We maintain office facilities in the United States, Bermuda, Europe, Canada, Australia, Singapore and Latin America. We own the property in which our offices are located in Dublin, Ireland, and we lease office space in the other countries. We renew and enter into new leases in the ordinary course of business as required. Our global headquarters is located at 92 Pitts Bay Road, AXIS House, Pembroke HM 08, Bermuda. We believe that our office space is sufficient for us to conduct our operations for the foreseeable future.
The following tables set forth our selected historical consolidated financial information for the last five years. This data should also be read in conjunction with the Consolidated Financial Statements and the accompanying notes presented under Item 8 and with ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ under
The following is a discussion and analysis of our results of operations for the years ended December 31, 2014, 2013 and 2012 and our financial condition at December 31, 2014 and 2013. This should be read in conjunction with the Consolidated Financial Statements and related notes included in Item 8 of this report. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.
Results by Segment: Years ended December 31, 2014, 2013 and 2012
Net income available to common shareholders of $771 million, or $7.38 per common share and $7.29 per diluted common share
Common shareholders’ equity of $5.2 billion; diluted book value per common share of $50.63
Our mission is to provide our clients and distribution partners with a broad range of risk transfer products and services and meaningful capacity, backed by significant financial strength. We manage our portfolio holistically, aiming to construct the optimum consolidated portfolio of funded and unfunded risks, consistent with our risk appetite and development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a leading global, diversified specialty insurance and reinsurance company, as measured by quality, sustainability and profitability. Our execution on this mission in 2014 included:
the development of our third-party capital capabilities through AXIS Ventures Reinsurance Limited which was launched to manage capital for investors interested in deploying funds directly into the property-catastrophe and related short-tail business;
increase in net favorable prior year reserve development and an increase in net premiums earned. These were partially offset by an increases in the current accident year loss ratio, exclusive of the natural catastrophe and weather-related losses, and an increase in general and administrative expenses.
The variability in our net investment income from 2012 through 2014 was largely attributable to the performance of our other investments. Income from this portfolio decreased by $71 million in 2014 compared to 2013, driven by lower returns from our hedge funds and reflected lower returns from global equity markets during 2014. Comparatively, income from this portfolio increased by $41 million in 2013 compared to 2012, driven by the strong performance of global equity markets during 2013.
During each period presented, we realized net investment gains. During 2014 and 2013, sales of equities were the largest contributor to the net realized gains while sales of fixed maturities were the primary driver in 2012. Other-than-temporary impairment ("OTTI") charges were $31 million, $9 million and $24 million in 2014, 2013 and 2012, respectively. The increase in OTTI during 2014 was primarily attributable to non-U.S. denominated securities as a result of the decline in foreign exchange rates against the U.S. dollar, and related to securities that are due to mature in the near future.
Tax expense increased to $26 million in 2014 compared to $7 million in 2013, due to an increase in the valuation allowance and a decrease in tax exempt income. Interest expense and financing costs were $75 million in 2014 compared to $62 million in 2013 and 2012, with the increase driven by the new senior notes issued during the first quarter of 2014.
During the first half of 2013 we issued $225 million of 5.50% Series D preferred shares. The Series D preferred share proceeds were partially used to redeem the $100 million of 7.25% Series A preferred shares outstanding. The redemption of the Series A preferred shares resulted in a recognition of a loss of $3 million.
In the reinsurance markets, the trading environment remains very competitive, with pressures broadly impacting all lines of business. We continue to observe great demand for multi-year commitments with non-concurrency of terms more prevalent in the marketplace. Overall, the market is experiencing margin compression in the face of rate deterioration and increased pressures on ceding commissions. While the outlook is for continuing competitive global market conditions, we have observed a customer preference towards counterparties that have the breadth and depth to provide meaningful, multi-faceted relationships, backed by financial strength and full-scale services coupled with innovation and technical strength, which positions larger players in a better position to mitigate the adverse effects of the current trading conditions.
Diluted book value ("DBV") per common share represents total common shareholders’ equity divided by the number of common shares and diluted common share equivalents outstanding, determined using the treasury stock method. Cash settled awards are excluded from the denominator.
Our objective is to generate superior returns on capital that appropriately rewards our common shareholders for the risks we assume and to grow revenue only when we expect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any one year may make it difficult to achieve a profitability target in any specific period and, therefore, established a ROACE target of 15% over the full underwriting cycle. Our average annual ROACE since inception is approximately 14%, tracking closely to our long-term goal.
The decrease in operating ROACE in 2014 compared to 2013 was driven by a decrease in net investment income and an increase in corporate expenses partially offset by an increase in underwriting income. The increase in operating ROACE in 2013 compared to 2012 was primarily driven by the improvement in our underwriting result, also aided by growth in net investment income and a decrease in corporate expenses.
In addition to the items noted above for operating ROACE, ROACE is also impacted by net realized investment gains, foreign exchange losses (gains) and the loss on repurchase of preferred shares. Net realized investment gains contributed favorably to our results in 2014, 2013 and 2012; thus ROACE exceeded operating ROACE in all three years. Foreign exchange movements also contributed favorably to our results in 2014 while 2013 and 2012 recorded foreign exchange losses, resulting in a larger increase in ROACE in 2014 compared to the two prior years.
During 2014 and 2013, our diluted book value per common share appreciated by 11% and 7%, respectively, driven primarily by $771 million and $684 million in net income available to common shareholders, respectively. This was partially offset by the decrease in unrealized gains on investments which are included in accumulated other comprehensive income. The decrease in 2014 reflected the impact of the strengthening of the U.S. dollar, along with the widening of credit spreads and the realization of equity gains during the year, while in 2013 we recorded a decrease in accumulated other comprehensive income primarily due to the impact of the rise in sovereign yield curves during the year on our investment portfolio.
During 2014, the DBV per common share adjusted for dividends grew by $5.93 or 13% driven primarily by our diluted net income per share of $7.29 which was partially offset by unrealized losses on investments included in other comprehensive income. Despite recording a more significant impact of catastrophe and weather-related events, 2013 and 2012 also reflected positive value creation for our shareholders. In 2013 our net income, in addition to the dividends declared, more than offset the impact of the upward shift in the sovereign yield curves. In 2012 our net income, combined with valuation improvements on our available-for-sale securities and common share repurchases executed at a discount to book value led the increases in diluted book value per common share adjusted for dividends.
The following table provides our group underwriting results for the periods indicated. Underwriting income is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses.
Group (or consolidated) underwriting income is a non-GAAP financial measure as defined in SEC Regulation G. See Item 8, Note 3 to the Consolidated Financial Statements, for a reconciliation of consolidated underwriting income to the nearest GAAP financial measures (income before income taxes) for the years indicated above. Also, refer to 'Non-GAAP Financial Measures' for additional information related to the presentation of consolidated underwriting income.
The five point decrease in the ceded premium ratio for our insurance segment was driven by changes in our reinsurance purchasing and business mix changes.
The general and administration expense ratio includes corporate expenses not allocated to underwriting segments of 3.5%, 2.4% and 3.8% for 2014, 2013 and 2012, respectively. These costs are further discussed in the ‘Other Expenses, Net’ section.
Our estimated net losses in relation to the natural catastrophe events described above were derived from ground-up assessments of our in-force contracts and treaties providing coverage in the affected regions. These assessments take into account the latest information available from clients, brokers and loss adjusters. In addition, we consider industry insured loss estimates, market share analyses and catastrophe modeling analyses, when appropriate. Our estimates remain subject to change as additional loss data becomes available.
