Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our individual underwriting operations. While 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.
Certain users of our financial statements evaluate performance exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses, interest in income (loss) of equity method investments, revaluation of net deferred tax asset and bargain purchase gain to understand the profitability of recurring sources of income.
On October 2, 2017, we acquired Novae, a diversified property and casualty insurance and reinsurance business which operates through Syndicate 2007 at Lloyd’s. The acquisition of Novae was undertaken to accelerate the growth strategy of our international insurance business, and to significantly scale up its capabilities to enable us to even better serve our clients and brokers. At the acquisition date, we identified VOBA, which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction, of $257 million.
Interest in income of equity method investments was $10 million in 2019 compared to $1 million in 2018.
In 2018, book value per diluted common share adjusted for dividends decreased by $2.38, or 4%, due to net unrealized investment losses reported in other comprehensive income.
Estimated net reserve for losses and loss expenses in relation to the catastrophe events described above were derived from ground-up assessments of 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. Estimates are subject to change as additional loss data becomes available.
$33 million of net favorable prior year reserve development on marine business primarily due to better than expected loss emergence 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.
2019 versus 2018: OTTI losses in 2019 were $7 million compared to $10 million in 2018. The OTTI charges in 2019 and 2018 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.
At December 31, 2019, the gross unrealized losses on our fixed maturities portfolio were $32 million (2018: $215 million).
Refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments'.
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 2019, AXIS Capital received $250 million (2018: $200 million) of distributions from its subsidiaries. AXIS Capital’s primary uses of funds are dividend payments to both 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 $1.1 billion at December 31, 2019, will provide AXIS Capital with sufficient liquidity for the foreseeable future.
The insurance and reinsurance business of our operating subsidiaries inherently provide liquidity, as premiums are received in advance (sometimes substantially in advance) of the time claims are paid. However, the amount of cash required to fund claim payments can fluctuate significantly from period to period, due to the low frequency/high severity nature of certain types of business we write.
Refer to Item 8, ‘Consolidated Statements of Cashflows’, for further details.
At December 31, 2019, the consolidated balance sheet reflected an increase in debt due to the issuance of $300 million aggregate principal amount of 3.900% Senior Notes due 2029 and the issuance of $425 million aggregate principal amount of Junior Subordinated Notes due 2040 (refer to Item 1, Note 10 to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details), partially offset by the repayment of $250 million aggregate principal amount of 2.650% Senior Notes at their stated maturity on April 1, 2019.
For proportional reinsurance contracts, premiums are recognized at the inception of the contract based on estimates received from ceding companies. We review these premium estimates on a quarterly basis and evaluate their reasonability in light of premiums reported by cedants. Factors contributing to changes in initial premium estimates may include:
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 impairment is considered other-than-temporary. In these instances, the full amount of the impairment is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations.
Reinsurance premiums are recorded at the inception of the contract and are estimated based on information 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.
The fair value of share-settled and cash-settled service and performance awards is based on the market value of the Company's common share measured at the grant date and is expensed over the requisite service period. Compensation expense associated with share-settled and cash-settled performance awards is also subject to periodic adjustment based on the achievement of established performance criteria during the applicable performance period.
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The table below provides the contractual maturities of fixed maturities:
Syndicate 2007 holds overseas deposits which include investments in private funds 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 and therefore are not included within available for sale investments.
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 securities are observable market inputs, the fair values of these derivatives are classified as Level 2.
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
The following table provides the balance sheet classifications of derivatives recorded at fair value:
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 2019, 2018 and 2017, the Company recognized net losses and loss expenses, net of reinstatement premiums, of $336 million, $430 million and $835 million, respectively, attributable to catastrophe and weather-related events.
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:
The discontinued lines - Novae includes the international facultative property line of business that Novae exited or placed into run-off in the fourth quarter of 2016.
At December 31, 2019, the Company's provision for uncollectible amounts was $18 million (2018: $21 million; 2017: $17 million.
The Company is exposed to the credit risk associated with reinsurance recoverable on unpaid and paid losses and loss expenses to the extent that any of its reinsurers fail to meet their obligations under reinsurance contracts. To help mitigate this risk, the Company's purchase of reinsurance is subject to financial security requirements specified by its Reinsurance Security Committee. This Committee maintains a list of approved reinsurers, performs credit risk assessments for potential new reinsurers, regularly monitors approved reinsurers with consideration for events which may have a material impact on their creditworthiness, recommends counterparty tolerance levels for different types of ceded business and monitors concentrations of credit risk. This assessment considers a wide range of individual attributes, including a review of the counterparty’s financial strength, industry position and other qualitative factors. Generally, the Committee requires that reinsurers who do not meet specified requirements provide collateral.
At December 31, 2019, the Company has committed to invest $71 million in Stone Point's private equity fund, Trident VIII L.P. ("Trident VIII"), For the year ended December 31, 2019, the Company has not paid any fees to Stone Point in relation to Trident VIII.
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 2016 through 2019.
Under the Insurance Act 1978, amendments thereto and Related Regulations of Bermuda (the "Act"), the Company's Bermuda subsidiary, AXIS Specialty Bermuda is required to maintain minimum statutory capital and surplus equal to the greater of a minimum solvency margin ("MSM") and the Enhanced Capital Requirement ("ECR"). The MSM is the greater of $100 million, 50% of net premiums written, 15% of net reserve for losses and loss expenses and 25% of the ECR. The Company's ECR is calculated based on a standard risk-based capital model developed by the Bermuda Monetary Authority ("BMA"). In 2016, the BMA implemented an Economic Balance Sheet ("EBS") framework which was used as the basis to determine the ECR. At December 31, 2019 and 2018, the required and available statutory capital and surplus were based on this EBS framework.
The Company's U.S. operations required statutory capital and surplus is determined using the risk-based capital formula ("RBC"), which is the National Association of Insurance Commissioners' (the "Commissioner") method of measuring the
minimum capital appropriate for U.S. reporting entities to support its overall business operations in consideration of its size and risk profile. If a company falls below the authorized control level as determined under the RBC, the Commissioner is authorized to take whatever regulatory actions may be considered necessary to protect policyholders and creditors. The maximum dividend that may be paid by the Company's U.S. insurance subsidiaries is restricted by the regulatory requirements of the domiciliary states. Generally, the maximum dividend that may be paid by each of the Company's U.S. insurance subsidiaries is limited to unassigned surplus (statutory equivalent of retained earnings) and may also be limited to statutory net income, net investment income or 10% of total statutory capital and surplus. At December 31, 2019, the maximum dividend that the Company's U.S. insurance operations could pay without regulatory approval was approximately $141 million (2018: $130 million).