cash provided by operating activities was $344 million in 2020 compared to $199 million in 2019. Cash inflows from insurance and reinsurance operations typically include premiums, net of acquisition costs, and reinsurance recoverables. Cash outflows principally include payments of losses and loss expenses together with payments of premiums to reinsurers and operating expenses. Cash provided by operating activities can fluctuate due to timing differences between the collection of premiums and reinsurance recoverables and the payment of losses and loss expenses, and the payment of premiums to reinsurers. Operating cash inflows increased in 2020 compared to 2019, primarily attributable to an increase in premiums received, a decrease in operating expenses, and a decrease in paid income taxes, partially offset by an increase in payments of losses and loss expenses, and a decrease in interest and dividends received from our fixed income portfolio.
•Financing cash outflows were due to the repayment of $500 million 5.875% Senior Notes, the redemption of $225 million Series D preferred shares, and dividends paid to common and preferred shareholders of $173 million in 2020 (2019: $180 million). In 2019, 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, and financing cash outflows primarily related to the repayment of $250 million 2.650% Senior Notes. Cash outflows also included common share repurchases associated with the vesting of share-settled restricted stock units of $10 million in 2020 (2019: $10 million). The declaration and payment of future dividends and share repurchases is at the discretion of our Board of Directors and will depend on many factors including, but not limited to, our net income, financial condition giving due consideration to the impact of the COVID-19 pandemic, business needs, capital and surplus requirements of our operating subsidiaries and regulatory and contractual restrictions, including those set forth in our credit facilities (refer to 'Capital Resources - Share Repurchases' below for further details).
Net losses and loss expenses, gross of reinstatement premiums, included estimates of ultimate losses for catastrophe and weather-related losses of $773 million in 2020, $351 million in 2019 and $440 million in 2018. There remains significant uncertainty associated with estimates of ultimate losses for certain of these events (refer to 'Underwriting Results - Insurance segment - Current Accident Year Loss' and 'Underwriting Results - Reinsurance segment - 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 $13.0 billion of cash and invested assets at December 31, 2020 could be available in one to three business days under normal market conditions; of this amount, $4.9 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, at January 1, 2021. our largest 1-in-250 year return period, single occurrence, single-zone modeled probable maximum loss (Southeast U.S. Hurricane) was approximately $0.4 billion, 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).
We expect that cash flows generated from operations, combined with the liquidity provided by our investment portfolio, to be sufficient to cover required cash outflows and other contractual commitments through the foreseeable future (refer to 'Contractual Obligations and Commitments' below for further details).
In addition to common equity, we have utilized other external sources of financing, including debt, preferred shares, and letter of credit facilities to support our business operations. We believe that we hold sufficient capital to allow us to take advantage of market opportunities and to maintain our financial strength ratings, as well as to comply with various local statutory regulations. We monitor capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business (refer to Item 1 'Risk and Capital Management' for further details).
We finance our operations with a combination of debt and equity capital. Debt to total capital, and debt and preferred equity to total capital ratios, provide an indication of our capital structure, along with some insight into our financial strength.
While the impact of the COVID-19 pandemic and catastrophe and weather-related losses have reduced common shareholders' equity, we believe that our financial flexibility remains strong, and adjustments are made if there are developments that are different from previous expectations.
Debt represents the 5.150% Senior Notes issued in 2014, which will mature in 2045, the 4.000% Senior Notes issued in 2017, which will mature in 2027, the 3.900% Senior Notes issued in 2019, which will mature in 2029, and the 4.900% Junior Subordinated Notes issued in 2019, which will mature in 2040 (refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' 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 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).
We routinely enter into agreements with financial institutions to obtain secured letter of credit facilities. These facilities are primarily used for the issuance of letters of credit, in the normal course of operations, to certain insurance and reinsurance entities that purchase reinsurance protection from us. These letters of credit allow those operations to take credit, under local insurance regulations, for reinsurance obtained in jurisdictions where AXIS Capital’s subsidiaries are not licensed or otherwise admitted as an insurer. The value of our letters of credit outstanding is driven by, among other factors, the amount of unearned premiums, development of loss reserves, the payment patterns of loss reserves, the expansion of our business and the loss experience of that business. A portion of these facilities may also be used for liquidity purposes.
On March 28, 2020, certain of AXIS Capital's operating subsidiaries (the "Participating Subsidiaries") amended an existing $250 million secured letter of credit facility with Citibank Europe plc (the "$250 million Facility") to extend the expiration date to March 31, 2021.
On November 19, 2019, we filed an unallocated universal shelf registration statement with the SEC, which became effective on filing. Pursuant to the shelf registration, we may issue an unlimited amount of equity, debt, warrants, purchase contracts or a combination of these securities. Our intent and ability to issue securities pursuant to this registration statement will depend on market conditions at the time of any proposed offering.
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.
(1) On May 11, 2020, Standard & Poor's revised its outlook from stable to negative due to unfavorable trends in operating performance.
At December 31, 2020, contractual obligations and commitments by period due were:
(1)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.
(4)Refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details.
The consolidated financial statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates in order to determine the reported values. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.
•reinsurance recoverable on unpaid losses and loss expenses, including the allowance for expected credit losses;
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 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 reinsurance business, we are generally notified of losses by ceding companies and/or their brokers. For excess of loss contracts, we are typically notified of insured losses on specific contracts and record a case reserve for the estimated ultimate liability arising from the claim. For contracts written on a proportional basis, we typically receive aggregated claims information and record a case reserve for the estimated ultimate liability arising from the claim based on that information. Proportional reinsurance contracts typically require that losses in excess of pre-defined amounts be separately notified so we can adequately evaluate them. Our claims department evaluates each specific loss notification we receive and records additional case reserves when a ceding company’s reserve for a claim is not considered adequate. 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.
The following is a brief description of the reserve estimation methods commonly employed by our actuaries including a discussion of their particular strengths and weaknesses:
•Expected Loss Ratio Method ("ELR Method"): This method estimates ultimate losses for an accident year or underwriting year by applying an expected loss ratio to the earned or written premium for that year. Generally, expected loss ratios are based on one or more of (a) an analysis of historical loss experience to date, (b) pricing information and (c) industry data, adjusted as appropriate, to reflect changes in rates, loss and exposure trends, and terms and conditions. This method is insensitive to actual incurred losses for the accident year or underwriting year in question and is, therefore, often useful in the early stages of development when very few losses have been incurred. Conversely, the lack of sensitivity to incurred/paid losses for the accident year or underwriting year in question means that this method is usually inappropriate in later stages of an accident year or underwriting year’s development.