Our favorable prior year reserve development was the net result of several underlying developments on prior accident years, identified during our quarterly reserve review process. The following table provides a breakdown of net prior year reserve development by segment:
The underlying exposures in our property, marine and aviation reserving classes within our insurance segment and the property reserving class within our reinsurance segment largely relate to short-tail business. Development from these classes contributed $207 million, $162 million and $186 million of the total net favorable prior year reserve development in 2014, 2013 and 2012, respectively, and primarily reflected the recognition of better than expected loss emergence. The reserve releases for 2014 included $40 million of favorable development across both segments relating to natural catastrophe and weather-related losses incurred during 2013.
In 2013, we recognized $50 million of net favorable prior year reserve development, the principal components of which were:
In 2012, we recognized $122 million of net favorable prior year reserve development, the principal components of which were:
$64 million of net favorable prior year reserve development on our property and other business, the majority of which related to the 2009 through 2011 accident years and the 2008 accident year. While development was primarily driven by better than expected loss emergence, a portion of the 2008 accident year amount was due to the final settlement of two specific case reserves.
$37 million of net favorable prior year reserve development on marine business, spanning a number of accident years and largely related to better than expected loss emergence. The majority of this development related to offshore energy business.
In 2014, we recognized $195 million of net favorable prior year reserve development, the principal components of which were:
$123 million of net favorable prior year reserve development on property and other business, spanning a number of accident years and driven by better than expected loss emergence. Included in this net development was $31 million of favorable reserve development relating to natural catastrophe and weather-related losses incurred during 2013. In addition, the net development included $26 million of adverse development on New Zealand 2010 and 2011 earthquake events and $10 million of adverse development on agriculture reserves relating to loss experience on events occurring late in the 2013 accident year.
$85 million of net favorable prior year reserve development on liability reinsurance business for the reasons discussed in the overview.
$12 million of net favorable prior year reserve development on trade credit and bond reinsurance business, primarily related to the 2010 and 2011 accident years, in recognition of better than expected loss emergence and updated information from our cedants.
Aggregate net prior year reserve development for our liability reserving class was insignificant during 2012; however, there were underlying favorable and adverse movements by accident year, driven by an underwriting to accident year reallocation for claims associated with a particular group of treaties.
Acquisition Cost Ratio: The acquisition cost ratio increased from 17.9% in 2013 to 19.0% during 2014, driven by increases in both segments. The increase in the insurance segment primarily reflected a reduction in ceding commissions following changes to our reinsurance program and a change in the mix of business. In the reinsurance segment, the increase was driven by higher acquisition costs paid on certain lines of business and variances in accruals for loss-sensitive features in underlying contracts.
The decrease in the ratio in 2013 compared to 2012 was driven by decreases in both segments. The insurance segment decrease was driven by a reduction in business written through MGAs and higher ceding commissions earned partially offset by a change in business mix. The reinsurance segment decrease was driven by variances in accruals for loss-sensitive features in underlying contracts, partially offset by higher acquisition costs paid on certain lines of business.
General and Administrative Expense Ratio: The general and administrative expenses increased from 15.5% in 2013 to 16.1% in 2014, primarily driven by personnel costs, professional fees, information technology costs and other related expenses associated with the continued build-out of the Company's global platforms and certain operational excellence initiatives. These initiatives are aimed at improving the effectiveness and efficiency of our operations and are expected to result in a reduction of expenses in future periods. The impact on the general and administrative expense ratio was partially offset by growth in net earned premiums.
2014 versus 2013: The decline in gross premiums written of 1% was primarily driven by our professional, property and credit and political risk lines of business, which were partially offset by increases in our liability, aviation and accident and health lines. The reduction in professional lines was driven by the reshaping of our D&O business written in the United States. Decreases in the property lines were driven by continuing competitive market conditions. The decrease in credit and political risk was driven by reduced deal flow compared to prior year. The growth in liability can be attributed to new business and rate increases in the U.S. casualty markets. The increases in the aviation lines were a result of timing differences and new business opportunities. The increase in accident and health lines reflected higher renewal insurance premiums and new business opportunities.
2014 versus 2013: Premiums ceded in 2014 were $756 million, or 30%, of gross premiums written, compared to $746 million, or 29%, in 2013. The increase in premiums ceded and the related ceded ratio primarily related to changes in the business mix, driven by growth in our liability lines which are subject to significant reinsurance cessions, partially offset by changes in the structure of our reinsurance program. Changes in our reinsurance program comprised decreases implemented during 2013, which included excess of loss treaty reductions driven by both retention and rate, and proportional changes related to reductions in the cession rates on our professional lines and liability reinsurance programs. These decreases were partially offset by additional reinsurance purchased during 2014, primarily in our professional lines.
2014 versus 2013: Natural catastrophe and weather-related losses impacted the current accident year loss ratios for both years.
In 2014, we recorded $66 million of aggregate pre-tax net losses related to natural catastrophe and weather-related events primarily related to Hurricane Odile and weather events in the United States. During 2013, we incurred $93 million of aggregate pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) related to worldwide natural catastrophe and weather-related events.
In 2013, we incurred $93 million of aggregate pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) related to worldwide natural catastrophe and weather-related events. During 2012, we recognized estimated pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) of $222 million primarily related to Storm Sandy.
Acquisition Cost Ratio: The increase in the current year acquisition cost ratio from 14.1% in 2013 to 15.2% in 2014 primarily reflected a reduction in ceding commissions following changes to our reinsurance program and a change in the mix of business.
General and Administrative Expense Ratio: The decrease in the general and administrative expense ratio from 20.1% in 2013 to 18.7% in 2014 was primarily due to a reduction in the allocation of certain corporate expenses and the growth in net premiums earned, partially offset by growth in personnel expenses and costs associated with new initiatives as we build out our global platform.
Other insurance related income in 2014 primarily related to realized gains on economic hedges purchased to protect our agriculture line of business against fluctuations in commodity prices, which were largely offset by realized and mark-to-market losses on our weather and commodity derivative business. Other insurance related income in 2013 reflected the net results of our weather and commodity business.
During 2014, we recognized estimated aggregate pre-tax net losses of $27 million related to worldwide natural catastrophe and weather-related events. Comparatively, in 2013, we recognized pre-tax net losses (net of related reinstatement premiums) of $105 million related to worldwide natural catastrophe and weather-related events.
2013 versus 2012: The significant decrease in the level of natural catastrophe and weather-related activity was the primary driver of the decrease in the 2013 current accident year loss ratio.
Corporate Expenses: Our corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 3.5%, 2.4% and 3.8% for 2014, 2013 and 2012, respectively. The increase in corporate expenses during 2014 compared to 2013 was primarily related to increased personnel costs as we expand our business globally, a reduction in certain allocated costs to the segments, and information technology and professional costs related to operational excellence initiatives. These initiatives are aimed at improving the effectiveness and efficiency of our operations and are expected to result in a reduction of expenses in future periods.
Foreign Exchange Losses (Gains): Some of our business is written in currencies other than the U.S. dollar. The foreign exchange losses (gains) for all years presented were largely driven by the re-measurement of net insurance related liabilities. During 2014, the foreign exchange gains were primarily driven by the depreciation in the euro, which decreased 12% against the U.S. dollar, and the Sterling which decreased by 6%. The appreciation of the euro and Sterling had the opposite effect in 2013 and 2012, with depreciation in the Australian dollar partially offsetting the 2013 losses.
The majority of the higher tax rate in 2013 compared to 2012 is attributable to an increase in pre-tax income in the U.S. A significant portion of our losses and loss expenses for Storm Sandy in 2012 related to insurance risks written by our U.S. subsidiaries, driving a low effective tax rate.
2014 versus 2013: The 1% increase in investment income from fixed maturities is reflective of the 3% increase in average fixed maturities balances during 2014 as additional investments in fixed maturities were funded primarily by reinvestment of net investment income. This was partially offset by lower reinvestment yields as book yields continue to decline towards market yields.
2013 versus 2012: The 4% reduction in investment income from fixed maturities reflected lower reinvestment yields as book yields continued to decline towards market yields. This decline was partially offset by the 5% growth in our average fixed maturities balances during 2013 as additional investments in fixed maturities were funded primarily by reinvestment of net investment income.
Other investments include hedge funds, direct lending funds and both direct and indirect (through a fund structure) investments in equity tranches of collateralized loan obligations (“CLO Equities”). These investments are recorded at fair value, with the change in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially period over period, particularly during volatile equity and credit markets.
2013 versus 2012: Lower net realized gains during 2013 are reflective of the significant declines in the pricing for our fixed maturities during 2013. The primary source of the net realized gains on fixed maturities in 2013 was corporate debt (mainly investment-grade but high yield also contributed). The strong performance of global equity markets during 2013 and 2012 enabled us to realize net gains on sales of common stock during 2013. The proceeds of common stock sales were used to fund incremental investments in hedge funds.
The level of OTTI losses increased in 2014 compared to 2013 due mainly to losses recorded on non-U.S. denominated securities as a result of the decline in foreign exchange rates against the U.S. dollar, and related to securities that are due to mature in the near future.
Excluding the foreign currency impact of securities denominated in foreign currencies, the total return would be 2.8% for 2014 (2013: 1.6%, 2012: 4.9%).
The cost of our total investments increased by $123 million from December 31, 2013, primarily due to investing a portion of our operating cash flows.
The following table provides a breakdown of the fair value of our eurozone exposure within our fixed maturity portfolio:
We also have an indirect eurozone exposure through our investment of $113 million (2013: $125 million) in non-U.S. bond mutual funds, which are classified as equities.
The composition of our corporate debt securities by sector was as follows:
The increase in investment grade corporate debt holdings during 2014 was due to attractive valuations, with much of the proceeds from the sale of municipal debt holdings being invested in this sector. The increase in non-investment grade holdings is due to additional funds being allocated to our short duration high yield strategy during 2014. At December 31, 2014, our short duration high yield portfolio had a fair value of $985 million (2013: $916 million), a weighted average credit rating of B+ (2013: B+) and duration of 2.0 years (2013: 1.6 years). At December 31, 2014, our total corporate debt portfolio, including short duration high yield securities, had a duration of 2.8 years (2013: 2.4 years).
At December 31, 2014, our non-agency RMBS had an average duration and weighted average life of 0.5 years (2013: 0.5 years) and 4.3 years (2013: 4.0 years), respectively.
Our CMBS portfolio continues to be rated highly, with approximately 84% rated AA or better (2013: 81%). Additionally, the weighted average estimated subordination percentage for the portfolio was 30% at December 31, 2014 (2013: 30%), which represents the current weighted average estimated percentage of the capital structure subordinated to the investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. At December 31, 2014, the average duration and weighted average life was 3.2 years (2013: 2.5 years) and 3.8 years (2013: 2.6 years), respectively.
At December 31, 2014, the gross unrealized losses on our fixed maturities portfolio were $173 million (2013: $180 million).
The decrease in gross unrealized losses on investment-grade securities is primarily due to the downward shift in sovereign yield curves. This was mostly offset by the negative movement in foreign exchange rates as a result of the strengthening of the US dollar and the widening of credit spreads on investment grade corporate debt securities.
During 2014, we sold all holdings of common stocks, with the proceeds reallocated to the more passive strategy of holding exchange-traded funds. At December 31, 2014, our equities portfolio had net unrealized gains of $36 million (2013: $136 million); the decline was primarily due to sales of common stocks resulting in net realized gains of $129 million during the year, offset by improved valuations reflective of markets.
The $131 million decrease in the fair value of our total hedge funds in 2014 was driven by $165 million of net redemptions offset by $34 million of price appreciation as our hedge funds benefited from the performance of the global equity and credit markets during the first half of 2014. Certain of these funds may be subject to restrictions on redemptions which may limit our ability to liquidate these investments in the short term. See Item 8, Note 5(b) of our Consolidated Financial Statements for further details on these restrictions.
We have made total commitments of $140 million to managers of direct lending funds. To date, $52 million of this commitment has been called. During 2013, we made a $60 million commitment as a limited partner in a multi-strategy hedge fund, of which $25 million has been called to date.
In order to support our obligations in regulatory jurisdictions where we operate as a non-admitted carrier, we provide collateral in the form of assets held in trust and, to a lesser extent, letters of credit. Refer to Item 8, Note 10(b) to our Consolidated Financial Statements for further information on our collateral requirements upon issuance of certain letters of credit. The fair value of our restricted investments primarily relates to these items, as noted in the table below. Our restricted investments primarily consist of high-quality fixed maturity and short-term investment securities.
Includes $245 million of fixed income securities deposited directly with Lloyd's to support the underwriting capacity of the Company's Lloyd's Syndicate, AXIS Syndicate 1686.
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 20, to the Consolidated Financial Statements for further information), as well as the need to maintain capital levels to adequately support (re)insurance operations and to preserve financial strength ratings issued by independent rating agencies. During 2014, AXIS Capital received $1,221 million (2013: $566 million; 2012: $525 million) of distributions from its subsidiaries. AXIS Capital’s primary uses of funds are dividend payments to both common and preferred shareholders, share repurchases, 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 over $1 billion at December 31, 2014, will provide AXIS Capital with sufficient liquidity for the foreseeable future.
Net cash provided by operating activities was $0.9 billion in 2014, compared to $1.1 billion in 2013 and 2012. The Company's insurance and reinsurance operations typically receive principal cash inflows from premiums and reinsurance recoverables. Our principal cash outflows are for the payment of claims and loss adjustment expenses, premium payments to reinsurers, policy acquisition costs and operating expenses. Cash provided by operating activities can fluctuate due to timing differences in the collection of premium receivable and reinsurance recoverables and the payment of losses and ceded premiums payable. The reductions in operating cash flows in 2014 and 2013 were primarily driven by an increase in net paid losses as we settled losses incurred in prior years. In 2014, the increase was primarily attributable to increased loss payments in the professional, liability and motor lines, while in 2013, the increase was primarily attributable to an increase in paid losses relating to natural catastrophe and weather-related events. Net paid losses in 2014 were also impacted by an increase in claims paid in the agriculture lines, however this increase was more than offset by the growth in the premiums collected for these lines of business.
Dividends paid to common and preferred shareholders are the primary source of recurring cash flows used in financial activities and totaled $158 million in 2014 (2013: $158 million, 2012: $159 million). Financing cash outflows also included common share repurchases totaling $543 million, $472 million and $318 million in 2014, 2013 and 2012, respectively. We note that market share repurchases are completely discretionary; the timing and amount of the additional repurchase transactions will depend on a variety of factors including, but not limited to, global (re)insurance and financial market conditions and opportunities, capital management and regulatory considerations (see ‘Capital Resources - Share Repurchases’ below). Cash outflows in 2014 and 2013 were partially offset by $15 million and $50 million third party investment in shares issued by Ventures Re, respectively (See noncontrolling interests discussion in Item 8, Note 14 of the Consolidated Financial Statements). During 2013 and 2012, financing cash flows also included a net $118 million inflow and $11 million outflow, respectively, related to the preferred share transactions discussed under 'Capital Resources - Preferred Shares' below.