•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.
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 accident or underwriting years, established in the prior reporting period. For the initial estimate of the current accident or underwriting year, the available claim data is typically insufficient to produce a reliable estimate of ultimate losses. As a result, initial estimates for an accident or underwriting year is generally based on the ELR Method for longer tailed lines and a BF method for shorter tailed lines. The initial ELR for each reserve class is established collaboratively by our actuaries, underwriters and management at the start of the year as part of the planning process, taking into consideration prior accident years’ or underwriting years' experience and industry benchmarks, adjusted after considering factors such as loss and exposure trends, rate differences, changes in contract terms and conditions, business mix changes and other known differences between the current year and prior accident or underwriting years. The initial expected loss ratios for a given accident or underwriting year may be modified over time if the underlying assumptions, such as loss development or premium rate changes, differ from the original assumptions.
Gross loss reserves for each of the reportable segments, segregated between case reserves and IBNR and by reserve class were as shown below. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for mapping of the Company's lines of business to reserve classes and the expected claim tails.
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. In addition, the inherent uncertainties relating to catastrophe events further add to the complexity of estimating potential exposure. Further, 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.
For reinsurance credit and surety business, initial and most recent underwriting year loss projections are generally based on the ELR method, with consideration given to qualitative factors. Given that there is a quicker and more stable reporting pattern for trade credit and mortgage business, we generally commence the transition to experience-based methods for these lines of business sooner than for surety business.
•more significant weight given to industry benchmarks in forming our key actuarial assumptions;
•potential volatility of actuarial estimates, given the number of years of development it takes to produce a meaningful incurred loss as a percentage of ultimate losses;
To date, key actuarial assumptions for long-tail business have been derived from a combination of industry benchmarks supplemented by 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.
In 2020, we continued to give weight to experience-based methods on the earlier years for insurance and reinsurance liability lines of business.
Loss reserves related to the COVID-19 pandemic represent our best estimate of losses and loss expenses that have been incurred at the balance sheet date. The determination of loss reserves is based on a ground-up assessment of coverage from individual contracts and treaties across all lines of business, and includes a review of modeling analyses and market information, where appropriate. In addition, we consider information received from clients, brokers and loss adjusters, together with global shelter-in-place orders and the outcomes of recent court judgments, including the UK Supreme Court ruling.
While we believe our estimate of loss reserves is adequate for losses and loss expenses that have been incurred at the balance sheet date based on current facts and circumstances, we continue to monitor the appropriateness of these assumptions as new information comes to light and adjustments are made to our estimate of ultimate losses related to the COVID-19 pandemic if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified. Actual losses for this event may ultimately differ materially from current estimates.
•a review of our portfolio of contracts to identify those contracts which may be exposed to the catastrophic event;
•discussions of the impact of the event with our customers and brokers; and
We generally use a blend of these information sources to arrive at aggregate estimates of the ultimate losses arising from the catastrophic event.
Results of operations for 2020 and 2019 were impacted by natural catastrophe activity (refer to 'Underwriting Results - Insurance segment - Current Accident Year Loss Ratio' and 'Underwriting Results - Reinsurance segment - Current Accident Year Loss Ratio' for further details).
While we believe that loss reserves at December 31, 2020 are adequate, new information, events or circumstances may result in ultimate losses that are materially greater or less than provided for in our loss reserves. As previously noted, there are many factors that may cause reserves to increase or decrease, particularly those related to catastrophe losses and long-tail lines of business.
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 $50 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.
In the normal course of business, we purchase treaty and facultative reinsurance protection to limit ultimate losses from catastrophic events and to reduce loss aggregation risk. To the extent that reinsurers do not meet their obligations under the reinsurance agreements, we remain liable. Consequently, we are exposed to credit risk associated with reinsurance recoverable balances to the extent that any of our reinsurers are unable or unwilling to pay claims.
Reinsurance recoverable on unpaid losses and loss expenses ("reinsurance recoverable") for each of the reportable segments, segregated between case reserves and IBNR and by reserve class was as shown below. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for mapping of the Company's lines of business to reserve classes and the expected claim tails.
At December 31, 2020, reinsurance recoverables as a percentage of loss reserves was 32% (2019: 30%). At December 31, 2020, reinsurance recoverables (excluding the allowance for expected credit losses) that were collectible from reinsurers rated A- or better by A.M Best were 87.6% (2019: 89.1%). Refer to Item 8, Note 11 to the Consolidated Financial Statements 'Commitments and Contingencies' for an analysis of the credit risk associated with reinsurance recoverable on unpaid and paid losses and loss expenses at December 31, 2020.
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.
Consequently, we review reinsurance recoverable balances at least quarterly to estimate an allowance for expected credit losses.
The allowance for expected credit losses is recognized in net income (loss). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined. Write-offs of reinsurance recoverable balances, together with associated allowances for expected credit losses, are recognized in the period in which balances are deemed uncollectible.
At December 31, 2020, the use of different assumptions could have a material effect on the allowance for expected credit losses. To the extent the creditworthiness of our reinsurers deteriorates due to an adverse event affecting the reinsurance industry, such as a large number of catastrophes, uncollectible amounts could be significantly greater than the allowance for expected credit losses. Given the various considerations used to estimate the allowance for expected credit losses, we cannot precisely quantify the effect a specific industry event may have on the allowance for expected credit losses.
A limited amount of our insurance business is written on a line slip or proportional basis, where we assume an agreed proportion of the premiums and losses of a particular risk or group of risks along with other unrelated insurers. As premiums for this business are not identified in the policy, premiums are recognized at the inception of the policy based on estimates provided by clients through brokers (refer to 'Reinsurance Segment' below for further details). We review these premium estimates on a quarterly basis and any adjustments to premium estimates are recognized in the period in which they are determined. Gross premiums written on a line slip or proportional basis accounted for 14% and 13% of the segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively, therefore the impact of these premium estimates on pre-tax net income was immaterial.