Our diversified underwriting portfolio has demonstrated an ability to withstand catastrophic losses. Since 2003, with the only exception being 2009, our annual cash flows from operations were in excess of $0.8 billion, with 2009 being adversely impacted by claims arising from the global financial crisis. Besides 2009, these positive cash flows were generated notwithstanding the impacts of the global financial crisis on other financial years and the recognition of significant natural catastrophe-related losses during the period: our net losses and loss expenses, gross of reinstatement premiums, included $266 million for Hurricanes Charley, Frances, Ivan and Jeanne in 2004; $1,019 million for Hurricanes Katrina, Rita and Wilma in 2005; $408 million for Hurricanes Gustav and Ike in 2008; $256 million for the Chilean and New Zealand earthquakes in 2010; $944 million for numerous natural catastrophe and weather events in 2011; and $331 million for Storm Sandy in 2012. There remains significant uncertainty associated with our estimates of net losses for certain of these events (see ‘Underwriting Results - Group - Underwriting Expenses’ for further details), as well as the timing of the associated cash outflows.
We continue to expect that cash flows generated from our operations, combined with the liquidity provided by our investment portfolio, will be sufficient to cover our required cash outflows and other contractual commitments through the foreseeable future. Refer to the ‘Contractual Obligations and Commitments’ section below for further information about the anticipated amounts and timing of our contractual obligations and commitments.
Concurrent with the closing of the Series C preferred share issuance, we redeemed 6 million of our previously outstanding Series A preferred shares at the $25.00 per share redemption price, for a total redemption of $150 million. Following this redemption, 4 million Series A preferred shares, representing $100 million in aggregate liquidation preference, remained outstanding.
We maintain a secured $750 million letter of credit facility (the “LOC Facility”). This facility is subject to certain covenants, including the requirement to maintain sufficient collateral to cover all of our obligations under the facility. Such obligations
include contingent reimbursement obligations for outstanding letters of credit and fees payable to the lender. In the event of default, the lender may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the facility to any or all of the participating operating subsidiaries.
In the event of default, including a breach of the covenants outlined above, the lenders may exercise certain remedies including the termination of the facility, the declaration of all principal and interest amounts related to facility loans to be immediately due and the requirement that any outstanding letters of credit that we opted to obtain on an unsecured basis be collateralized.
At December 31, 2014, we had $423 million and $nil letters of credit outstanding under the LOC Facility and the Credit Facility, respectively. The remaining available capacity under these three facilities was $577 million, not taking into
Following the Company's announcement of the signing of the definitive amalgamation agreement with PartnerRe Ltd., we currently expect that our share repurchase program will be suspended until the closing date of the amalgamation transaction.
The ‘A+’ grouping is the second highest ratings category out of fifteen. Ratings outlooks (‘Positive’, ‘Negative’ and ‘Stable’) are assigned to indicate a rating’s potential direction over an intermediate term, generally defined as 12 - 36 months.
The ‘A’ grouping is the third highest out of nine rating categories. Each of the second through seventh categories are subdivided into three subcategories, as indicated by an appended numerical modifier of ‘1’, ‘2’ and ‘3’. The ‘1’ modifier indicates that the obligation ranks in the higher end of the rating category, the ‘2’ modifier indicates a mid-category ranking and the ‘3’ modifier indicates a ranking in the lower end of the rating category.
On January 25, 2015, the Company announced the signing of a definitive amalgamation agreement with PartnerRe Ltd. Following this announcement, Standard and Poor's placed our rating on Creditwatch with negative implications. The status reflects Standard and Poor's uncertainty around the effective execution of the merger and successful integration of the two entities. We expect that the Creditwatch placement will be resolved or updated within the three months after the announcement date, following Standard and Poor's discussions with the Company's management.
Following the amalgamation announcement, Moody's placed AXIS Capital's ratings on review for a possible upgrade of the Company. Moody's expects to conclude its review following completion of the merger.
We are obligated to pay claims for specified loss events covered by the (re)insurance contracts we write. Such loss payments represent our most significant future payment obligation. In contrast to our other contractual obligations, our cash payments are not determinable from the terms specified within the underlying contracts. The total amount in the table above reflects our best estimate of our reserve for losses and loss expenses. However, the actual amounts and timing may differ materially; refer to the ‘Critical Accounting Estimates - Reserve for Losses and Loss Expenses’ for further information. We have not taken into account corresponding reinsurance recoverable amounts that would be due to us.
Expected Loss Ratio Method (“ELR”): This method estimates ultimate losses for an accident year or underwriting year by applying an expected loss ratio to the earned or written premium for that year. Generally, expected loss ratios are based on one or more of (a) an analysis of historical loss experience to date, (b) pricing information and (c) industry data, adjusted as appropriate, to reflect changes in rates and terms and conditions. This method is insensitive to actual incurred losses for the accident year or underwriting year in question and is, therefore, often useful in the early stages of development when very few losses have been incurred. Conversely, the lack of sensitivity to incurred/paid losses for the accident year or underwriting year in question means that this method is usually inappropriate in later stages of an accident year or underwriting year’s development.
There are additional risks affecting our ability to accurately estimate ultimate losses for catastrophic events. For example, the estimation of loss reserves related to hurricanes and earthquakes can be affected by factors including, but not limited to: the inability to access portions of impacted areas, infrastructure disruptions, the complexity of factors contributing to losses, legal and regulatory uncertainties, complexities involved in estimating business interruption losses and additional living expenses, the impact of demand surge, fraud and the limited nature of information available. For hurricanes, additional complex coverage factors may include determining whether damage was caused by flooding versus wind, evaluating general liability and pollution exposures, and mold damage. The timing of a catastrophe, for example near the end of a reporting period, can also affect the level of information available to us to estimate reserves for that reporting period.
Although our estimates of ultimate losses for our short-tail business are inherently less uncertain than for our medium and long-tail business, significant judgment is still required. For example, because much of our excess insurance and excess of loss reinsurance business has high attachment points, it is often difficult to estimate whether claims will exceed those attachment points. Also, the inherent uncertainties relating to catastrophe events previously discussed, together with our typically large line sizes, further add to the complexity of estimating our potential exposure. In addition, we use MGAs and other producers for certain business within our insurance segment; this 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.
Loss reporting patterns for professional lines business tend to be volatile, causing instability in actuarial indications based on incurred loss data until an accident year matures for a number of years. Consequently, our initial loss reserves for an accident year or underwriting year are generally based upon an ELR method and the consideration of relevant qualitative factors. As accident years and underwriting years mature, we increasingly give more weight to methods that reflect our actual experience until our selections are based almost exclusively on experience-based methods. We evaluate the appropriateness of the
Inherent uncertainties about loss trends, claims inflation (e.g. medical, judicial, social) and general economic conditions; and
Commencing with our fourth quarter 2012 reserving process, we began to give weight to actuarial methods that reflect our actual experience for liability business as we believed that our oldest accident years were at a stage of expected development where such methods would produce meaningful actuarial indications. In 2014, we continued to give weight to experience-based methods for the insurance liability classes for accident years 2007 and prior, which led to the recognition of $14m of net favorable prior year reserve development during the calendar year on those accident years 2007 and prior. For the reinsurance liability lines, we continued to give weight to experience-based methods for accident years 2008 and prior, resulting in the recognition of $87 million of net favorable prior year reserve development for these years in calendar year 2014.
While we believe that our loss reserves at December 31, 2014 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 our 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 our loss reserves across all accident years. For example, if our assumed loss development pattern for our property and other insurance business was three months shorter with no accompanying change in our ELR assumption, our loss reserves may decrease by approximately $33 million. Each of the impacts set forth in the tables is estimated individually, without consideration for any correlation among key assumptions or among reserving classes. Therefore, it would be inappropriate to take each of the amounts and add them together in an
attempt to estimate total volatility. While we believe the variations in the expected loss ratios and loss development patterns presented could be reasonably expected, our own historical data regarding variability is generally limited and actual variations may be greater or less than these amounts. It is also important to note that the variations are not meant to be a “best-case” or “worst-case” series of scenarios and, therefore, it is possible that future variations in our loss reserves may be more or less than the amounts presented. While we believe that these are reasonably likely scenarios, we do not believe this sensitivity analysis should be considered an actual reserve range.
The recognition of reinsurance recoverable on unpaid losses and loss expenses requires two key estimates. The first estimate is the amount of loss reserves to be ceded to our reinsurers. This amount consists of two elements, those related to our gross case reserves and those related to our gross IBNR. Reinsurance recoveries related to our gross case reserves are estimated on a case-by-case basis by applying the terms of any applicable reinsurance coverage to our individual case reserve estimates. Our estimate of ceded IBNR is generally developed as part of our loss reserving process and, consequently, its estimation is subject to similar risks and uncertainties as the estimation of gross IBNR. Estimates of amounts to be ceded under non-proportional reinsurance contracts also take into account pricing information for those contracts and require greater judgment than estimates for proportional contracts.
could also affect the willingness and ability of a reinsurer to meet their contractual obligations to us. Accordingly, we review our reinsurance recoverable on a quarterly basis and estimate and record an offsetting provision for uncollectible amounts. Any changes in this provision are reflected in net income. We are selective in choosing our reinsurers, placing reinsurance principally with reinsurers with a strong financial condition and industry ratings.
We apply case-specific provisions against certain recoveries that we deem unlikely to be collected in full. In addition, we use a default analysis to estimate our provision for uncollectible amounts on the remainder of the balance. The principal components of the default analysis are reinsurance recoverable by reinsurer and default factors applied to estimate uncollectible amounts based on our reinsurers’ credit ratings. The default factors are based on a model developed by a major rating agency. The provision recorded against reinsurance recoverable was $18 million at December 31, 2014 and 2013. We have not written off any significant reinsurance recoverable balances in the last three years. At December 31, 2014, the use of different assumptions within our approach could have a material effect on our provision for uncollectible reinsurance recoverable. To the extent the creditworthiness of our reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than our provision. Given the various considerations used to estimate our uncollectible provision, we cannot precisely quantify the effect a specific industry event may have on our provision.
A limited portion of our insurance business is written on a line slip or proportional basis, under which we assume a fixed percentage of the premiums and losses on a particular risk or group of risks along with numerous other unrelated insurers. Although premiums on this business are not contractually stated, we recognize gross premiums written based on an estimate provided by the client via the broker. For further details on the estimation process, see the discussion provided for the reinsurance segment below. We review these estimates on a quarterly basis and record significant adjustments in premium estimates when identified. Gross premiums written on a line slip/proportional basis comprised 9%, 10% and 7% of the segment’s total for the years ended December 31, 2014, 2013 and 2012, respectively, and therefore the associated impact of these estimates on our pre-tax net income was immaterial. The decrease in 2014 compared to 2013 was driven by a decrease in the amount of proportional business written in our accident and health line. The increase in 2013 when compared to 2012, was driven by growth in our accident and health lines, a large portion of which related to proportional business.
Since inception, our historical experience has shown that cumulative adjustments to our annual initial premium estimates on proportional reinsurance contracts have ranged from a negative revision of 4% to a favorable revision of 9%. Giving more weight to recent years where premium volume was comparable to current levels, we believe that a reasonably likely change in our 2014 proportional reinsurance gross premiums written estimate would be 5% in either direction. Such a change would result in a variance in our gross premiums written of approximately $60 million and an immaterial impact on our pre-tax net income. However, larger variations, both positive and negative, are possible.
Line slip and proportional (re)insurance contracts are generally written on a “risks attaching” basis, covering claims that relate to the underlying policies written during the terms of such contracts. As the underlying business incepts throughout the contract term (typically one year) and typically has a one-year coverage period, we generally earn these premiums evenly over a 24-month period.
Since 2009, significant liquidity has returned to the financial markets, resulting in an increase in observable market prices for our financial instruments. At December 31, 2014, the fair value for 97% (2013: 94%) of our total fixed maturities and equities was based on prices provided by globally recognized independent pricing services where we have a current and detailed understanding of how their prices were derived. The remaining securities were priced by either non-binding broker quotes or internal valuation models.
We measure the fair value for hedge, direct lending and CLO equity funds by obtaining the net asset value (NAV) as advised by our external fund manager or third party administrator. For any funds for which we did not receive a December 31, 2014 net asset value, we have recorded an estimate of the change in fair value for the latest period based on return estimates obtained from the fund managers. Accordingly, we do not typically have a reporting lag in our fair value measurements for these funds. Historically, our estimated NAVs have not significantly diverged from the subsequent final audited NAVs. Where
we have the ability to liquidate our holdings at the reported NAV in the near term, these holdings are classified as Level 2 within the fair value hierarchy while the remaining holdings are classified as Level 3.
Actual default rates at November 30, 2014 for our CLO - Equities varied from 0% to 2.7% (November 30, 2013: 0.5% to 3.0%) on the remaining underlying collateral. While, on average, these default rates are much lower than our default rate assumptions noted above, we remain cautious on this favorable development given the continuing global economic uncertainty. Due to the use of significant unobservable inputs in our discounted cash flow model, we continue to classify the CLO - Equities as Level 3.
For an impaired fixed maturity, we recognize an OTTI in earnings when we:
At December 31, 2014, the Company is not party to any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K to which an entity unconsolidated with the Company is a party that management believes is reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that the Company believes is material to investors.
Refer to Note 12 to the Consolidated Financial Statements for further details on the dilution calculation.
A reconciliation of consolidated underwriting income to income before income taxes (the nearest GAAP financial measure) can be found in Item 8, Note 3 to the Consolidated Financial Statements. Underwriting-related general and administrative are reconciled to general and administrative expenses (the nearest GAAP financial measure) within 'Underwriting Results - Group'.
In this regard, certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (or losses), foreign exchange gains (or losses) and losses on repurchase of preferred shares to understand the profitability of recurring sources of income.
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2014, 2013 and 2012
We have audited the accompanying consolidated balance sheets of AXIS Capital Holdings Limited and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
Net investment income includes interest and dividend income and the amortization of market premiums and discounts and is presented net of investment expenses. Investment income is recognized when earned. Purchases and sales of investments are recorded on a trade-date basis and realized gains/losses on sales of investments are determined based on the specific identification method.
Our reserve for losses and loss expenses represents an estimate of the unpaid portion of our ultimate liability for losses and loss expenses for (re)insured events that have occurred at or before the balance sheet date. The balance reflects both claims that have been reported to us (“case reserves”) and claims that have been incurred but not yet reported to us (“IBNR”). These amounts are reduced for estimated amounts of salvage and subrogation recoveries.
We review our reserve for losses and loss expenses on a quarterly basis. Case reserves are primarily established based on amounts reported from insureds and/or their brokers. Management estimates IBNR after reviewing detailed actuarial analyses and applying informed judgment regarding qualitative factors that may not be fully captured in the actuarial estimates. A variety of actuarial methods are utilized in this process, including the Expected Loss Ratio, Bornhuetter-Ferguson and Chain Ladder methods. Our estimate is highly dependent on management’s judgment as to which method(s) are most appropriate for a particular accident year and class of business. Our historical claims data is often supplemented with industry benchmarks when applying these methodologies.