Reinsurance premiums are recorded at the inception of the contract based on estimates received from ceding companies.
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 52% and 48% of the reinsurance segment’s gross premiums written for the years ended December 31, 2020 and 2019, 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);
As a result of this review process, any adjustments to premium estimates are recognized in the period in which they are determined. Changes in premium estimates could be material to gross premiums written in the period. Changes in premium estimates could be also material to net premiums earned in the period in which they are determined as any adjustment may be substantially or fully earned. Gross premiums written for proportional reinsurance contracts, including adjustments to premium estimates established in prior years, accounted for 48% and 52% of the reinsurance segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively.
Historical experience has shown that cumulative adjustments to initial premium estimates for proportional reinsurance contracts have ranged from 0% to 5% 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 2020 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 $39 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.
Premiums are earned evenly over the period during which we are exposed to the underlying risk. Changes in circumstances subsequent to the inception of contracts can impact the earning periods. For example, when exposure limits for a contract are reached, any associated unearned premiums are fully earned. This can have a significant impact on net premiums earned, particularly for multi-year contracts such as those in the credit and political risk line of business.
Fixed premium insurance policies and excess of loss reinsurance contracts are generally written on a "losses occurring" or "claims made" basis over the term of the contract. Consequently, premiums are earned evenly over the contract term, which is generally 12 months.
Our estimated fair value of a financial instrument may differ from the amount that could be realized if the financial instrument 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.
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using net asset values (NAVs) as advised by external fund managers or third-party administrators (refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information).
As the significant inputs used to price this security are unobservable, the fair value of the indirect investment in CLO-Equities is classified as Level 3.
Significant inputs used in discounted cash flow models were as follows:
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.
Impairment Losses and the Allowance for Expected Credit Losses - Fixed Maturities Available for Sale
The following discussion provides details regarding our processes for identification of impairments of fixed maturities, available for sale following the adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," and the recognition of the related impairment losses.
During 2020, we recorded an allowance for expected credit losses of $0.3 million and an impairment loss of $1 million (refer to 'Net Investment Income and Net Investment Gains (Losses)' for further details).
An available for sale fixed maturity is impaired if the fair value of the investment is below amortized cost.
In instances where we intend to hold the impaired fixed maturity, we determine whether the decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. If 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), an allowance for expected credit losses is established. The allowance for expected credit losses is limited to the difference between a security's amortized cost basis and its fair value. At December 31, 2020, the allowance for expected credit losses was $0.3 million. The allowance for expected credit loss is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations.
The non-credit component (e.g. interest rates, market conditions, etc.) of the loss is recognized in other comprehensive income.
The allowance for expected credit losses 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 the allowance for expected credit losses are disclosed in Item 8, Note 5 (f) to the Consolidated Financial Statements 'Investments'.
At December 31, 2020, there were no recently issued accounting pronouncements that we have not yet adopted that we expect could have a material impact on our results of operations, financial condition or liquidity.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018 116
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2020, 2019 and 2018 117
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 118
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, 2020, 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 26, 2021 expressed an unqualified opinion on the Company's internal control over financial reporting.
Auditing the Company’s methods, assumptions and best estimate of the cost of the ultimate settlement and administration of claims represented by the incurred but not reported ("IBNR") claims included in recorded loss and loss adjustment reserves involved especially subjective auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists.
Our audit procedures related to reserves for losses and loss expenses included the following, among others:
-We evaluated the Company’s methodologies against recognized actuarial practices for the remaining classes. We also evaluated the assumptions used by the Company using our industry knowledge and experience and other analytical procedures.
-We compared the results of the reserve study prepared by third party actuaries to management’s best estimate and evaluated the differences.
(1) Refer to Note 14 'Shareholder's Equity' for details on dividends declared and paid related to the Company's common and preferred shares.
•AXIS Specialty Limited ("AXIS Specialty Bermuda"), a Bermuda domiciled company is licensed to provide specialty insurance and treaty reinsurance products on a worldwide basis. In addition, AXIS Specialty Bermuda conducts insurance and reinsurance business through its branch in Singapore, AXIS Specialty Limited (Singapore Branch).
•AXIS Insurance Company, domiciled in Illinois and AXIS Reinsurance Company, domiciled in New York, together with AXIS Reinsurance Company (Canadian Branch) are licensed to offer a range of specialty insurance and treaty reinsurance products to a variety of niche markets on a worldwide basis. AXIS Surplus Insurance Company, domiciled in the state of Illinois, is eligible to write insurance on a surplus lines basis.
•The Company operates in the Lloyd's of London ("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 AXIS Syndicate 1686's ("Syndicate 1686") capital support. AXIS Syndicate 1686 is managed by AXIS Managing Agency Ltd. ("AXIS Managing Agency").
•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"). Effective January 1, 2018, AXIS Managing Agency commenced management and oversight of Syndicate 2007. Effective January 1, 2019, Syndicate 2007 ceased accepting new business and was placed into run-off.
•AXIS Ventures Limited ("AXIS Ventures") and AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), regulated by the BMA as insurance managers, generate fee income from services provided to strategic capital partners. Effective September 23, 2020, AXIS Ventures deregistered as an insurance manager with the BMA.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and include AXIS Capital Holdings Limited and its wholly-owned subsidiaries.
•reinsurance recoverable on unpaid losses and loss expenses, including the provision for expected credit losses;
The Company recognizes investment income from fixed maturities based on the constant effective yield method, which includes an adjustment for estimated principal repayments, if applicable. The effective yield used to determine the amortization of fixed maturities subject to prepayment risk (e.g. asset-backed, mortgage-backed and other structured securities) is recalculated and adjusted periodically based on historical and/or projected future cash flows. Adjustments to the yield for highly rated prepayable fixed maturities are accounted for using the retrospective method. Adjustments to the yield for other prepayable fixed maturities are accounted for using the prospective method.