The estimates of our reinsurance recoverable and the associated provision require management’s judgment and are reviewed in detail on a quarterly basis. Any adjustments to amounts recognized in prior periods are reported in our net losses and loss expenses in the Consolidated Statements of Operations for the period when the adjustments were identified. The charge-off of amounts previously reserved as uncollectible is also considered on a case-by-case basis as part of this quarterly process.
In June 2014, the FASB issued new guidance for share-based payments where a performance target could be achieved after the requisite service period has ended, requiring that compensation costs be recognized in the period in which it becomes probable that the performance target will be achieved and to represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance is effective for reporting periods beginning after December 15, 2015. As the new guidance was issued to clarify treatment where there was divergence in accounting practice, the adoption of this guidance is not expected to impact our results of operations, financial condition or liquidity.
Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re. Therefore we have determined that we have two reportable segments, insurance and reinsurance. We do not allocate our assets by segment, with the exception of goodwill and intangible assets, as we evaluate the underwriting results of each segment separately from the results of our investment portfolio.
We estimate that the annual amortization expense for our total intangible assets with a finite life will be approximately $2 million in 2015 and 2016 and $1 million in 2017 through to 2019. The estimated remaining useful lives of these assets range from five to twenty-four years.
Intangible assets with an indefinite life consist primarily of U.S. state licenses that provide a legal right to transact business indefinitely. Our impairment reviews for goodwill and indefinite lived intangibles did not result in the recognition of impairment losses for the years ended December 31, 2014, 2013 and 2012.
Represents the non-credit component of the other-than-temporary impairment (OTTI) losses, adjusted for subsequent sales of securities. It does not include the change in fair value subsequent to the impairment measurement date.
At December 31, 2014, 9 securities (2013: 63) were in an unrealized loss position of $8 million (2013: $6 million).
At December 31, 2014, there were no securities that had been in a continuous unrealized loss position for 12 months or greater (2013: 9 securities with a fair value of $3 million). Based on our impairment review process and our ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, we concluded that the above equities in an unrealized loss position were temporarily impaired at December 31, 2014 and 2013.
Two common redemption restrictions which may impact our ability to redeem our 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 2014 and 2013, neither of these restrictions impacted our redemption requests. At December 31, 2014, $87 million (2013: $99 million), representing 11% (2013: 10%) of our total hedge funds, relate to holdings where we are still within the lockup period. The expiry of these lockup periods range from March, 2015 to March, 2016.
During 2013, we made a $60 million commitment as a limited partner in a multi-strategy hedge fund. Once the full amount of committed capital has been called by the General Partner, the assets will not be fully returned until the completion of the fund's investment term which ends in December, 2018. The General Partner then has the option to extend the term by up to three years. At December 31, 2014, $35 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the multi-strategy funds line of the table above.
Includes $37 million of gains in 2012 relating to previously unrealized foreign exchange currency amounts on the hedged fixed maturity portfolios. The hedged portfolio was sold and all associated foreign exchange contracts were fully settled during 2012 so there is no impact on the 2013 or 2014 figures.
The following table summarizes the OTTI recognized in earnings by asset class:
Non-U.S. government obligations are evaluated for credit loss primarily through qualitative assessments of the likelihood of credit loss using information such as duration and severity of unrealized losses, as well as credit ratings and price volatility. At December 31, 2014, our holdings in sovereign debt, including $119 million (2013: $161 million) relating to the eurozone countries, were substantially all investment-grade securities. The gross unrealized losses of $54 million at December 31, 2014 were mainly due to pricing and foreign exchange losses on emerging market debt. Based on our analysis, we do not anticipate any credit losses on our non-U.S. government fixed maturities at December 31, 2014. In 2014, the OTTI charges on Non-U.S. government fixed maturities mainly related to unrealized foreign exchange losses on certain securities where forecasted recovery was uncertain.
Our investments in CMBS are diversified and highly rated, with a weighted average estimated subordination percentage of 30% at December 31, 2014 (2013: 30%). Based on discounted cash flows at December 31, 2014, the current level of subordination is sufficient to cover the estimated loan losses on the underlying collateral of the CMBS.
For non-agency RMBS, our projected cash flows incorporated underlying data from widely accepted third-party data sources along with certain internal assumptions and judgments regarding the future performance of the security. These assumptions included the following: default, delinquency, loss severity and prepayment rates. The assumptions used to calculate the credit losses in 2014 have not changed significantly since December 31, 2013. At December 31, 2014, the fair value of our non-agency RMBS was $73 million (2013: $68 million), consisting primarily of $49 million (2013: $41 million) of Prime and $17 million (2013: $19 million) of Alt-A MBS. We have concluded there are no credit losses anticipated for any of our non-agency RMBS at December 31, 2014, other than those already recorded.
The OTTI losses on common stocks in 2014 and 2013 are primarily due to the severity and duration of their unrealized loss positions, for which we concluded the forecast recovery period was uncertain. The recognition of such losses does not necessarily indicate that sales will occur or that sales are imminent or planned. At December 31, 2014, the fair value of our equities was $568 million (2013: $702 million), which included $8 million (2013: $6 million) of gross unrealized losses.
At December 31, 2014, we held $110 million (2013: $34 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of cash and cash equivalents on our consolidated balance sheet. The required collateral for these loans is either cash or U.S. Treasuries at a minimum rate of 102% of the loan principal. Upon maturity, we receive principal and interest income.
Within the hedge fund, direct lending fund and CLO fund industries, there is a general lack of transparency necessary to facilitate a detailed independent assessment of the values placed on the securities underlying the NAV provided by the fund manager or fund administrator. To address this, on a quarterly basis, we perform a number of monitoring procedures designed to assist us in the assessment of the quality of the information provided by managers and 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 our fair value estimates against subsequently received NAVs. Backtesting involves comparing our previously reported values for each individual 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, 2014, our direct investments in CLO - Equities were classified within Level 3 as we estimated the fair value for these securities using an income approach valuation technique (discounted cash flow model) due to the lack of observable and relevant trades in the secondary markets.
Cash settled awards comprise restricted stock units that form part of our compensation program. Although the fair value of these awards is determined using observable quoted market prices in active markets, the stock units themselves are not actively traded. Accordingly, we have classified these liabilities within Level 2.
Due to the diversity of the portfolio, the range of unobservable inputs is widespread; therefore, presentation of a weighted average is not useful. Weather parameters may include various temperature and/or precipitation measures that will naturally vary by geographic location of each counterparty's operations.
On a quarterly basis, our valuation process for CLO - Equities includes a review of the underlying cash flows and key assumptions used in the discounted cash flow model. We review and update the above significant unobservable inputs based on information obtained from secondary markets, including from the managers of the CLOs we hold. These inputs are the responsibility of management and, in order to ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we update our assumptions through regular communication with industry participants and ongoing monitoring of the deals in which we participate (e.g. default and loss severity rate trends), we maintain a current understanding of the market conditions, historical results, as well as emerging trends that may impact future cash flows. By maintaining this current understanding, we are able to assess the reasonableness of the inputs we ultimately use in our model.
The transfers to Level 2 from Level 3 made during 2014 were primarily due to the availability of observable market inputs and multiple quotes from pricing vendors and broker-dealers on CLO Debt securities and also due to certain hedge funds
where we have the ability to liquidate holdings at the reported NAV in the near term due to the expiry of lockup provisions. The transfers from Level 3 to Level 2 made during 2013 were primarily due to the availability of observable market inputs and multiple quotes from pricing vendors and broker-dealers.
U.S. GAAP guidance over disclosures about the fair value of financial instruments are also applicable to financial instruments not carried at fair value, except for certain financial instruments, including insurance contracts.
The carrying values of cash equivalents (including restricted amounts), accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated their fair values at December 31, 2014, due to their respective short maturities. As these financial instruments are not actively traded, their respective fair values are classified within Level 2.
At December 31, 2014, our senior notes are recorded at amortized cost with a carrying value of $991 million (2013: $996 million) and have a fair value of $1,089 million (2013: $1,073 million). The fair values of these securities were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of our senior notes are classified within Level 2.
Within our investment portfolio we are exposed to foreign currency risk. Accordingly, the fair values for our investment portfolio are partially influenced by the change in foreign exchange rates. We may enter into foreign currency forward contracts to manage the effect of this foreign currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.
During 2013, we began to write derivative-based risk management products designed to address weather risks with the objective of generating profits on a portfolio basis. The majority of this business consists of receiving a payment at contract inception in exchange for bearing the risk of variations in a quantifiable weather-related phenomenon, such as temperature. Where a client wishes to minimize the upfront payment, these transactions may be structured as swaps or collars. In general, our portfolio of such derivative contracts is of short duration, with contracts being predominantly seasonal in nature. In order to economically hedge a portion of this portfolio, we may also purchase weather derivatives.
Within our (re)insurance portfolio we are exposed to commodity price risk. During 2014, we began to hedge this price risk by entering into commodity derivative contracts. All commodity derivative contracts entered into during 2014 were settled at December 31, 2014.
The total unrealized and realized gains (losses) recognized in earnings for derivatives not designated as hedges were as follows:
The following table presents a reconciliation of our beginning and ending gross reserve for losses and loss expenses and net reserve for unpaid losses and loss expenses for the years indicated:
The underlying exposures in our property, marine and aviation reserving classes within our insurance segment and the property reserving class within our reinsurance segment largely relate to short-tail business. Development from these classes contributed $207 million, $162 million and $186 million of the total net favorable prior year reserve development in 2014, 2013 and 2012, respectively, and primarily reflected the recognition of better than expected loss emergence.
Our professional lines business recognized $32 million and $54 million of favorable prior year development in 2014 and 2012, respectively, while 2013 recognized $29 million of net adverse development. The 2014 and 2012 favorable prior year reserve developments were driven by increased weight being given to experience-based actuarial methods in selecting our ultimate loss estimates for accident years 2010 and prior. As our loss experience has generally been better than expected, this resulted in the recognition of favorable development. The increase in the reserves in 2013 was due to a $51 million adverse development in the insurance segment, reflecting worse than expected loss experience for the 2011-2012 accident years, following worse than expected loss experience on certain parts of our U.S. D&O business, and the 2008-2009 accident years, due to developments on certain global financial crisis-related claims. During 2013, the transition to the experience-based actuarial methods had a favorable impact on 2010 and prior years, which partially offset the adverse development discussed above.
In the first quarter of 2013, we began to give weight to actuarial methods that reflect our actual experience for liability reinsurance business, as we believe that our older accident years are now at a stage of expected development where such methods will produce meaningful actuarial indications. During 2014 and 2013, we recognized $21 million and $85 million, respectively, of net favorable prior year development, primarily reflecting the greater weight management is giving to experience based indications and our experience which has been favorable for the 2004 through 2008 accident years. This favorable development was offset in 2014 and partially offset in 2013 by adverse development in our liability insurance business of $23 million and $24 million, respectively, relating primarily to an increase in loss estimates for certain specific claim reserves.
All of these reinsurance covers provide us the right to recover a portion of specified losses and loss expenses from reinsurers. However, to the extent that our reinsurers do not meet their obligations under these agreements due to solvency issues, contractual disputes or other reasons, we remain liable. We predominantly cede our business to reinsurers rated A- or better by A.M. Best.
On November 15, 2004, AXIS Capital issued $500 million aggregate principal amount of 5.75% senior unsecured debt (the ''5.75% Senior Notes'') at an issue price of 99.785%, generating net proceeds of $496 million. Interest on the 5.75% Senior Notes was payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2005. AXIS Capital repaid the full $500 million of its outstanding 5.75% Senior Notes upon their scheduled maturity of December 1, 2014.
On March 13, 2014, AXIS Specialty Finance PLC, a 100% owned finance subsidiary, issued $250 million aggregate principal amount of 2.65% senior unsecured notes (the "2.65% Senior Notes") at an issue price of 99.896% and $250 million aggregate principal amount of 5.15% senior unsecured notes (the "5.15% Senior Notes", and, together with the 5.875% Senior Notes and the 2.65% Senior Notes, the "Senior Notes") at an issue price of 99.474%. The net proceeds of the issuance, after consideration of the offering discount and underwriting expenses and commissions, totaled approximately $248 million and $246 million for the 2.65% Senior Notes and the 5.15% Senior Notes, respectively. Interest on the 2.65% Senior Notes and the 5.15% Senior Notes is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. Unless previously redeemed, the 2.65% Senior Notes and the 5.15% Senior Notes will mature on April 1, 2019 and April 1, 2045, respectively. The 2.65% Senior Notes and the 5.15% Senior Notes are ranked as unsecured senior obligations of AXIS Specialty Finance PLC. AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance PLC under the 2.65% Senior Notes and the 5.15% Senior Notes. AXIS Capital's obligations under this guarantee are unsecured and senior and rank equally with all other senior obligations of AXIS Capital. Net proceeds from these two offerings were used towards the repayment of $500 million of AXIS Capital’s 5.75% senior unsecured notes which matured on December 1, 2014.
Interest expense recognized in relation to our 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. During 2014, we incurred interest expense of $72 million (2013: $59 million, 2012: $59 million).
On March 26, 2013, in advance of the scheduled August expiration, we terminated and replaced our previously existing credit facility. AXIS Capital and certain subsidiaries are now party to a $250 million credit facility (the "Credit Facility"), which was issued by a syndication of lenders pursuant to a Credit Agreement and other ancillary documents (together, the "Facility Documents") and will expire in March 2017. At the request of the Company and subject to the satisfaction of certain conditions, the aggregate commitment available under the Credit Facility may be increased by up to $150 million. Under the terms of the Credit Facility, loans are available for general corporate purposes and letters of credit may be issued in the ordinary course of business, with total usage not to exceed the aggregate commitment available. Interest on loans issued under the Credit Facility is payable based on underlying market rates at the time of loan issuance. While loans under the Credit Facility are unsecured, we have the option to issue letters of credit on a secured basis in order to reduce associated fees. Letters of credit issued under the Credit Facility would principally be used to support the (re)insurance obligations of our operating subsidiaries. Each of AXIS Capital, AXIS Specialty Finance LLC and AXIS Specialty Holdings Bermuda Limited guarantees the obligations of the other parties to the Credit Facility. The Credit Facility is subject to certain non-financial covenants, including limitations on fundamental changes, the incurrence of additional indebtedness and liens and certain transactions with affiliates and investments, as defined in the Facility Documents. The Credit Facility also requires compliance with certain financial covenants, including a maximum debt to capital ratio and a minimum consolidated net worth requirement. In addition, each of AXIS Capital’s material (re)insurance subsidiaries party to the Credit Facility must maintain a minimum A.M. Best Company, Inc. financial strength rating. In the event of default, including a breach of these covenants, the lenders may exercise certain remedies including the termination of the Credit Facility, the declaration of all principal and interest amounts related to Credit Facility loans to be immediately due and the requirement that all outstanding letters of credit be collateralized.
On September 18, 2013, we entered into an amendment to the Credit Facility in order to permit AXIS Capital and its subsidiaries to enter into swap contracts and other arrangements related to weather derivative transactions. All other material terms and conditions remained unchanged.