If a fixed maturity is impaired and the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the full amount of the impairment loss is charged to net income and is included in net investment gains (losses).
a.the extent to which the fair value is less than amortized cost;
The length of time a security has been in an unrealized loss position no longer impacts the determination of whether a credit loss exists. If a security is assessed to be credit impaired, it is subject to a discounted cash flow analysis by comparing the present value of expected future cash flows with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost, a credit loss exists and an allowance for expected credit losses is recognized. If the present value of expected future cash flows is equal to or greater than the amortized cost basis, an expected credit loss does not exist.
The Company reports accrued interest receivable related to available for sale debt securities separately and has elected not to measure an allowance for expected credit losses for accrued interest receivable. Write-offs of accrued interest receivable balances are recognized in net investment gains (losses) in the period in which they are deemed uncollectible.
On a quarterly basis, the Company assesses whether unrealized losses on fixed maturities represent impairments that are other-than-temporary. The Company's 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:
b.the financial condition, near-term and long-term prospects of the issuer of the security;
Equity securities are reported at fair value. 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.
Mortgage loans, held for investment are presented net of an allowance for expected credit losses. The allowance for expected credit losses is estimated based on the Company’s analysis of projected lifetime losses. These projections take into account the Company’s experience with credit quality indicators, loan losses, defaults, loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available. The allowance for expected credit losses is recognized in net investment gains (losses). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined.
Reinsurance premiums are recorded at the inception of the contract based on estimates received from ceding companies. For multi-year contracts insurance and reinsurance premiums are recorded at the inception of the contract based on management’s best estimate of total 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.
Any adjustments to insurance and reinsurance premium estimates are recognized in the period in which they are determined.
Insurance and reinsurance premiums are earned evenly over the period during which the Company is exposed to the underlying risk, which is generally one to two years with the exception of multi-year contracts. Unearned premiums represent the portion of premiums which relate to the unexpired risks under contracts in force.
Insurance and reinsurance premium balances receivable are reviewed for impairment at least quarterly and are presented net of an allowance for expected credit losses.
The allowance for expected credit losses is estimated based on the Company's analysis of amounts due, historical delinquencies and write-offs, and current economic conditions, together with reasonable and supportable forecasts of short-term economic conditions. The allowance for expected credit losses is recognized in net income (loss). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined. Write-offs of premium balances receivable, together with associated allowances for expected credit losses, are recognized in the period in which balances are deemed uncollectible. The Company does not have a history of significant write-offs.
Insurance and reinsurance premium balances receivable are reviewed for impairment at least quarterly and an allowance is established for amounts considered uncollectible.
Reinsurance recoverable balances are reviewed for impairment at least quarterly and are presented net of an allowance for expected credit losses.
The estimates of reinsurance recoverable balances 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.
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.
For the purpose of evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is necessary to perform a quantitative goodwill impairment test. If determined to be necessary, the quantitative test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of the reporting
Reinsurance recoverable on unpaid losses and loss expenses of $4,497 million at December 31, 2020 was presented net of an allowance for expected credit losses. A case-specific allowance for expected credit losses was estimated based on the Company's analysis of amounts due, historical delinquencies and write-offs. In addition, the Company used a default analysis based on the reinsurers' credit rating and the length of collection periods to estimate allowances for expected credit losses on the remainder of the reinsurance recoverable balance. The default analysis considered current and forecasted economic conditions including the potential impact from the COVID-19 pandemic. At December 31, 2020, the allowance for credit losses expected to be recognized over the life of the reinsurance recoverable balances was $24 million.
Mortgage loans, held for investment of $593 million at December 31, 2020 was presented net of an allowance for expected credit losses. The allowance for expected credit losses was estimated based on the Company’s analysis of projected lifetime losses. These projections take into account the Company’s experience with credit quality indicators, loan losses, defaults, loss severity, and loss expectations for loans with similar risk characteristics. These projections are revised as conditions change and new information becomes available. At December 31, 2020, the allowance for credit losses expected to be recognized over the life of our mortgage loans was $nil.
The Company's reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, credit and surety, professional lines, motor, liability, engineering, agriculture, marine and aviation, accident and health, and discontinued lines - Novae.
The following table presents net premiums earned by segment and line of business:
Intangible assets with an indefinite life include U.S. state licenses that provide a legal right to transact business indefinitely and the value of Lloyd's syndicate capacity, which represents the right to underwrite a certain allocated limit of premium in the Lloyd's market.
(1) On April 1, 2015, the Company completed its acquisition of Ternian Insurance Group LLC and recognized the definite life intangible assets detailed above.
(2) On October 2, 2017, the Company acquired Novae and recognized finite lived intangible assets, including Value of Business Acquired ("VOBA"), distribution networks, and indefinite lived intangible assets related to Lloyd's syndicate capacity, all detailed above.
The maximum exposure to loss on these interests is limited to the amount of commitment made by the Company. The Company has not provided financial or other support to these structured securities other than the original investment.
The following table summarizes fixed maturities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
At December 31, 2020, 719 fixed maturities (2019: 1,190) were in an unrealized loss position of $19 million (2019: $32 million) of which $7 million (2019: $5 million) was related to securities below investment grade or not rated.
At December 31, 2020, 249 fixed maturities (2019: 497) had been in a continuous unrealized loss position for twelve months or greater and had a fair value of $437 million (2019: $998 million).
The unrealized losses of $19 million (2019: $32 million) were due to non-credit factors and were expected to be recovered as the related securities approach maturity.
At December 31, 2020, the Company did not intend to sell the securities in an unrealized loss position and it is more likely than not that the Company will not be required to sell these securities before the anticipated recovery of their amortized costs.
The Company has a high quality mortgage loan portfolio with a weighted average debt service coverage ratio of 2.4x (2019: 2.1x) and a weighted average loan-to-value ratio of 60% (2019: 57%). At December 31, 2020 and 2019, there were no credit losses or past due amounts associated with the commercial mortgage loans held by the Company.
(1)Applies to one fund with a fair value of $38 million.
(2)Applies to one fund with a fair value of $61 million.
Two common redemption restrictions which may impact the Company's ability to redeem hedge funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund’s net assets which may otherwise hinder the general partner or investment manager’s ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2020 and 2019, neither of these restrictions impacted the Company's redemption requests. At December 31, 2020, $25 million (2019: $69 million), representing 17% (2019: 41%) of total hedge funds, relate to holdings where the Company is still within the lockup period. The expiration of these lockup periods range from March 2021 to March 2022.