On November 20, 2013, certain of AXIS Capital’s operating subsidiaries entered into an amendment to extend the term of the Company's secured $750 million letter of credit facility (the ''LOC Facility'') with Citibank Europe plc (''Citibank'') pursuant to a Master Reimbursement Agreement and other ancillary documents (together, the ''LOC Facility Documents''). The LOC Facility may be terminated by Citibank on December 31, 2016 upon thirty days prior notice. Under the terms of the LOC Facility, letters of credit to a maximum aggregate amount of $750 million are available for issuance on behalf of the operating subsidiaries. These letters of credit will principally be used to support the reinsurance obligations of the operating subsidiaries. The LOC Facility is subject to certain covenants, including the requirement to maintain sufficient collateral, as defined in the LOC Facility Documents, to cover all of the obligations under the LOC Facility. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default,
Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the LOC Facility to any or all of the operating subsidiaries party to the LOC Facility Documents.
The three largest balances by reinsurer accounted for 13%, 11% and 11% of total reinsurance recoverable on unpaid and paid losses at December 31, 2014 (2013: 14%, 11% and 11%). Amounts related to our reinsurers with the ten largest balances comprised 77% of December 31, 2014 balance (2013: 77%) and had a weighted average A.M. Best rating of A+ (2013: A+).
The diversity of our client base limits the credit risk associated with our premiums receivable. In addition, for insurance contracts we have contractual rights to cancel coverage for non-payment of premiums and for reinsurance contracts we have contractual rights to offset premiums receivable with corresponding payments for losses and loss expenses.
We lease office space under operating leases which expire at various dates. We renew and enter into new leases in the ordinary course of business, as required. During 2014, total rent expense with respect to these operating leases was $27 million (2013: $29 million; 2012: $29 million).
At December 31, 2014 we have $123 million (2013: $168 million) of unfunded investment commitments related to our investments in hedge and direct-lending funds, which are callable by our investment managers. For further details, see Note 5(b). In addition, we have a $25 million commitment to purchase securities with one of our fixed income managers at December 31, 2014.
At December 31, 2014, and 2013, our authorized share capital was 800,000,000 common shares, par value of $0.0125 per share.
On December 5, 2014, our Board of Directors authorized a new share repurchase plan for up to $750 million of our common shares through December 31, 2016. The new plan is effective January 1, 2015.
In 2013, the total dividends declared on Series A preferred shares were $0.9063 per share. In 2013, dividends of $1.3594 per share were paid, of which $0.4531 had been declared in 2012. In 2012, the total dividends declared and paid on Series A preferred shares were $1.8125 per share.
During November 2005, we issued $250 million of 7.50% Series B preferred shares, par value $0.0125 per share, with a liquidation preference of $100.00 per share. We may redeem the shares on or after December 1, 2015 at a redemption price of $100.00 per share. Dividends on the Series B preferred shares if, as and when declared by our board of directors will be payable initially at a fixed rate per annum equal to 7.50% of the liquidation preference on the first day of March, June, September and December of each year, commencing on March 1, 2006, up to but not including December 1, 2015. Commencing on March 1, 2016, the dividend rate on the Series B preferred shares will be payable at a floating rate. During a floating rate period, the floating rate per annum will be reset quarterly at a rate equal to 3.4525% plus the 3 month LIBOR Rate. Dividends on the Series B preferred shares are non-cumulative.
In 2014, 2013 and 2012, total dividends declared and paid on Series B preferred shares were $7.50 per share.
The holders of the Series D preferred shares, as well as our previously issued preferred shares, have no voting rights other than the right to elect a specified number of directors if preferred share dividends are not declared and paid for a specified period.
The reconciliation of the beginning and ending balance of the noncontrolling interests in Ventures Re for the year was as follows:
During 2014, our total pension expenses were $21 million (2013: $20 million and 2012: $20 million) for the above retirement benefits.
We currently issue restricted stock and restricted stock units to our employees with service conditions, vesting generally over a period of 3 or 4 years. The 3 year awards are subject to cliff vesting at the end of the 3 year period. With the 4 year awards, 25% of the award vests annually. We also grant performance-based stock awards to certain employees in order to promote long-term growth and profitability. Performance-based awards represent the right to receive a specified number of common shares in the future, based upon the achievement of established performance criteria during the applicable performance period. Some awards have a scaled performance metric, but the actual award could be higher or lower than target. At December 31, 2014, we anticipate that the established performance based criterion for these awards are likely to be achieved.
At December 31, 2014, 5,868,286 equity-based awards remained available for grant under the 2007 Plan. Between January 1, 2015 and February 11, 2015, a total of 977,253 service-based restricted stock units and 78,441 performance-based restricted stock units were approved for grant by the board of directors. Included in the total restricted stock awards approved for grant subsequent to December 31, 2014 were 485,784 awards which will be settled in cash upon vesting.
During 2014, we granted 1,121,066 restricted stock awards (2013: 1,007,425; 2012: 2,447,700) to our employees with a weighted average grant-date fair value per share of $44.46 (2013: $39.52; 2012: $32.20).
During 2014, we also granted 1,018,083 restricted stock units that will settle in cash rather than shares when the awards ultimately vest (2013: 847,425). At December 31, 2014, the compensation expense recorded in the income statement, and corresponding liability for cash-settled awards, included in other liabilities on the Consolidated Balance Sheets, was $21 million (2013: $9 million).
The following is a summary of stock options outstanding and exercisable at December 31, 2014 and related activity for the year ended:
The collateral manager of four of our CLOs is Blackstone Debt Advisors L.P., is entitled to management fees payable by the collateralized obligations in the ordinary course of business. We also have investments in two hedge funds managed by Blackstone Alternative Asset Management, LP, who is entitled to management fees in the ordinary course of business. On June 30, 2012, Blackstone Group ceased to be a related party. Fees due or paid for the six months ended June 30, 2012 were $1 million.
Our U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the U.S. Internal Revenue Code and Regulations. Should the U.S. subsidiaries pay a dividend outside the U.S. group, withholding taxes will apply. Our U.S. subsidiaries are not under examination but remain subject to examination in the U.S. for tax years 2011 through 2014.
At December 31, 2014, the total operating loss carryforwards for our Singapore and Australian branches were $110 million (2013: $115 million) and $68 million (2013: $45 million), respectively. Such operating losses are currently available to offset future taxable income of the branches and may be carried forward indefinitely in each jurisdiction. At December 31, 2014, our European subsidiaries have a $7 million (2013: $4 million) foreign tax credit which can be carried forward indefinitely. In addition, at December 31, 2014, our U.S. companies have a $8 million (2013: $7 million) alternative minimum tax credit that can be carried forward indefinitely.
The following table provides an analysis of the movement in our valuation allowance:
Although realization is not assured, management believes it is more likely than not that the tax benefit of the recorded net deferred tax assets will be realized. Other than the items discussed above, the remaining gross deferred tax assets relate substantially to our U.S. operations. In evaluating our ability to recover these tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including historical results, operating loss carryback potential and scheduled reversals of deferred tax liabilities. Our U.S. operations have produced significant taxable income in prior periods and have deferred tax liabilities that will reverse in future periods such that we believe sufficient ordinary taxable income is available to utilize all remaining ordinary deferred tax assets. In 2014 and 2013, there were sufficient net unrealized gains to offset remaining impairments, therefore a valuation allowance on such impairments in the U.S., was not considered necessary.
Our (re)insurance operations are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate, the most significant of which include Bermuda, Ireland and the United States. These regulations include certain restrictions on the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities.
not cause the company to fail to meet its relevant margins is required. At December 31, 2014, the maximum dividend/distribution AXIS Specialty Bermuda could pay, without a signed affidavit, having met minimum levels of statutory capital and surplus requirements, was approximately $932 million.