At December 31, 2020, the Company had $20 million (2019: $24 million) of unfunded commitments as a limited partner in multi-strategy hedge funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until after the completion of the funds' investment term. These funds have investment terms ranging from two years to the dissolution of the underlying fund.
At December 31, 2020, the Company had $201 million (2019: $82 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.
under the equity method of accounting. The Company's proportionate share of the underlying equity in net assets resulted in a basis difference of $5 million which represents initial transactions costs.
The following table provides an analysis of net investment gains (losses):
(1)Related to instances where the Company intends to sell securities or it is more likely than not that the Company will be required to sell securities before their anticipated recovery.
Unrealized losses on securities issued or backed, either explicitly or implicitly by the U.S. government are not analyzed for credit losses. 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.
In 2019, the OTTI charge on corporate debt securities mainly related to loss severity, unrealized foreign exchange losses on certain securities where the forecasted recovery of the amortized cost of these securities was uncertain, and instances where the Company intended to sell securities before the forecasted recovery of the amortized cost of these securities.
The Company's investments in CMBS are diversified and primarily rated AA or better. At December 31, 2020, CMBS had a weighted average estimated subordination percentage of 29% (2019: 29%). Based on discounted cash flows at December 31, 2020 and 2019, the current level of subordination is sufficient to cover the estimated loan losses on the underlying collateral of the CMBS.
The Company's restricted investments and cash primarily consist of high-quality fixed maturity and short-term investment securities.
•Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company's judgments about assumptions that market participants might use.
U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. As the fair values of U.S. Treasury securities are based on unadjusted quoted market prices in active markets, the fair values of these securities are classified as Level 1. The fair values of U.S. government agency securities are determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of U.S. government agency securities are classified as Level 2.
Non-agency RMBS mainly include investment-grade bonds originated by non-agencies. The fair values of these securities are determined using an option adjusted spread model or other relevant models, which use inputs including available trade information or broker quotes, prepayment and default projections based on historical statistics of the underlying collateral and current market data. As the significant inputs used to price these securities are observable market inputs, the fair values of non-agency RMBS 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.
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 bonds 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.
Derivative instruments include foreign exchange forward contracts and exchange traded interest rate swaps that are customized to the Company's economic hedging strategies and trade in the over-the-counter derivative market. The fair values of these derivatives are determined using a market approach valuation technique based on significant observable market inputs from third-party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used to price these derivatives are observable market inputs, the fair values of these derivatives are classified as Level 2.
Other privately held securities are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair value of the variable yield security was determined using an externally developed discounted cash flow model. This model includes inputs that are specific to that investment. The inputs used in the fair value measurement include an appropriate discount rate, default rate, loss absorption rate and estimated maturity date. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation of this investment. A significant increase (decrease) in this input in isolation could result in significantly lower (higher) fair value measurement for this investment. In order to assess the 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 investee specific information that may impact future cash flows.
Other underwriting-related derivatives are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these derivatives are determined using internally developed discounted cash flow models which use appropriate discount rates. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation of these derivatives. A significant increase (decrease) in this input in isolation could result in a significantly lower (higher) fair value measurement for the derivative contracts. In order to assess the 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.
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, 2020, the carrying values of cash and cash equivalents including restricted amounts, accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated fair values due to their short maturities. As these financial instruments are not actively traded, their fair values are classified as Level 2.
At December 31, 2020, the carrying value of mortgage loans, held for investment approximated fair value. The fair values of mortgage loans are primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk or are determined from pricing for similar loans. As mortgage loans are not actively traded, their fair values are classified as Level 3.
(1)Derivative assets and liabilities are classified within other assets and other liabilities in the consolidated balance sheets.
The following table provides a reconciliation of gross derivative assets and liabilities to the net amounts presented in the consolidated balance sheets, with the difference being attributable to the impact of master netting agreements:
The Company's investment portfolio is exposed to foreign currency risk therefore the fair values of its investments are partially influenced by changes in foreign exchange rates. The Company may enter into foreign exchange forward contracts to manage the effect of this foreign currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.
The following table provides the total unrealized and realized gains (losses) recognized in net income for derivatives not designated as hedges:
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. Medium-tail business consists primarily of insurance and reinsurance professional lines reserve classes, insurance credit and political risk and reinsurance credit and surety reserve classes.
•the response of government bodies including legislative, regulatory or judicial actions and social influences that could alter the interpretation of the Company's contracts;
•the evaluation of the loss and impact of loss mitigation actions.
•estimates of the size of insured industry losses from the catastrophic event and the Company's corresponding market share;
•a review of the Company's portfolio of contracts performed to identify those contracts which may be exposed to the catastrophic event;
•a review of modeled loss estimates based on information previously reported by customers and brokers, including exposure data obtained during the underwriting process;
The following table presents a reconciliation of the Company's beginning and ending gross reserves for losses and loss expenses and net reserves for unpaid losses and loss expenses:
The Company writes business with loss experience generally characterized as low frequency and high severity in nature, which can result in volatility in its financial results. During 2020, 2019 and 2018, the Company recognized catastrophe and weather-related losses, net of reinstatement premiums, of $774 million, $336 million and $430 million.
AXIS Managing Agency Ltd., the managing agent of Syndicate 2007 entered into an agreement for the Reinsurance to Close ("RITC") of the 2015 and prior years of account of Syndicate 2007, with an effective date of January 1, 2018. This agreement was accounted for as a novation reinsurance contract. At December 31, 2018, foreign exchange and other included a reduction in reserves for losses and loss expenses of $819 million related to this transaction.
At December 31, 2020, net reserve for losses and loss expenses included estimated amounts for numerous catastrophe events. The magnitude and complexity of losses arising from certain of these events 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. These events include the COVID-19 pandemic, Hurricanes Laura, Sally, Zeta and Delta, the Midwest derecho and wildfires across the West Coast of the United States in 2020, Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian and the Australia Wildfires in 2019 and Hurricanes Michael and Florence, California Wildfires and Typhoon Jebi in 2018. As a result, actual losses for these events may ultimately differ materially from current estimates.
The Company's net favorable prior year reserve development arises from changes to estimates for losses and loss expenses related to loss events that occurred in previous calendar years. The following table presents net prior year reserve development by segment:
In 2020, we recognized $9 million of net favorable prior year reserve development, the principal components of which were:
•$47 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence mainly related to the 2018 and 2019 accident years, better than expected loss emergence attributable to the 2017, 2018 and 2019 catastrophe events.
•$25 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the primary casualty, U.S. excess casualty and program books of business mainly related to the 2017 and 2018 accident years.
In 2019, we recognized $53 million of net favorable prior year reserve development, the principal components of which were:
•$33 million of net favorable prior year reserve development on marine business primarily due to better than expected loss emergence mainly related to the 2015 through 2017 accident years.
•$25 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the U.S. excess casualty and U.S. primary casualty books of business mainly driven by the higher frequency and severity of auto claims and the higher frequency of general liability claims mainly related to the 2015 and 2017 accident years.
•$21 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business mainly related to older accident years, partially offset by an increase in loss estimates for proportional treaty business mainly related to the 2018 accident year.
•$31 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.
estimate attributable to 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.
Non-U.S. dollar denominated loss data is converted to U.S. dollar at the rates of exchange in effect at the balance sheet date for material underlying currencies. Fluctuations in foreign currency exchange rates may cause material shifts in loss development. Reserves for losses and loss expenses disclosed in the consolidated balance sheets are also remeasured using the rates of exchange in effect at the balance sheet date.
There are many considerations in establishing net reserves for losses and loss expenses and an attempt to evaluate net reserves for losses and loss expenses using solely the data presented in these tables could be misleading. The Company cautions against mechanical application of standard actuarial methodologies to project ultimate losses using data presented in this disclosure.
The accident and health line of business includes accidental death, travel insurance and specialty health products for employer and affinity groups. A large increase in reported claims related to the accident and health line of business was observed from 2012. In addition, an increase in limited benefits medical business written in 2017 resulted in a significant increase in reported claims observed in that year.
This reserve class includes the professional lines line of business which provides directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity, cyber and privacy insurance, medical malpractice and other financial insurance related covers for commercial enterprises, financial institutions, not-for-profit organizations and other professional service providers. This reserve class also includes discontinued lines - Novae specifically the financial institutions and professional indemnity lines of business that Novae exited or placed into run-off in the first quarter of 2017. This business is predominantly written on a claims-made basis. Typically, this reserve class is anticipated to exhibit medium to long tail claim reporting and payment patterns.
This reserve class includes catastrophe, property, agriculture, engineering, marine and aviation, accident and health, and discontinued lines - Novae.
The engineering line of business provides protection for all types of construction risks and risks associated with erection, testing and commissioning of machinery and plants during the construction stage. This line of business also includes coverage for losses arising from operational failures of machinery, plant and equipment, and electronic equipment as well as business interruption. The Company decided to exit this line of business in 2020.
The marine and aviation line of business includes specialty marine classes such as cargo, hull, pleasure craft, marine liability, inland marine and offshore energy. The principal perils covered by policies in this portfolio include physical loss, damage and/or liability arising from natural perils of the seas or land, man-made events including fire and explosion, stranding/sinking/salvage, pollution, shipowners and maritime employers liability. This business is written on a non-proportional and proportional basis. Aviation provides cover for airline, aerospace and general aviation exposures. This business is written on a proportional and non-proportional 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, cyber, 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.
This reserve class includes the motor line of business which provides protection to insurers for motor liability and motor property damage losses arising from any one occurrence. A loss occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence. This reserve class also includes discontinued lines - Novae specifically the motor reinsurance line of business that Novae exited or placed into run-off in the first quarter of 2017. The Company offers traditional proportional and non-proportional reinsurance as well as structured solutions predominantly relating to European exposures.
The motor non-proportional business consists of standard excess of loss contracts written for cedants in several European countries with most of the premium related to two major markets, U.K. and France. Since 2009/2010, an increasing number of large bodily injury settlements in the U.K. market were settled using indexed annuities (Periodical Payment Orders "PPOs"). This led to a materially longer development tail on the older accident years for the U.K. non-proportional motor book. This also resulted in the inclusion of capitalization clauses on a number of U.K. motor treaties which allow reinsurers to settle claims arising under PPOs with a lump sum payment, to help mitigate the lengthening of the development tail on more recent accident years.
This reserve class includes the liability line of business which provides protection to insurers of admitted casualty business, excess and surplus lines casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, workers' compensation, auto liability and excess casualty. This reserve class includes discontinued lines - Novae specifically the general liability reinsurance line of business that Novae exited or placed into run-off in the first quarter of 2017.
(1) Non-U.S. dollar denominated loss data is converted to U.S dollar at the rates of exchange in effect at the balance sheet date for material underlying currencies. Fluctuations in currency exchange rates may cause material shifts in loss development. Reserves for losses and loss expenses disclosed in the consolidated balance sheets are also remeasured using rates of exchange in effect at the balance sheet date.
Facultative reinsurance provides cover for all or a portion of the losses incurred for a single policy and the Company separately negotiates each facultative contract.
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 percentage 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.
For the year ended December 31, 2020, the Company recognized ceded losses and loss expenses of $1,914 million (2019: $1,602 million; 2018: $1,565 million).
At December 31, 2020, the Company's provision for uncollectible amounts was $24 million (2019: $18 million; 2018: $21 million).
(1) On June 1, 2020, AXIS Specialty Finance LLC, a 100% owned finance subsidiary, repaid $500 million aggregate principal amount of 5.875% Senior Notes at their stated maturity.
On April 3, 2019, AXIS Capital and AXIS Specialty Finance PLC entered into a first supplemental indenture (the "First Supplemental Indenture") among AXIS Specialty Finance PLC, as issuer, AXIS Capital, as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), to the senior indenture (the "Indenture") relating to the 5.150% Senior Notes.
Interest expense recognized in relation to the Senior Notes includes interest payable, amortization of the offering discounts and amortization of debt offering expenses. The offering discounts and debt offering expenses are amortized over the period of time during which the Senior Notes are outstanding. For the year ended December 31, 2020, the Company incurred interest expense of $52 million (2019: $67 million, 2018: $64 million).
Interest expense recognized in relation to the Junior Notes includes interest payable and amortization of debt offering expenses. The debt offering expenses are amortized over the period of time during which the Junior Notes are outstanding. For the year ended December 31, 2020, the Company incurred interest expense of $21 million (2019: $1 million).
The following table provides the scheduled maturity of the Company's debt obligations at December 31, 2020:
On November 20, 2013, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") entered into an amendment to extend the term of the Company's secured $750 million letter of credit facility with Citibank Europe plc ("Citibank") (the "$750 million Facility") pursuant to a Master Reimbursement Agreement and other ancillary documents (together, the "LOC Facility Documents"). Under the terms of the $750 million Facility, letters of credit to a maximum aggregate amount of $750 million are available for issuance on behalf of the Participating Subsidiaries. These letters of credit are principally used to support the reinsurance obligations of the Participating Subsidiaries. The $750 million Facility is subject to certain covenants, including the requirement to maintain sufficient collateral, as defined in the LOC Facility Documents to cover all of the obligations under the $750 million Facility. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the $750 million Facility to any or all of the Participating Subsidiaries.
On March 28, 2020, the expiration date of the $250 million Facility was extended to March 31, 2021.
The Company monitors and manages the aggregation of credit risk on a group-wide basis allowing it to consider exposure management strategies for individual companies, countries, regions, sectors and any other relevant inter-dependencies. The Company's credit exposures are aggregated based on the origin of risk. Credit risk aggregation is also managed through minimizing overlaps in underwriting, financing and investing activities. As part of its credit aggregation framework, the Company also assigns aggregate credit limits by country and by single counterparty (or parent of affiliated counterparties). These limits are based on and adjusted for a variety of factors including the prevailing economic environment and the nature of the underlying credit exposures.
(ii) Reinsurance Recoverable on Unpaid and Paid Losses and Loss Expenses
The diversity of the Company's client base limits credit risk associated with its insurance and reinsurance premium balances receivable. In addition, for insurance contracts the Company has contractual rights to cancel coverage for non-payment of premiums and for reinsurance contracts the Company has contractual rights to offset premium balances receivable against corresponding payments for losses and loss expenses.
These contractual rights contribute to the mitigation of credit risk, together with the monitoring of aged premium balances receivable. In light of these mitigating factors and considering that a significant portion of premium balances receivable are not currently due based on the terms of the underlying contracts, the Company does not utilize specific credit quality indicators to monitor its premium balances receivable.
At December 31, 2020, the Company recorded an allowance for estimated uncollectible premium balances receivable of $9 million (2019: $7 million).
The Company produces its business through brokers and direct relationships with insurance companies. For the year ended December 31, 2020, three brokers accounted for 47% (2019: 47%; 2018: 43%) of gross premiums written.
Marsh & McLennan Companies Inc. accounted for 19% (2019: 18%; 2018: 17%), Aon plc accounted for 17% (2019: 19%; 2018: 17%), and Willis Tower Watson PLC accounted for 11% (2019: 10%; 2018: 9%).
No other broker and no single insured or reinsured accounted for more than 10% of gross premiums written in any of the last three years.
The Company is not party to any material legal proceedings arising outside the ordinary course of business.
At December 31, 2020 the Company has $588 million (2019: $588 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, 2020 the Company has $46 million (2019: $32 million) of unfunded investment commitments to purchase commercial mortgage loans.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
On February 1, 2020, the commencement date, the Company reflected a 15 year lease for a new office property in Alpharetta, Georgia in the Company's consolidated balance sheet. Consequently, this lease is also reflected in the maturity table above. The total contractual lease costs over the 15 year lease is $40 million.
(1) Due to the net loss recognized for the year ended December 31, 2020, the share equivalents were anti-dilutive.
The Company's authorized share capital is 800,000,000 common shares, par value of $0.0125 per share.
The following table presents changes in common shares issued and outstanding:
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, dividends accumulate, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum.
On January 17, 2020, the Company redeemed all 9,000,000 Series D preferred shares, for an aggregate liquidation preference of $225 million.
(1) On January 17, 2020, the Company redeemed all 9,000,000 Series D preferred shares, for an aggregate liquidation preference of $225 million. The final dividend on the Series D preferred shares was declared in 2019.
In May 2017, shareholders approved the establishment of the AXIS Capital Holdings Limited 2017 Long-Term Equity Compensation Plan (the "2017 Plan"). The 2017 Plan provides for, among other things, the issuance of restricted shares, restricted stock units (share-settled awards and cash-settled awards), performance units (share-settled awards and cash-settled
awards), stock options, stock appreciation rights and other equity-based awards to the Company's employees and directors. The 2017 Plan authorizes the issuance of a total of 3,400,000 common shares. The Company's 2017 Plan replaced its 2007 Long-Term Equity Compensation Plan ("2007 Plan") when it expired in May 2017. All remaining shares available for grant pursuant to the 2007 Plan have been canceled. Awards made pursuant to the 2007 Plan prior to its expiration remain in effect in accordance with the terms of the 2007 Plan. At December 31, 2020, 1,912,055 equity-based awards remained available for grant pursuant to the 2017 Plan. The grant date fair value of each award is established at the fair market value of the Company's common shares at the date of grant.
Performance restricted stock units granted pursuant to the 2017 Plan or the 2007 Plan represent the right to receive a specified number of common shares in the future, based on the achievement of established performance criteria and continued service during the applicable performance period. Awards granted pursuant to these plans generally cliff vest at the
Grants provided under the 2017 Plan and the 2007 Plan generally allow for accelerated vesting provisions on the employee’s
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 do 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.
(1) Fair value is based on the closing price of the Company's common shares on the grant date.
(1) Related to share-settled stock units and cash settled restricted stock units.
In addition, the Company has invested $38 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, 2020, fees paid to Freedom were $2 million (2019: $3 million; 2018: $2 million).
The Company has invested $23 million in Stone Point's private equity fund, Trident VIII L.P. ("Trident VIII"). For the year ended December 31, 2020, fees paid to Stone Point in relation to Trident VIII were $1 million (2019: $nil; 2018: $nil).
The Company's Chairman, Mr. Butt received consulting fees for the year ended December 31, 2020 of $0.4 million (2019: $0.4 million; 2018: $0.5 million) pursuant to the terms of a consulting agreement between Mr. Butt and the Company which terminated on December 31, 2020.
Harrington and Harrington Re commenced operations in 2016 (refer to Note 5 'Investments'). The Company has the ability to exercise significant influence over the operating and financial policies of Harrington and Harrington Re. In the normal course of business, the Company enters into certain reinsurance transactions with Harrington Re. For the year ended December 31, 2020, the Company ceded reinsurance premiums of $256 million (2019: $247 million; 2018: $194 million) and ceded losses of $187 million (2019: $157 million; 2018: $142 million) to Harrington Re. In addition, Harrington Re paid certain acquisition costs and administrative fees to the Company. At December 31, 2020, the amount of reinsurance recoverable on unpaid and paid losses was $641 million (2019: $518 million) and the amount of ceded reinsurance payable included in insurance and reinsurance balances payable was $188 million (2019: $159 million) in the consolidated balance sheets. All transactions were conducted at market rates consistent with negotiated arms-length contracts.
On November 5, 2013, the Company formed AXIS Ventures Reinsurance Limited ("Ventures Re"), a Bermuda domiciled insurer. All of Ventures Re's directors are employees of the Company. With effect from January 1, 2015, Ventures Re is no longer included in the consolidated financial statements of the Company. In the normal course of business, the Company entered into certain reinsurance contracts with Ventures Re. Effective, January 1, 2020, Ventures Re entered into a novation reinsurance contract with various reinsurers. For the year ended December 31, 2020, the Company ceded premiums of $nil (2019: $192 million; 2018: $182 million) and ceded losses of $nil (2019: $140 million; 2018: $138 million) to Ventures Re. In addition, Ventures Re paid certain acquisition costs and administrative fees to the Company. At December 31, 2020, the amount of reinsurance recoverable on unpaid and paid losses was $nil (2019: $199 million) and the amount of ceded reinsurance payable included in insurance and reinsurance balances payable was $nil (2019: $46 million) in the consolidated balance sheets. All transactions were conducted at market rates consistent with negotiated arms-length contracts.
Under current Bermuda law, AXIS Capital's Bermuda domiciled subsidiaries are not required to pay any taxes in Bermuda on income or capital gains. The Company has received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, it will be exempt from taxation in Bermuda until March 2035. The Company's primary Bermuda subsidiary has an operating branch in Singapore, which is subject to the relevant taxes in that jurisdiction. The Singapore branch is not under examination in that tax jurisdiction but remains subject to examination for tax years 2017 through 2020.
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 2016 through 2020.
AXIS Capital had subsidiaries in Ireland, the U.K., Belgium, Luxembourg, Brazil, and Dubai in 2018. 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 2020. AXIS Capital's Irish operations had branches in the U.K. and Switzerland in 2018. Effective January 1, 2019, following the merger of AXIS Specialty Europe and Aviabel SA., AXIS Capital's Irish operations also has branches in Belgium and the Netherlands. There are ongoing audits in Ireland, with respect to 2016 and 2017 tax years, and Belgium, with respect to 2017 and 2018 tax years. There are no other ongoing audits of AXIS Capital's subsidiaries or branches, but they remain subject to examination in all applicable jurisdictions for tax years 2016 through 2020.
The following table presents the tax effects allocated to each component of other comprehensive income (loss):
The following table presents details of amounts reclassified from accumulated other comprehensive income ("AOCI") to net
(2) 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 statutory capital and surplus in each of the Company's most significant regulatory jurisdictions is shown in the following table:
Under the Act, AXIS Specialty Bermuda is restricted as to the payment of dividends for amounts greater than 25% of the prior year’s statutory capital and surplus, whereby an affidavit signed by at least two members of the Board of Directors is required, attesting that any dividend in excess of this amount would not cause the Company to fail to meet its relevant margins. At December 31, 2020, the maximum dividend AXIS Specialty Bermuda could pay, without a signed affidavit, having met minimum levels of statutory capital and surplus requirements, was approximately $792 million (2019: $844 million).
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. In response to the ongoing COVID-19 pandemic, the Central Bank of Ireland requires the Company's Irish subsidiaries to obtain approval prior to making any distribution. At December 31, 2020, the maximum dividend the Company's Irish subsidiaries could pay, having met their solvency and capital requirements was approximately $11 million (2019: $70 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. 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.
AXIS Capital UK II Limited is the sole corporate member of Syndicate 2007. On January 1, 2018, the Company received authorization from Lloyd’s for AXIS Managing Agency to commence management and oversight of Syndicate 2007.
Each year, corporate members can apply to Lloyd's to release accumulated funds, whether syndicate profits or interest on FAL, which are in excess of the agreed FAL requirements. At December 31, 2020 and 2019, actual capital and assets exceeded the FAL requirements for Syndicates 1686 and 2007. During 2020, net funds of $32 million (2019: $47 million) were released from FAL. Both AXIS Corporate Capital UK Limited and AXIS Corporate Capital II Limited continue to support the FAL requirements of Syndicates 1686 and 2007.
An unaudited summary of quarterly financial results is shown in the following table:
(3)During the quarters ended December 31, September 30, June 30 and March 31, 2020, the Company recognized reorganization expenses of $7 million, $1 million, $0.4 million and $1 million, respectively, related to its transformation program. During the quarters ended December 31, September 30, June 30 and March 31, 2019, the Company recognized reorganization expenses of $8 million, $11 million, $3 million and $15 million, respectively (refer to Note 18 'Reorganization Expense').
(4)During the quarters ended December 31, September 30, June 30 and March 31, 2020, the Company recognized amortization of VOBA of $1 million, $1 million, $1 million and $2 million, respectively, related to the acquisition of Novae. During the quarters ended December 31, September 30, June 30 and March 31, 2019, the Company recognized amortization of VOBA of $2 million, $4 million, $7 million and $13 million, respectively (refer to Note 4 'Goodwill and Intangible Assets').
In the first quarter of 2021, North America experienced severe winter weather that may impact the Company's financial results. The assessment of the financial impact of these events on the Company's first quarter results is at a very early stage.